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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 Commission file
number 2-99779
National Consumer Cooperative Bank
(Exact name of registrant as specified in its charter)
United States of America
12 U.S.C. Section 3001 et. seq.) 52-1157795
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1401 Eye Street N.W., Suite 700 Washington, D.C. 20005
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (202)336-7700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements of the past 90 days. Yes X No_____.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant: the registrant's voting stock
is not traded on any market. A subsidiary of the registrant
holds 2.97% of its Class B stock. All registrant's Class C and
Class D stock is held by non-affiliates.
( Cover Continued on Next Page )
( Cover Continued )
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date.
Outstanding at December 31, 1997
Class C
(Common stock, $100.00 par value) 219,044
Class B
(Common stock, $100.00 par value) 840,045
Class D
(Common stock, $100.00 par value) 3
INDEX
PART I
Item 1 Business......................................... 1
Item 2 Properties...................................... 8
Item 3 Legal Proceedings.................................8
Item 4 Submission of Matters to a Vote
of Security Holders............................ 8
PART II
Item 5 Market for the Registrant's Common Stock and Related
Stockholder Matters........................... 9
Item 6 Selected Financial Data..........................12
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations. 13
Item 7A Quantitative and Qualitative Disclosures about
Market Risk................................... 23
Item 8 Financial Statements and Supplementary Data.. . 26
Item 9 Changes in and Disagreements with Accountants,
on Accounting and Financial Disclosure........ 62
PART III
Item 10 Directors and Executive Officers of the
Registrant................................... 62
Item 11 Executive Compensation........................ 71
Item 12 Security Ownership of Certain Beneficial
Owners and Management........................ 72
Item 13 Certain Relationships and Related
Transactions................................. 73
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K...................... 78
PART I
ITEM 1. BUSINESS
General
The National Consumer Cooperative Bank, which does
business as the National Cooperative Bank ("NCB"), is a financial
institution organized under the laws of the United States. NCB
provides financial and technical assistance to eligible
cooperative enterprises or enterprises controlled by eligible
cooperatives. A cooperative enterprise is an organization which
is owned by its members and which is engaged in producing or
furnishing goods, services, or facilities for the benefit of its
members or voting stockholders who are the ultimate consumers or
primary producers of such goods, services, or facilities. NCB is
structured as a cooperative institution whose voting stock can
only be owned by its patrons or those eligible to become its
patrons.
In the legislation chartering NCB (the National Consumer
Cooperative Bank Act or the "Act"), Congress stated its finding
that cooperatives have proven to be an effective means of
minimizing the impact of inflation and economic hardship on
members/owners by narrowing producer-to-consumer margins and
price spreads, broadening ownership and control of economic
organizations to a larger base of consumers, raising the quality
of goods and services available in the marketplace and
strengthening the nation's economy as a whole. To further the
development of cooperative businesses, Congress specifically
directed NCB (1) to encourage the development of new and existing
cooperatives eligible for its assistance by providing specialized
credit and technical assistance; (2) to maintain broad-based
control of NCB by its voting shareholders; (3) to encourage a
broad-based ownership, control and active participation by
members in eligible cooperatives; (4) to assist in improving the
quality and availability of goods and services to consumers; and
(5) to encourage ownership of its equity securities by
cooperatives and others.
NCB has attempted to fulfill its statutory obligations
in two fashions. First, NCB makes loans and offers other
financing arrangements which afford cooperative businesses
substantially the same financing opportunities currently
available for traditional enterprises. Second, NCB provides
financial and other assistance to the NCB Development Corporation
("NCB Development"), a non-profit corporation without capital
stock organized in 1982 which makes loans and provides assistance
to developmental cooperatives.
The Act was passed on August 20, 1978, and NCB commenced
lending operations on March 21, 1980. In 1981, Congress amended
the Act (the "Act Amendments") to convert the Class A Preferred
Stock of NCB previously held by the United States to Class A
Notes as of December 31, 1981 (the "Final Government Equity
Redemption Date"). Since the Final Government Equity Redemption
Date, NCB's capital stock, except for three shares of non-voting
Class D stock, has been owned by borrowers or entities eligible
to borrow from NCB. NCB maintains its executive offices at 1401
Eye Street, N.W., Washington, D.C. 20005. The telephone number
of its executive offices is (202) 336-7700. NCB also maintains
regional offices in Anchorage, New York City, and San Francisco.
NCB Financial Corporation, NCB Retail Finance Corporation and
NCB I, Inc. maintain offices in Wilmington, Delaware while NCB
Savings Bank, FSB maintains its offices in Ohio.
When used in this report, the words "believes",
"anticipates", "expects", "seeks" and similar expressions are
intended to identify forward-looking statements. Such statements
are subject to a number of risks and uncertainties that could
cause actual results to differ materially from those projected,
including: competition within each of NCB's businesses, the
effects of international, national and regional economic
conditions, the availability of capital and other risks described
from time to time in NCB's filings with the Commission. Given
these uncertainties, investors are cautioned not to place undue
reliance on such statements. NCB also undertakes no obligation to
publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future
events or circumstances.
LOAN REQUIREMENTS, RESTRICTIONS AND POLICIES
Eligibility Requirements. Cooperatives,
cooperative-like organizations, and legally chartered entities
primarily owned and controlled by cooperatives are eligible to
borrow from NCB if they are operated on a cooperative basis and
are engaged in producing or furnishing goods, services or
facilities primarily for the benefit of their members or voting
stockholders who are the ultimate consumers of such goods,
services or facilities. In addition, to be eligible to borrow
from NCB, the borrower must, among other things, (1) be
controlled by its members or voting stockholders on a democratic
basis; (2) agree not to pay dividends on voting stock or
membership capital in excess of such percentage per annum as
may be approved by NCB; (3) provide that its net savings shall be
allocated or distributed to all members or patrons, in proportion
to their patronage, or retain such savings for the actual or
potential expansion of its services or the reduction of its
charges to the patrons, and (4) make membership available on a
voluntary basis, without any social, political, racial or
religious discrimination and without any discrimination on the
basis of age, sex, or marital status to all persons who can make
use of its services and are willing to accept the
responsibilities of membership. NCB may also purchase
obligations issued by members of eligible cooperatives.
Lending Authorities. The Board of Directors establishes
its policies governing the lending operations in compliance with
the Act and the policies are carried out by management pursuant
to written loan policies adopted by the Board. The management in
turn adopts and implements guidelines and procedures consistent
with stated Board directives. Lending policies and guidelines
are reviewed regularly by the Board of Directors and management
to make needed changes and amendments.
Management may approve individual credit exposures of up
to 75% of the single borrower lending limit which is equal to 15%
of NCB's capital (using the definition of capital for national
banks as set forth by the Office of the Comptroller of the
Currency) without prior approval of the Board. The President
may delegate authorities up to this limit to such committees and
individual officers as he may deem appropriate.
The Bank's senior management approves credit commitments
that exceed individual or team lending authority.
LENDING LIMITS
Single Borrower
The total amount of loans, letters of credit, leases and
other financing that may be made available to any one borrower
may not exceed 15% of defined capital. The approval of any loan
to a single borrower which has a combined total of financing from
NCB in excess of 75% of the 15% limit is subject to the prior
approval of the Loan and Business Development Committee of the
Board.
Cooperatives of Primary Producers
The total dollar value of loans to cooperatives that
produce, market and furnish goods, services and facilities on
behalf of their members as primary producers may not exceed 10%
of the gross assets of NCB. The total dollar volume of loans
outstanding to any producer cooperative may not exceed 20% of the
amount available for loans to all producer cooperatives.
INTEREST RATES
Generally
NCB charges interest rates approximately equal to the
market rates charged by other lending institutions for comparable
types of loans. NCB seeks to price its loans to yield a
reasonable return on its portfolio in order to build and maintain
its financial viability and to encourage the development of new
and existing cooperatives. In addition, in an attempt to ensure
that NCB will have access to additional sources of capital in
order to sustain its growth, it seeks to maintain a portfolio
that is competitively priced and of sound quality.
Interest Rates for Real Estate Loans
NCB offers both adjustable and fixed rates based on a
basis point spread over recognized indexes such as LIBOR and U.S.
Treasury securities with yields adjusted to a constant maturity.
Interest rates may be fixed at the time of commitment for a
period generally not exceeding 30 days. NCB takes the following
factors into consideration in pricing its real estate loans:
prevailing market conditions, loan-to-value ratios, lien
position, cooperative payment history, reserves, occupancy level
and cash flow.
Interest Rates on Commercial Loans
NCB makes commercial loans at fixed and variable
interest rates. Loan pricing is based on prevailing market
conditions, income and portfolio diversification objectives and
the overall assessment of risk of the transaction. Typically,
commercial loan repayment schedules are structured by NCB with
flat monthly principal reduction plus interest on the outstanding
balance.
Fees
NCB typically assesses fees to cover the costs to NCB of
its consideration of and handling of loan transactions, and to
compensate NCB for setting aside funds for future draws under a
commitment. The fees paid to outside vendors such as appraisers,
environmental consultants and legal counsel retained by NCB for
loan transactions are charged to the borrower.
Underwriting
When evaluating credit requests, NCB seeks to determine
whether a prospective borrower has and/or will have sound
management, sufficient cash flow to service debt, assets in
excess of liabilities and a continuing demand for its products,
services or use of its facilities, so that the request will be
repaid in accordance with its terms.
NCB evaluates repayment ability based upon an analysis
of a borrower's historical cash flow and conservative projections
of future cash flows from operations. This analysis focuses on
determining the predictability of future cash flows as a primary
source of repayment.
Security
Loans made by NCB are generally secured by specific
collateral. If collateral security is required, the value of the
collateral must be reasonably sufficient to protect NCB from
loss, in the event that the primary sources of repayment of
financing from the normal operation of the cooperative, or
refinancing, prove to be inadequate for debt repayment.
Collateral security alone is not a sufficient basis for NCB to
extend credit. Unsecured loans normally are made only to
borrowers with strong financial conditions, operating results and
demonstrated repayment ability.
Loans Benefiting Low-Income Persons
Under the Act, the Board of Directors must use its best
efforts to insure that at the end of each fiscal year at least
35% of NCB's outstanding loans are to (1) cooperatives whose
members are predominantly low-income persons, as defined by NCB,
and (2) other cooperatives that propose to undertake to provide
specialized goods, services, or facilities to serve the needs of
predominantly low-income persons. NCB defines a "low-income
person," for these purposes, as an individual whose family's
income does not exceed 80% of the median family income, adjusted
for family size for the area where the cooperative is located, as
determined by the Department of Housing and Urban Development.
As of December 31, 1997, 25.4% of the outstanding loans was to
"low income persons".
Loans for Residential Purposes
The Act prohibits NCB from making loans for financing,
construction, ownership, acquisition or improvement of any
structure used primarily for residential purposes if, after
giving effect to such loan, the aggregate amount of all loans
outstanding for such purposes will exceed 30 percent of the gross
assets of NCB.
To date, the 30% cap on residential real estate loans
has not restricted NCB's ability to provide financial services to
residential borrowers. NCB has been able to maintain its
position in the residential real estate market without increased
real estate portfolio exposure by selling real estate loans to
secondary market purchasers of such loans. The preponderance of
NCB real estate origination volume in recent years has been
predicated upon sale to secondary market purchasers. There can,
however, be no assurance that NCB's future lending for
residential purposes will not be impaired by the statutory limit.
As of December 31, 1997, approximately 15.0% of NCB's total
assets consisted of loans which qualify under the residential
cap.
Operations of Subsidiaries
NCB also attempts to fulfill its statutory mission by
providing financing opportunities to cooperatives through several
subsidiaries.
NCB Financial Corporation ("NCBFC") is a Delaware
chartered, wholly-owned, S&L holding company whose sole
subsidiary is NCB Savings Bank, FSB.
NCB Savings Bank, FSB ("NCBSB") is a federally
chartered, federally insured savings bank located in Hillsboro,
Ohio.
NCB Capital Corporation ("NCBCC") is a wholly-owned
subsidiary of NCB that originates loans to cooperatives and sells
loans in the secondary market. The company's name was changed
from NCB Mortgage Corporation in November, 1997.
NCB Insurance Brokers, Inc. ( "NCBIB") is engaged in the
business of brokering housing-related insurance to cooperatives.
NCB I, Inc. ("NCB I") is a wholly-owned, special purpose
corporation that holds credit enhancement certificates related to
the securitization and sale of cooperative real estate loans.
NCB and NCB I are parties to an agreement under which each agrees
not to commingle the assets of NCB I with those of NCB.
NCB Retail Finance Corporation ( "NCBRFC") is a
wholly-owned special purpose corporation that participates in the
securitization and sale of loans to customers involved in the
grocery business. NCBRFC is required by its certificate of
incorporation to have at least two directors independent of NCB
and to avoid commingling its assets with those of NCB.
COMPETITION
Congress created and capitalized NCB because it found
that existing financial institutions were not making adequate
financial services available to cooperative, not-for-profit
business enterprises. However, NCB experiences considerable
competition in lending to the most credit worthy cooperative
enterprises.
REGULATION
NCB is organized under the laws of the United States.
NCB is examined annually by the Farm Credit Administration, and
the General Accounting Office is authorized to audit NCB.
Reports of such examinations and audits are to be forwarded to
Congress, which has the sole authority to amend or revoke NCB's
charter. NCB Savings Bank, FSB is regulated by the Office of
Thrift Supervision.
TAXES
The Act provides that NCB shall be treated as a
cooperative within the meaning of Section 1381 (a)(2) of the
Internal Revenue Code. As such and pursuant to the provisions of
the Act, NCB, in determining its taxable income for federal
income tax purposes, is allowed a deduction for an amount equal
to any patronage refunds in the form of cash, Class B or Class C
stock, or allocated surplus that are distributed or set aside by
NCB during the applicable tax period. To date, NCB has followed
the policy of distributing or setting aside such patronage
refunds during the applicable tax period which has reduced NCB's
federal income tax liability.
Section 109 of the Act, as amended, provides that NCB,
including its franchise, capital, reserves, surplus, mortgages or
other security holding and income, is exempt from taxation by any
state, county, municipality or local taxing authority, except
that any real property held by NCB is subject to any state,
county, municipal or local taxation to the same extent according
to its value as other real property is taxed.
NCB has determined that under the Internal Revenue Code
as amended by the Bank Act, all income generated by NCB and its
subsidiaries, with the exception of NCB Savings Bank, qualifies
as patronage income under the Internal Revenue Code, with the
consequence that NCB is able to issue tax deductible patronage
refunds with respect to all such income.
NCB's subsidiaries are subject to state income taxes.
AGREEMENT CONCERNING CLASS A NOTES
Following passage of a technical amendment to the Act,
NCB entered into, as of December 21, 1989, a Financing Agreement
with the U.S. Treasury to govern the interest rates payable on
the Class A notes until their final redemption on October 31,
2020. Pursuant to the Financing Agreement, NCB has issued to the
U.S Treasury four replacement Class A notes. As of January 1,
1998, the face amounts and current maturities of the outstanding
replacement notes were as follows:
Current
Replacement Maturity Face
Note Date Amount Maturity
1 4/1/98 $53,553,328 3 months
2 10/1/99 $36,854,000 36 months
3 10/1/00 $55,281,000 60 months
4 10/1/00 $36,854,000 120 months
When each note matures NCB has the right to borrow again
from the Treasury the maturing amount under the same terms and
conditions. At each maturity date, the interest rate to be paid
upon the note for the succeeding period will be calculated by the
U.S. Treasury based upon the prevailing interest rates for
Treasury obligations of comparable maturities. NCB intends
generally to avail itself of this right. Thus, until the final
redemption of the Class A notes, NCB would have outstanding to
the U.S. Treasury four tranches of Class A notes in the
maturities stated above. In November 1994, however, NCB adopted
a Capitalization and Patronage Refund Policy that contemplates
the probable retirement of $25 million of Class A notes in 2010
and $25 million in 2015.
FURTHER INFORMATION
For further information concerning the development of
NCB's business in 1997, please see the response to Item 7.
ITEM 2. PROPERTIES
NCB leases space for its Washington, D.C. headquarters
and for three regional offices located in Anchorage, New York
City, and San Francisco. NCB Financial Corporation, NCB Retail
Finance Corporation and NCB I, Inc. maintain offices in
Wilmington, Delaware while NCB Savings Bank, FSB maintains its
offices in Ohio. NCB's headquarters is 34,464 square feet in
size and regional offices average 1500 square feet. The rental
expense for the fiscal year ended December 31, 1997 was
$1,293,000 for NCB's headquarters and regional offices. NCB
considers the regional offices suitable for its needs and the
facilities are fully utilized in its operations.
Minimum future rental payments, assuming present office
space and space leased for the headquarters are retained without
subtracting payments made to NCB under subleases of such space,
for the following fiscal years ended December 31 are as follows:
Other
Year Headquarters Offices
1998 $1,320,000 $231,960
1999 $1,340,000 $ 21,609
2000 $1,360,000
2001 $1,380,000
2002 $ 389,000
ITEM 3. LEGAL PROCEEDINGS
NCB is not involved in any pending legal proceeding,
other than ordinary routine litigation incidental to its
business.
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
NCB did not submit any matters to a vote of its security
holders during the fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
NCB currently has three classes of stock outstanding
whose
rights are summarized as follows:
Class B Stock - The Act permits Class B stock to be held
only by borrowers of NCB and requires each borrower to hold Class
B stock at the time the loan is made whose par value is equal to
1% of its loan amount. The Act prohibits NCB from paying
dividends on Class B stock. There are two series of Class B
stock. Class B-1 stock is Class B stock purchased for cash at
par value on or after June 29, 1984, while Class B-2 stock is all
other Class B stock. Class B stock is transferable to another
eligible holder only with the approval of NCB. NCB does not
permit any transfers of Class B-2 stock and permits only such
transfers, at the stock's $100 par value, of Class B-1 stock as
are required to permit new borrowers to obtain their required
holdings of Class B stock. In each instance, NCB specifies which
holder(s) are permitted to transfer their stock to the new
borrower, based upon which Class B stockholders with holdings of
such stock beyond that required to support their loans have held
such stock for the longest time. NCB will also repurchase, at
par value, any shares of Class B stock that it is required to be
repurchased from holders by the terms of the contracts under
which such stock was originally sold by NCB. At December 31, 1997,
the stock required to be repurchased was approximately $150,000.
Class B stock has voting rights, but such voting rights are
limited in accordance with the weighted voting system described
in Item 10.
Class C Stock - The Act permits Class C stock to be held
only by cooperatives eligible to borrow from NCB. The Act allows
NCB to pay dividends on Class C stock, but so long as any Class A
notes are outstanding, limits dividends on Class C stock(or any
other NCB stock) to the interest rate payable on such notes,
which was a blended rate of 6.4% during 1997. In 1994, NCB
adopted a policy under which annual cash dividends on Class C
stock of up to 2 percent of NCB's net income may be declared.
The policy does not provide any specific method to determine the
amount, if any, of such dividend. Whether any such dividends
will be declared and if so, in what amount accordingly rests
within the discretion of the NCB's Board of Directors. The Board
declared an initial dividend of 83 cents per share of Class C
stock, payable on June 30, 1996 to holders of record as of March
31, 1996. On April 24, 1997, the Board declared a cash dividend
of $1.02 per share of Class C stock payable on or before June
30, 1997 to holders of record as of March 31, 1997. In November,
1996, the Board approved a dividend de minimus provision which
states that Class C stock dividends shall not be distributed to a
stockholder until such time as the cumulative amount of the
dividend payable to the stockholder is equal to, or exceeds,
twenty-five dollars ($25.00) unless specifically requested by the
stockholder. Class C stock is transferable to another eligible
holder only with the approval of NCB. Class C stock has voting
rights, but such voting rights are limited in accordance with the
weighted voting system described in Item 10.
Class D Stock - Class D stock is non-voting stock that
may be held by any person. Only three shares are outstanding and
NCB has no present intention to issue any additional shares of
such stock. The Act permits NCB to pay dividends on Class D
stock but NCB has no present intention to declare any such
dividends. Class D stock is transferable only with the approval
of NCB. No requests for approval of such transfers have been
made to NCB.
There is no established public trading market for any
class of NCB's common equity, and it is unlikely that any such
market will develop in view of the restrictions on transfer of
NCB's stock discussed above. Holders of Class B stock may use
such stock to meet the Class B stock ownership requirements
established in the Bank Act for borrowers from NCB and may be
permitted by NCB, within the limits set forth above, to transfer
Class B stock to another borrower from NCB.
As of December 31, 1997 there were 1,188 holders of
Class B stock, 374 holders of Class C stock, and 3 holders of
Class D stock.
Under the Act, NCB must make annual patronage refunds to
its patrons, which are those cooperatives from whose loans or
other business NCB derived interest or other income during the
year with respect to which a patronage refund is declared. NCB
allocates its patronage refunds among its patrons generally in
proportion to the amount of income derived during the year from
each patron. NCB stockholders, as such, are not entitled to any
patronage refunds. They are entitled to patronage refunds only in
the years when they have patronized NCB, and the amount of their
patronage does not depend on the amount of their stockholding.
Under the Act, patronage refunds may be paid only from taxable
income and only in the form of cash, Class B or Class C stock,
or allocated surplus.
Under NCB's current patronage refund policy that became
effective in 1995, NCB makes the non-cash portion of the refund
in the form of Class B stock until a patron has holdings of
Class B or Class C stock of 16% of its loan amount and thereafter
in Class C stock. Under the current patronage refund policy, NCB
intends to pay a higher percentage of the patronage refund in
cash to those patrons who have greater holdings of Class B and
Class C stock in proportion to their loan amount. NCB generally
intends to pay a minimum 35% of the patronage refund in cash to
those patrons with stock holdings of 1.0% or more of their loan
amount and up to 55% to those patrons with stock holding of 12.5%
or more of their loan amount. There can, however, be no
assurance that a cash patronage refund of any amount will be
declared for any year.
NCB has declared a patronage refund for the year ended
December 31, 1997 of approximately $14.0 million of which $5.9
million will be distributed in cash and $8.1 million in Class B
or Class C stock.
Sales of Unregistered Shares of Class C Stock
During the last quarter of 1997, NCB sold one share of
its Class C stock without registration under the Securities Act
of 1933 (the "1933 Act") in reliance on the exemption from
registration provided by Section 4(2) of the 1933 Act. The stock
was sold for $100 a share in cash without any underwriting
discounts or commissions to cooperative organizations eligible to
obtain loans from NCB. The stock was not offered to the general
public; the purchasers had access to essentially the same
information that would be contained in a registration statement
and had the capability to evaluate the merits of such an
investment.
ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
At December 31, 1997 1996 1995 1994 1993
Loans and leases outstanding $773,768 $750,094 $597,190 $501,090 $457,713
Allowance for loan losses 17,638 15,505 14,554 13,031 12,309
Total assets 869,304 839,336 684,532 567,321 535,767
Total capital* 314,376 307,714 300,995 295,749 292,581
Subordinated debt** 182,542 182,542 182,542 182,542 182,542
Long-term borrowings, including
subordinated debt 387,335 384,679 337,230 287,899 312,897
Members' equity 131,833 125,172 118,453 113,207 110,039
Other borrowed funds
including deposits 531,740 515,257 365,288 256,315 230,868
For the Years Ended December 31, 1997 1996 1995 1994 1993
Total interest income $ 68,787 $ 61,265 $ 52,770 $ 41,714 $ 39,451
Total interest expense 41,944 35,299 30,753 20,609 20,633
Net interest income 26,843 25,966 22,017 21,105 18,788
Net income 12,462 11,199 9,083 8,877 8,616
Ratios
Capital to assets 36.2% 36.7% 44.0% 52.3% 54.6%
Return on average assets 1.5% 1.5% 1.5% 1.7% 1.6%
Return on average members'
equity 9.7% 9.2% 7.8% 7.9% 8.0%
Net yield on interest
earning assets 3.3% 3.7% 3.7% 4.2% 3.8%
Average members' equity as a percent of
Average total assets 15.3% 16.5% 18.9% 21.5% 20.4%
Average total loans and
lease financing 17.9% 19.2% 21.9% 25.0% 24.3%
Net average loans and lease
financing to average
total assets 85.5% 84.3% 84.0% 83.4% 81.9%
Net average earning assets to
average total assets 96.5% 92.4% 92.7% 94.8% 93.9%
Allowance for loan losses
to loans outstanding 2.3% 2.1% 2.5% 2.6% 2.7%
Provision for loan losses
to average loans outstanding 0.5% 0.3% 0.4% 0.2% 0.3%
* - Capital includes members' equity and subordinated debt
** - Excludes deferred hedge gains
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial summary
1997 vs. 1996
Net income of $12.5 million in 1997 increased 11.3% from
$11.2 million in 1996. The growth in net income was due to
increased volume of commercial and mortgage lending activities,
servicing fees and other non-interest income. The impact of the
increase in net interest income was partially offset by increases
in the provision for loan losses, non-interest expenses and
provision for income taxes.
Credit quality in NCB's lending portfolio remained
strong during 1997. Nonperforming assets amounted to 1.3% of
total assets at year end. Net chargeoffs as a percentage of
total loans and leases outstanding at December 31, 1997 was .18%.
The provision for loan losses as a percentage of average loans
and leases increased to .5% in 1997 from .3% in 1996. In this
same period, the allowance for loan losses as a percentage of
loans and leases has increased to 2.3% in 1997 from 2.1% in 1996.
The return on average assets remained unchanged in 1997 and 1996
at 1.5%. The return on average equity increased to 9.7% compared
with 9.2% in 1996.
Total assets increased 3.6% or $30.0 million to $869.3
million as of December 31, 1997 from $839.3 million at year end
1996. Loans outstanding showed a 3.2% increase over last year
primarily due to growth in real estate loans held for sale and
lease financing.
Net Interest Income
Net interest income for the year ended December 31, 1997
increased 3.4% or $0.9 million from the same period in the prior
year. The increase resulted primarily from higher volume of loans
and leases outstanding.
As shown on Table 2, the net yield on interest earning
assets dropped 29 basis points to 3.32% from 3.61% for the year
ended December 31, 1996. The yields on average interest earning
assets dropped slightly to 8.51% in 1997 from 8.52% in 1996 due
to a declining market interest rates on interest bearing assets.
Yields on interest bearing liabilities increased from 6.01% in
1996 to 6.20% in 1997 due to the repricing of the subordinated
debt and higher volume and interest rates on our borrowings. As a
result, the net spread decreased 20 basis points to 2.31% at year
end December 31, 1997 compared with 2.51% at the prior year end.
For the year ended December 31, 1997, interest income
increased 13.7% to $68.8 million compared with $61.3 million from
the prior year. The increase in interest income was mostly due
to a higher average balance of interest earning assets. Average
loans and leases outstanding at December 31, 1997 increased to
$720.3 million compared with $633.4 million at December 31, 1996.
Total interest expense increased $6.6 million to $41.9
million for the year ended December 31, 1997 from $35.3 million
in 1996. As shown on Table 2, the average rate on interest
bearing liabilities at December 31, 1997 went up 19 basis points
to 6.20% compared with 6.01% at December 31, 1996. The increase
was primarily due to the repricing of $53.5 million of
subordinated debt and increased use of long term facilities.
See Table 1 & Table 2
Table 1
CHANGES IN NET INTEREST INCOME
(dollars in thousands)
1997 Compared to 1996 1996 Compared to 1995
Increase (decrease) due to Increase (decrease) dueto
change in: change in:
For the years ended Average Average Average Average
December 31, Volume* Rate Net** Volume Rate Net**
Interest Income
Cash equivalents and
investment securities $ 162 $ 482 $ 644 $ 406 $ (419) $ (13)
Commercial loans and
leases 4,123 367 4,490 3,659 (1,592) 2,067
Real estate loans 3,440 (1,052) 2,388 5,378 (339) 5,039
Total interest income 7,725 (203) 7,522 9,443 (2,350) 7,093
Interest Expense
Deposits 53 (192) (139) 616 35 651
Notes payable 6,413 (236) 6,177 6,212 (1,269) 4,943
Subordinated debt (22) 628 606 2 (1,050) (1,048)
Total interest expense 6,444 200 6,644 6,830 (2,284) 4,546
Net interest income $1,281 $ (403) $ 878 $2,613 $ (66) $ 2,547
* Average monthly balances
**Changes in interest income and interest expense due to changes in rate and
volume have been allocated to "change in average volume" and "change in
average rate" in proportion to the absolute dollar amounts in each.
Table 2
RATE RELATED ASSETS AND LIABILITIES
(dollars in thousands)
For the years ended December 31,
1997 1996 1995
Average Average Average
Assets Average Income/ Rate/ Average Income/ Rate Average Income/ Rate/
Balance* Expense Yield Balance* Expense Yield Balance* Expense Yield
Interest earning assets
Real estate loans $355,160 $30,951 8.71% $316,015 $28,565 9.04% $256,564 $23,524 9.17%
Commercial loans and
leases 365,143 31,599 8.65% 317,427 27,106 8.54% 275,352 25,039 9.09%
Total loans and
leases 720,303 62,550 8.68% 633,442 55,671 8.79% 531,916 48,563 9.13%
Investment securities and
cash equivalents 87,386 6,237 7.14% 77,926 5,594 7.18% 55,890 4,207 7.52%
Total interest earning
assets 807,689 68,787 8.52% 711,368 61,265 8.61% 587,806 52,770 8.97%
Allowance for loan
losses (16,747) (14,976) (13,309)
Non-interest earning assets
Cash 5,028 4,577 5,023
Other 46,176 33,021 37,518
Total non-interest earning
assets 51,204 37,598 42,541
Total assets $842,146 $733,990 $617,038
Liabilities and members' equity
Interest bearing liabilities
Subordinated debt $182,542 $10,455 5.73% $182,943 $ 9,849 5.38% $182,915 $10,897 5.96%
Note payable 409,767 27,518 6.72% 321,080 21,341 6.65% 229,963 16,398 7.13%
Deposits 84,147 3,971 4.72% 83,056 4,109 4.95% 70,596 3,458 4.90%
Total interest bearing
liabilities 676,456 41,944 6.20% 587,079 35,299 6.01% 483,474 30,753 6.36%
Other liabilities 36,754 25,038 17,178
Members' equity 128,936 121,873 116,386
Total liabilities and
members' equity $842,146 $733,990 $617,038
Net interest earning
assets $131,233 $131,335 $104,332
Net interest revenues
and spread $26,843 2.32% $25,966 2.60% $22,017 2.61%
Net yield on interest earning
assets 3.32% 3.65% 3.74%
*Based on monthly balances. Average loan balances includes nonaccrual loans.
Credit quality
Credit quality remained strong in 1997. NCB maintains
loan loss reserves that, in management's judgement based on
current expectations relative to portfolio characteristics, are
adequate to absorb future losses inherent in the loan portfolio.
An inevitable aspect of the lending or risk assumption
process is the fact that losses will be incurred. The extent to
which losses occur depends on the risk characteristics of the
loan portfolio. NCB emphasizes continuous credit risk
management. Specific procedures have been established that seek
to eliminate undue credit risk on the balance sheet. They
include a multilevel approval processes and an ongoing assessment
of the credit condition of the portfolio. In addition, a risk
rating system is designed to classify each loan according to the
risks unique to each credit facility.
To manage credit risk over a wide geographic area and
lending in multiple industries, NCB uses a team-based approval
process which relies upon the expertise of lending teams familiar
with particular segments of our industry. Those credit
facilities exceeding delegated lending authority for each team
are approved by senior management in an attempt to ensure the
quality of lending decisions. Financial analysis of the
industries and regions serviced is regularly performed by the
various lending teams that keep abreast of economic events and
market conditions throughout the United States.
Loans with developed risk characteristics that make
their full and timely payment uncertain are assigned to the
Special Assets Department. The Department determines, on a
case-by-case basis, the best course of action to restore a credit
to an acceptable risk rating or to minimize potential losses to
NCB.
By maintaining an adequate allowance for loan losses,
management seeks to protect NCB's capital against the risk of
losses inherent in the credit extension process. The allowance
is increased by the provision for possible credit losses and
decreased by the amount of charge-offs, net of recoveries. The
adequacy of the allowance for loan losses is determined based on
risk ratings, current and projected economic conditions,
concentrations, diversification, and portfolio size, among other
relevant factors.
The provision for loan losses increased to $3.5 million
in 1997 from $1.95 million in 1996. The increase was largely
attributable to identified downgrade of loans as well as growth
in the portfolio. The provision as a percentage of average loans
and leases outstanding increased to .5% in 1997 from .3% in 1996.
The allowance for loan losses increased 13.8% to $17.6
million in 1997. The allowance as a percentage of loans and
leases outstanding increased to 2.3% at December 31, 1997 from
2.1% at December 31, 1996. The allowance as a percentage of
non-performing loans ( restructured and non-accruing loans )
increased to 303% in 1997 compared with 200% in the prior year.
Total non-performing assets ( non-accruing and
restructured loans and real estate owned(REO)) increased to $10.9
million at December 31, 1997 from $8.1 million at December 31,
1996. Non-performing assets as a percentage of loans and leases
outstanding plus REO increased to 1.4% in 1997 from 1.1% in 1996.
Non-performing assets as a percentage of total capital increased
to 8.3% in 1997 from 6.5% in 1996.
See Table 3 & Table 4
Non-accruing loans, as a percentage of loans and leases,
remained at .3% at year-end 1997 and 1996. Restructured loans
decreased to $2.8 million in 1997 compared with $5.1 million in
1996 due to a repayment of a real estate loan in July 1997. As
of year end, all restructured loans were current.
The majority of NCB's loans are to cooperatives in
industries such as owner-occupied multi-family residential
housing, food distribution, health care, and financial services.
NCB bases credit decisions on the cash flows of its customers and
views collateral as a secondary source of repayment.
The real estate portfolio contains a concentration of
loans in the New York City area; however, the majority of loans
are to seasoned housing cooperatives with low loan-to-value
ratios. NCB also has minimal credit exposure to highly leveraged
transactions, commercial real estate and construction loans. NCB
has no foreign loan exposure.
See Table 5
Non-interest income
Non-interest income increased by 32.6% to $14.6 million
in 1997. Non-interest income is composed of gains from sales of
blanket mortgages and share loans to secondary market investors,
servicing fees, origination fees, and advisory fees. The majority
of the increase was caused by the higher amount of asset sales to
the secondary market. Gains on sales of loans were $7.2 million
in 1997 which represented 49.6% of non-interest income. Real
estate loan sales in 1997 of $320.4 million reflected an increase
of 85.0% or $147.2 million compared with $173.2 million in 1996.
NCB maintains a conservative interest rate risk policy;
accordingly, warehoused loans were fully hedged in 1997 and 1996.
Servicing income remained a stable source of
non-interest income for NCB in 1997. NCB earned servicing fee
income of $2.2 million and $2.1 million in 1997 and 1996,
respectively. As of December 31, 1997, NCB serviced $1.37 billion
in single and multi-family real estate and commercial loans for
investors compared with $1.2 billion at year end 1996.
Other income increased 19% to $5.1 million for the year
ended December 31, 1997 compared with $4.3 million for the prior
year. The majority of other income is related to the commercial
line of business activities.
Non-interest expenses
Non-interest expenses increased 4.6% from $23.0 million
to $24.1 million. Increases in compensation and employee
benefits and contributions to NCBDC were offset by a decrease in
contractual services, occupancy and equipment, and other
expenses. Non-interest expenses as a percentage of average
assets were 2.9% for 1997 compared with 3.1% in 1996. Salaries
and benefits, the single largest component of non-interest
expenses, increased 16.9% or $1.8 million. During 1997, loan
officers were paid more commissions due to high levels of loan
originations while bonuses paid to the remaining employees were
at their maximum payout based on NCB's performance. Salaries and
employee benefits accounted for 52.6% of non-interest expenses in
1997 compared with 47.1% in 1996. As of December 31, 1997, NCB
and its consolidated subsidiaries employed 159 employees compared
with 162 employees one year earlier.
Table 3
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
For the years ended December 31, 1997 1996 1995 1994 1993
Balance at beginning of year $15,504 $14,554 $13,031 $12,309 $10,419
Charge-offs
Commercial 597 1,106 131 320 159
Real estate-residential 958 31 568 0 93
Total charge-offs 1,555 1,137 699 320 252
Recoveries
Commercial 133 137 125 164 356
Real estate-residential 52 0 192 0 82
Total recoveries 185 137 317 164 438
Net charge-offs(recoveries) 1,370 1,000 382 156 (186)
Provision for loan losses 3,504 1,950 1,905 878 1,704
Balance at end of year $17,638 $15,504 $14,554 $13,031 $12,309
Table 4
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
At December 31, 1997 1996 1995 1994 1993
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
Loans and lease
financing
Commercial * $347,658 44.9% $342,211 45.6% $327,215 54.8% $246,796 49.5% $229,461 50.1%
Real estate-
residential * 389,153 50.3 384,035 51.2 247,524 41.5 233,527 46.5 210,846 46.1
Real estate
commercial 7,025 1.0 8,742 1.2 9,361 1.6 10,301 2.1 10,577 2.3
Lease financing 29,932 3.8 15,106 2.0 13,090 2.1 9,466 1.9 6,829 1.5
Total loans and
lease financing $773,768 100.0% $750,094 100.0% $597,190 100.0% $501,090 100.0% $457,713 100.0%
Allocation of allowance for loan losses
Commercial $ 10,348 58.7% $ 7,826 50.5% $ 7,158 49.2% $ 0 0.0% $ 0 0.0%
Real estate-
residential 6,971 39.5 6,963 44.9 5,820 40.0 0 0.0 0 0.0
Lease financing 319 1.8 151 1.0 250 1.7 0 0.0 0 0.0
Unallocated 0 0.0 564 3.6 1,326 9.1 13,031 100.0 12,309 100.0
Total allowance for
loan losses $17,638 100.0% $15,504 100.0% $ 14,554 100.0% $ 13,031 100.0% $ 12,309 100.0%
*Includes loans held for sale
Table 5
NONPERFORMING ASSETS
(dollars in thousands)
At December 31, 1997 1996 1995 1994 1993
Real estate owned $5,115 $ 377 $1,397 $ 300 $ 172
Non-accruing $3,030 $2,601 $1,741 $ 723 $ 886
Restructured $2,791 $5,147 $4,041 $2,143 $2,283
Under the provisions of the National Consumer
Cooperative Bank Act, NCB makes tax deductible, voluntary
contributions to the NCB Development Corporation. These
contributions are discretionary and are based upon the approval
of NCB's Board of Directors. In 1997, NCB agreed to make a
contribution to NCBDC to fund certain business activities. The
contribution to NCB Development Corporation was $1.0 million in
1997 and $.72 million in 1996. Non-interest expenses, adjusted
for the contribution to NCBDC, as a percentage of average assets
decreased to 2.7% in 1997 compared with 3.0% in 1996.
Year 2000
A significant challenge facing NCB, its subsidiaries and
affiliate as well as all companies, is the readiness of its
computer systems for the next millennium. NCB is dependent upon
its internal computer systems and has external interdependencies
with other financial institutions and customers. While the
interdependencies may not be within NCB's influence, internal
systems are.
Following the adoption of a Year 2000 policy governing
the purchase of new software and process for remediating existing
software, management began to identify and test internal systems
in 1997. All systems have been identified and evaluated as to
their critical impact. Those core systems where Year 2000
compliance is known to be deficient have been designated for
replacement. Conversion to the new systems is scheduled for
completion before December 31, 1998. Testing of all other systems
is scheduled for completion by June, 1999.
Management does not expect costs associated with
modification to NCB's information systems infrastructure to have
a material impact on NCB's business, operations or
financial condition. In the event significant customers,
financial institutions, or companies with which NCB is
interdependent do not successfully and timely achieve Year 2000
compliance, or NCB's own Year 2000 compliance is not achieved on
schedule, NCB's business could be adversely affected.
Income taxes
Under the terms of the Act, NCB is exempt from most
state and local taxes. In addition, under provisions of the Act
and Subchapter T of the Internal Revenue Code, NCB substantially
reduces its Federal tax liability through the issuance of annual
patronage dividends. The federal income tax provision is
determined on non-member income generated by NCB Savings Bank,
FSB, and reserves set aside for the retirement of Class A notes
and dividends on Class C stock. NCB's subsidiaries are also
subject to varying levels of state taxation.
Note 19 to the consolidated financial statements
contains additional discussions of NCB's tax status.
1996 vs. 1995
Net income of $11.2 million in 1996 increased 23.9% from
$9.1 million in 1995. The growth in net income was due to
increased volume of commercial and mortgage lending activities,
servicing fees and other non-interest income. The impact of the
increase in net interest income was partially offset by increases
in the provision for loan losses and non-interest expenses.
Net interest income of $26.0 million for the year ended
December 31, 1996 represented an increase of $3.9 million or
17.9% over year end 1995. Net yield on interest earning assets
decreased 9 basis points to 3.65% in 1996 from 3.74% in 1995 while net
spread slightly decreased from 2.61% in 1995 to 2.60% in 1996.
Credit quality in NBC's lending portfolio remained
strong during 1996. Nonperforming assets as a percentage of total
assets at year end was 1%. Net chargeoffs as a percentage of
total loans and leases outstanding was .13%. The provision for
loan losses as a percentage of average loans and leases decreased
to .3% in 1996 from .4% in 1995. In this same period, the
allowance for loan losses as a percentage of average loans and
leases decreased to 2.1% in 1996 from 2.5% in 1995.
Non-interest income decreased by 10.9% to $11.0 million
in 1996. Non-interest income was composed of gains from sales of
blanket mortgages and share loans to secondary market investors,
servicing fees, origination fees and advisory fees. Gains on
loan sales were $4.6 million in 1996 which represented 41.7% of
non-interest income. Real estate loan sales decreased by $79.5
million to $173.2 million in 1996 from $252.7 million in 1995.
NCB maintains a conservative interest rate risk policy;
accordingly, warehoused loans were fully hedged in 1996 and 1995.
Non-interest expenses increased 1.8% from $22.6 million
to $23 million. Increases in compensation and employee benefits,
occupancy and equipment, contributions to NCBDC and other
expenses of $2 million were offset by a decrease in contractual
services of $1.6 million. Non-interest expenses as a percentage
of average assets were 3.1% for 1996 compared with 3.7% in 1995.
Salaries and benefits, the single largest component of
non-interest expenses, increased 4.1% as a result of additional
employee hiring and incentive bonuses paid to NCB's personnel.
Employees are eligible to receive bonuses based on performance
objectives which are tied to market compensation for comparable
positions. Salaries and employee benefits accounted for 47.1% of
non-interest expenses in 1996 and 46.1% of non-interest expenses
in 1995.
1997 vs. 1996 Fourth quarter results
Net income for the fourth quarter of 1997 was $5.1
million compared with $1.1 million in the fourth quarter of 1996.
The increase was due primarily to higher non-interest income.
Non-interest income for the quarter increased to $7.9 million in
1997 from $1.9 million in 1996 due primarily to the timing of
gains realized in loan sales. This increase however was
partially offset by an increase in the provision for loan losses
and non-interest expenses of $.5 million and $.8 million,
respectively.
See Table 6
Sources of Funds
Capital Markets Access
NCB maintains line of credit facilities provided by
a consortium of banks. At year end, total borrowing capacity
under these facilities was $320 million, and the outstanding
balance at December 31, 1997 was $218.2 million compared with an
outstanding balance of $224.5 million at December 31, 1996.
Usage, as measured by average outstanding balances during the
year, increased from $120.6 million in 1996 to $186.2 million in
1997 due to growth in commercial loan volume and additional
activity to fund warehoused real estate loans.
In 1996, NCB developed a program under which it borrows, on
a short-term basis, from certain of its customers. At December
31, 1997 and 1996, the short-term borrowings outstanding were
$12.2 million and $6.5 million, respectively.
In 1997, steps were taken to move into the medium term note
market. In January, 1997, NCB received approval to issue up to
$100 million under the medium term note program. As of December
31, 1997, NCB had $40 million outstanding under this program. In
addition, during 1997, NCB implemented a commercial paper program
of which a face value of $25.0 million was outstanding at year
end.
NCB's loan sale activity is another source of funding.
NCB originates most of its real estate loans, including share
loans originated by NCB Savings Bank, FSB, for sale into the
secondary market. In 1997, NCB sold $366.2 million compared to
$173.2 million of cooperative real estate, commercial and share
loans sold in the prior year.
In 1998, NCB expects to sell $390 million of cooperative
real estate, commercial, and share loans. Actual sales through
February, 1998 were $126.9 million.
Table 6
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
(dollar in thousands)
1997 1996
For the three months
ended Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
Interest income $16,248 $18,545 $17,088 $16,906 $16,855 $15,168 $14,536 $14,706
Interest expense 9,831 11,428 10,489 10,196 10,007 8,645 8,193 8,454
Net interest income 6,417 7,117 6,599 6,710 6,848 6,523 6,343 6,252
Provision for loan
losses 1,460 655 687 702 1,000 300 330 320
Income after provision
for loan losses 4,957 6,462 5,912 6,008 5,848 6,223 6,013 5,932
Non-interest income 7,852 1,860 1,783 3,069 1,880 1,658 6,327 1,122
Net revenue 12,809 8,322 7,695 9,077 7,728 7,881 12,340 7,054
Non-interest expenses 7,308 6,076 5,589 5,092 6,479 6,189 5,275 5,064
Income before income
taxes 5,501 2,246 2,106 3,985 1,249 1,692 7,065 1,990
Provision for income
taxes 353 283 402 337 189 157 222 229
Net income $ 5,148 $ 1,963 $ 1,704 $ 3,648 $ 1,060 $ 1,535 $ 6,843 $ 1,761
Deposits
At NCB's wholly-owned subsidiary, NCB Savings Bank, FSB,
deposits declined 5.4% to $83.8 million in 1997 from $88.6
million a year earlier. The decrease was attributable to
scheduled maturities of the certificate of deposits. The weighted
average rates on deposits at December 31, 1997 and 1996 were 4.9%
and 4.8%, respectively. Although NCB relies heavily on funds
raised through the capital markets, deposits are a major portion
of interest bearing liabilities -- 11.7% in 1997 compared with
12.7% in 1996. Management anticipates that deposits will
represent an increasing portion of its funding structure.
Uses of funds
Loans and leases
Loans and leases outstanding increased 3.2% to $773.8
million at year-end 1997 from $750.1 million in 1996.
NCB's commercial loan portfolio expanded with new
business opportunities. The commercial loan and lease portfolio
increased 5.7% to $377.6 million at December 31, 1997 compared
with $357.3 a year earlier. The commercial loan portfolio
reflects an increase in the food processing and distribution
areas even though $19.0 million of loans were sold through the
retail loan securitization program. Decreases in the areas of
financial services and other, which includes native Alaskan and
hardware wholesale cooperatives, were due to scheduled loan
repayments and maturities.
NCB's real estate portfolio increased 1.0% to $396.2
million at the end of 1997 from $392.8 million at same period
last year. The real estate portfolio was substantially composed
of multifamily blanket mortgages and single family share
loans. NCB does not invest in speculative commercial real estate
transactions.
For 1998, NCB expects continued strength in its
origination and secondary marketing activities. Net loan volume
is expected to increase approximately $37 million based on new
loan originations (net of scheduled amortization) of $427
million and sales of $390 million.
Cash, Cash Equivalents, and Investment Securities
Cash, cash equivalents, and investments increased 6.7%
or $5.8 million to $91.8 million compared with $86.3 million in
1996. Cash, cash equivalents, and investment securities,
represent 10.6% of interest earning assets in 1997 compared with
7.3% in 1996.
Asset and Liability Management
Asset and liability management is the structuring of
interest rate sensitivities of the balance sheet to maximize net
interest income under the constraints of liquidity and
interest-rate risk ("IRR"). NCB's liquidity and IRR
are managed by the Risk Management Committee which meets
quarterly. The purpose of the committee is to develop and
implement strategies, including the buying and selling of
off-balance sheet instruments such as interest rate swaps and
financial futures contracts, and to ensure sufficient reward for
known and controlled risk.
Overall, NCB's Risk Management Committee adheres to the
philosophy that a consistently balanced position results in the
safest and most predictable net interest earnings stream over
various interest rate cycles.
Liquidity
Liquidity is the ability to meet financial obligations
either through the sale or maturity of existing assets or through
the raising of additional funds. Maintaining adequate liquidity
therefore requires careful coordination of the maturity of assets
and liabilities.
NCB's asset liquidity is generally provided by
maintaining near-cash and short-term investments which can be
converted to cash at little or no cost. These investments
include: fed funds, eurodollar investments, commercial paper,
certificates of deposit, and other short term obligations. These
securities normally have a maturity of less than ninety days and
are not subject to price variations. At December 31, 1997, NCB
held $21.7 million in cash and cash equivalents compared with
$17.2 million in cash and cash equivalents at year end 1996.
These funds are normally used to fund business operations.
NCB's had at year end a $32.5 million investment
portfolio which is a second source of asset liquidity. The
portfolio consists of high-grade corporate and government
obligations. The weighted average period to maturity remained at
5 years for 1997 and 1996.
Aside from its principal amortization (scheduled and
non-scheduled) and maturities, the loan portfolio is an excellent
source of liquidity as demonstrated by NCB's success in asset
securitization. In fact, NCB has been instrumental in developing
the secondary market for loans made to cooperatives.
NCB also has $320 million of revolving lines of credit,
$130 million of which are committed until May 27, 2000 and $130
million committed until May 27, 1998. The remaining balance of
$60 million is uncommitted at December 31, 1997. Average
outstanding balances were $186.2 million in 1997 compared
with $120.6 million in 1996.
Finally, NCB's wholly-owned subsidiary, NCB Savings
Bank, FSB raises both local and national deposits from NCB
members, which also serve as a source of liquidity. NCB Savings
Bank, FSB, uses cooperative deposits to co-originate loans with
NCB.
See Table 7
ITEM 7A, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
NCB's principal market risk exposure is to interest
rates.
NCB's asset and liability management process is utilized
to manage NCB's interest rate risk through the structuring of the
balance sheet and off-balance sheet portfolios to maximize net
interest income while maintaining an acceptable level of risk to
changes in market interest rates. The achievement of this goal
requires a balance between profitability, liquidity, and interest
rate risk.
Interest rate risk is managed by the Risk Management
Committee (RMC), which is composed of senior officers of NCB, in
accordance with policies approved by NCB's Board of Directors.
The RMC formulates strategies based on appropriate levels of
interest rate risk. In determining the appropriate level of
interest rate risk, the RMC considers the impact on earnings and
capital of the current outlook on interest rates, potential
changes in interest rates, regional and national economies,
liquidity, business strategies, and other factors. The RMC
meets regularly to review, among other things, the sensitivity of
assets and liabilities to interest rate changes, the book and
market values of assets and liabilities, unrealized gains and
losses, purchase and sale activity, warehouse loans and
commitments to originate loans ("mortgage pipeline"),and the
maturities of investments and borrowings. Additionally, the RMC
reviews liquidity, cash flow flexibility, maturities of deposits,
and consumer and commercial deposit activity.
To effectively measure and manage interest rate risk,
NCB uses simulation analysis to determine the impact on net
interest income under various interest rate scenarios, balance
sheet trends, and strategies. From these simulations, interest
rate risk is quantified and appropriate strategies are developed
and implemented. Additionally, duration and market value
sensitivity measures are utilized when they provide added value
to the overall interest rate risk management process. The
overall interest rate risk position and strategies are reviewed
by executive management and NCB's Board of Directors on an
ongoing basis. NCB has traditionally managed its business to
reduce its overall exposure to changes in interest rates.
However, under current policies of NCB's Board of Directors,
management has been given some latitude to increase NCB's
interest rate sensitivity position within certain limits if, in
management's judgement, it will enhance profitability. As a
result, changes in market interest rates may have a greater
impact on NCB's financial performance in the future than they
have had historically.
NCB manages its exposure to interest rates by entering
into certain financial instruments with off-balance sheet risk in
the ordinary course of business. The financial instruments used
for hedging interest rate risk include interest rate swaps, caps,
floors, financial options, financial futures contracts, and
forward delivery contracts. A hedge is an attempt to reduce risk
by creating a relationship whereby any losses on the hedged asset
or liability are expected to be offset in whole or in part by
gains on the financial instrument used for hedging. Thus, market
risk resulting from a particular instrument is normally offset by
other on or off-balance-sheet instruments. See Note 21 to the
Consolidated Financial Statements.
The following table presents an analysis of the
sensitivity inherent in NCB's net interest income and market
value of portfolio equity (market value of assets, less
liabilities, adjusted for the market value of mortgage servicing
rights and off-balance-sheet instruments). The interest rate
scenarios presented in the table include interest rates at
December 31, 1997 and as adjusted by instantaneous parallel rate
changes upward and downward of up to 200 basis points. Each rate
scenario reflects unique prepayment and repricing assumptions.
Substantially, all of NCB's portfolio is held for non-trading purposes.
Since there are limitations inherent in any methodology
used to estimate the exposure to changes in market interest
rates, this analysis is not intended to be a forecast of the
actual effect of a change in market interest rates on NCB. The
net interest income variability reflects NCB's interest
sensitivity gap (defined below).
CHANGE IN CHANGE IN
CHANGE IN NET INTEREST MARKET VALUE OF
INTEREST RATES INCOME PORTFOLIO EQUITY
+200 (1.9)% (6.7)%
+100 (1.0) (3.5)
0 0.0 0.0
-100 .8 3.8
-200 1.7 8.2
Assumptions with respect to the model's projections of
the effect of changes in interest rates on Net Interest Income
include:
1. Target balances for various asset and liability classes
which are solicited from the management of the various
business units.
2. Interest rate scenarios which are generated by RMC.
3. Spread relationships between various interest rate
indices, which are generated by the analysis of
historical relationships and RMC consensus.
4. Assumptions about the effect of embedded options and
prepayment speeds:
NCB is subject to limited prepayment risk given the
structure of the loans; therefore limited prepayments are
factored into the assumptions.
The interest rate sensitivity gap ("gap") is defined as
the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given
time period. During a period of rising interest rates, a
positive gap (where the amount of maturing and repricing assets
exceed liabilities) would tend to have a positive impact on net
interest income while a negative gap (where the amount of
maturing and repricing liabilities exceeds assets) would tend to
have a detrimental impact. During a period of declining interest
rates, a negative gap would tend to have a positive
impact on net interest income while a positive gap would tend to
have a detrimental impact.
NCB's one-year cumulative gap position at December 31,
1997 was a positive $20.6 million or 2.37% of assets. Though NCB
had a positive gap at December 31, 1997, a rising interest rate
environment would marginally reduced net interest income. This
results from interest rate sensitive liabilities maturing and/or
repricing more frequently than interest rate sensitive assets
within the specified time period, generally twelve months. The December 31
one-year gap position is a one-day position that is continually changing and
is not indicative of NCB's position at any other time. While the gap
position is a useful tool in measuring interest rate risk
and contributes toward effective asset and liability management,
it is difficult to predict the effect of changing interest rates
solely on that measure, without accounting for alterations in the
maturity or repricing characteristics of the balance sheet that
occur during changes in market interest rates. For example,
the gap position reflects only the prepayment assumptions
pertaining to the current rate environment. Assets tend to
prepay more rapidly during periods of declining interest rates
than during periods of rising interest rates. Because of this
and other risk factors not contemplated by the gap position, an
institution could have a matched gap position in the current rate
environment and still have its net interest income exposed to
interest rate risk.
The following table sets forth the expected maturity and
repricing characteristics of NCB's consolidated assets,
liabilities and off-balance sheet contracts at December 31, 1997.
See Table 8
It is clear from Table 8 that NCB had a positive gap (as
a percentage of total assets) of 2.37% and 2.94% at the one year
and 180 day time horizons, respectively. At December 31, 1997,
NCB's static gap position was in compliance with existing Board
policies.
Table 7
MATURITY SCHEDULE OF LOANS
(dollar in thousands)
One Year
One Year Through Over
At December 31, 1997 or Less Five Years Five Years Total
Commercial $41,880 $126,897 $178,881 $347,658
Real estate-
residential 11,755 34,987 342,410 389,152
Real estate-
commercial 5,018 2,007 7,025
Lease 420 17,290 12,223 29,933
Total loans and leases $54,055 $184,192 $535,521 $773,768
Fixed interest rate
loans $ 68,886 $321,594
Variable interest rate
loans 115,306 213,927
$184,192 $535,521
Table 8
Interest Rate Sensitivity
(dollar in thousands)
At December 31, 1997 Over 12
Interest Interest Interest Interest Interest Months and
-sensitive -sensitive -sensitive -sensitive -sensitive Non-Interest
30 day 3 month 6 month 12 month Total Sensitive Total
Interest earning assets
Cash and cash
equivalents $ 28,574 $ 0 $ 0 $ 0 $ 28,574 $ 0 $ 28,574
Investment securities 9,500 1,364 96 1,492 12,452 50,759 63,211
Loans and leases 202,827 48,992 18,948 38,100 308,867 464,901 773,768
Total interest earning
assets $240,901 $ 50,356 $ 19,044 $ 39,592 $349,893 $515,660 $865,553
Interest bearing liabilities
Deposits $ 3,567 $ 5,540 $ 27,435 $ 17,462 $ 54,004 $ 29,822 $ 83,826
Short-terms
borrowings 243,121 0 0 0 243,121 0 243,121
Long-term debt* 0 8,000 13,000 27,000 48,000 156,793 204,793
Subordinated debt* 53,553 0 0 0 53,553 128,989 182,542
Total interest bearing
Liabilities 300,241 13,540 40,435 44,462 398,678 315,604 714,282
Other
Other non-interest
bearing, net 0 0 0 0 0 151,271 151,271
Effect of interest rate
swaps and
Financial futures 9,027 (118,410) 40,000 0 (69,383) 69,383 0
Total $309,268 $(104,870) $ 80,435 $ 44,462 $329,295 $536,258 $865,553
Repricing difference $(68,367) $ 155,226 $(61,391) $ (4,870) $ 20,598 $(20,598)
Cumulative gap $(68,367) $ 86,859 $ 25,468 $ 20,598
Cumulative gap as %
total assets -7.89% 10.03% 2.94% 2.37%
* Net of premiums/discounts.
Capital
NCB's strong capital position should support
growth, continuing access to financial markets, and allow
for greater flexibility during difficult economic periods.
Historically, NCB has maintained a strong capital
structure. NCB's average equity to average assets was 15.3% in
1997 compared with 16.5% in 1996. When including NCB's
subordinated debt, NCB's average total capital to average assets
was 37.0% and 41.5% in 1997 and 1996, respectively. The Bank Act
limits NCB's outstanding debt to ten times its capital and
surplus (including the subordinated debt). As of December 31,
1997, NCB Savings Bank, FSB, had a risk based capital ratio of
21.6%, well in excess of regulatory requirements.
Patronage policy
Each year, NCB declares patronage refunds
approximately equal to its taxable net income thereby
substantially reducing its Federal income tax. In June 1997, NCB
distributed $10.8 million to its active member-borrowers.
Of this total, approximately $4.1 million was distributed in
cash.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NCB's financial statements and notes thereto are
set forth beginning at page 25 below. NCB is not subject to any
of the requirements for supplementary financial information
contained in Item 302 of Regulation S-K.
Report of Independent Public Accountants
To the Board of Directors and
Members of National Cooperative Bank:
We have audited the accompanying consolidated balance sheet of
National Cooperative Bank and subsidiaries as of December 31,
1997, and the related consolidated statements of income, changes
in members' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of National Cooperative Bank and
subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, effective
January 1, 1997, the Company changed its method of accounting for
loan-servicing rights and interest-only receivables.
Washington, D.C.,
January 28, 1998
(except with respect to the matter discussed in Note 24,
as to which the date is February 13, 1998)
Independent Auditors' Report
To the Board of Directors and
Members of National Cooperative Bank
We have audited the accompanying consolidated balance sheets of
National Cooperative Bank and subsidiaries as of December 31,
1996, and the related consolidated statements of income, changes
in members' equity, and cash flows for each of the two years in
the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the consolidated financial
position of National Cooperative Bank and subsidiaries at
December 31, 1996, and the results of their operations and their
cash flows for each of the two years in the period ended December
31, 1996 in conformity with generally accepted
accounting principles.
Washington, D.C.
January 30, 1997
NATIONAL COOPERATIVE BANK
CONSOLIDATED BALANCE SHEETS
December 31,
Assets 1997 1996
Cash and cash equivalents $ 21,689,245 $ 17,150,534
Restricted cash 6,884,572 8,348,703
Investment securities
Available-for-sale (amortized
cost of $60,911,708 and
$57,967,940 in 1997 and 1996) 61,268,440 57,903,166
Held-to-maturity (fair value of
$1,911,605 and $2,294,294 in
1997 and 1996) 1,942,312 2,946,425
Loans and lease financing 584,635,993 565,824,579
Loans held for sale 189,132,330 184,269,872
Less: Allowance for loan
losses (17,638,136) (15,504,510)
756,130,187 734,589,941
Other assets 21,389,059 18,396,811
Total assets $869,303,815 $839,335,580
Liabilities and Members' Equity
Liabilities
Deposits $ 83,825,979 $ 88,620,002
Patronage dividends payable
in cash 5,872,708 4,721,600
Other liabilities 17,072,271 11,332,033
Borrowings
Short-term 243,120,607 224,500,000
Long-term 204,793,392 202,137,077
447,913,999 426,637,077
Subordinated debt 182,785,385 182,853,313
Total borrowings 630,699,384 609,490,390
Total liabilities 737,470,342 714,164,025
Members' equity
Common stock
Class B 84,004,502 78,600,416
Class C 21,904,447 21,751,584
Class D 300 300
Retained earnings
Allocated 8,109,931 5,770,844
Unallocated 17,474,132 19,113,185
Unrealized gain (loss)
on investment securities
available-for-sale 340,161 (64,774)
Total members' equity 131,833,473 125,171,555
Total liabilities and
members' equity $869,303,815 $839,335,580
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
1997 1996 1995
Interest income
Loans and lease
financing $62,549,700 $55,671,365 $48,563,512
Investment securities 6,237,441 5,593,678 4,206,876
Total interest income 68,787,141 61,265,043 52,770,388
Interest expense
Deposits 3,970,498 4,109,098 3,457,902
Short-term borrowings 11,229,046 7,851,964 6,196,456
Long-term debt, other
borrowings and
subordinated debt 26,744,347 23,338,194 21,098,803
Total interest
expense 41,943,891 35,299,256 30,753,161
Net interest income 26,843,250 25,965,787 22,017,227
Provision for loan
losses 3,504,000 1,950,000 1,904,500
Net interest income
after provision for
loan losses 23,339,250 24,015,787 20,112,727
Non-interest income
Gain on sale of loans 7,229,368 4,578,209 6,009,720
Loan and deposit
servicing fees 2,237,082 2,125,131 1,701,682
Other 5,097,382 4,283,556 4,629,503
Total non-interest
income 14,563,832 10,986,906 12,340,905
Non-interest expense
Compensation and
employee benefits 12,658,409 10,828,385 10,406,220
Contractual services 3,808,267 4,182,131 5,808,285
Occupancy and equipment 4,016,118 4,140,589 3,060,293
Contribution to NCB
Development Corporation 1,000,000 720,000 500,000
Other 2,582,435 3,135,476 2,817,915
Total non-interest
expense 24,065,229 23,006,581 22,592,713
Net income before taxes 13,837,853 11,996,112 9,860,919
Provision for income
taxes 1,375,498 796,914 777,683
Net income $12,462,355 $11,199,198 $ 9,083,236
Distribution for net
income
Patronage dividends $13,982,639 $10,492,444 $11,308,558
Retained earnings (1,520,284) 706,754 (2,225,332)
$12,462,355 $11,199,198 $ 9,083,236
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
Retained Retained Total
Common Earnings Earnings Unrealized Members'
Stock Allocated Unallocated Gain(Loss) Equity
Balance, December 31, 1994 $ 92,667,996 $ 4,848,218 $ 17,112,436 $(1,421,581) $113,207,069
Net income - - 9,083,236 - 9,083,236
Cancellation and
redemption of stock (3,544,579) - 3,234,213 - (310,366)
1994 patronage dividends
distributed in
common stock and cash 4,957,803 (4,848,218) (198,684) - (89,099)
Other dividend paid - - (24,540) - (24,540)
1995 patronage dividends
to be distributed in cash - - (5,088,851) - (5,088,851)
Retained in form of
equity - 6,219,707 (6,219,707) - -
Unrealized gain on investment
securities available-
for-sale - - - 1,675,619 1,675,619
Balance, December 31, 1995 94,081,220 6,219,707 17,898,103 254,038 118,453,068
Net income - - 11,199,198 - 11,199,198
Proceeds from issuance
of common stock 1,000 - - - 1,000
Cancellation and
redemption of stock (658,484) - 590,484 - (68,000)
1995 patronage dividends
distributed in
common stock and cash 6,928,564 (6,219,707) 101,189 - 810,046
Other dividend paid - - (183,345) - (183,345)
1996 patronage dividends
to be distributed in cash - - (4,721,600) - (4,721,600)
Retained in form of equity - 5,770,844 (5,770,844) - -
Unrealized loss on investment
securities available-
for-sale - - - (318,812) (318,812)
Balance, December 31, 1996 100,352,300 5,770,844 19,113,185 (64,774) 125,171,555
Net income - - 12,462,355 - 12,462,355
Proceeds from issuance
of common stock 500 - - - 500
Cancellation and
redemption of stock (1,133,918) - 247,597 - (886,321)
1996 patronage dividends
distributed in
common stock and cash 6,690,367 (5,770,844) (144,882) - 774,641
Other dividend paid - - (221,484) - (221,484)
1997 patronage dividends
to be distributed in cash - - (5,872,708) - (5,872,708)
Retained in form of equity - 8,109,931 (8,109,931) - -
Unrealized gain on investment
securities available-
for-sale - - - 404,935 404,935
Balance, December 31, 1997 $105,909,249 $ 8,109,931 $17,474,132 $ 340,161 $131,833,473
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 1997 1996 1995
Cash flows from operating
activities
Net income $ 12,462,355 $ 11,199,198 $ 9,083,236
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities
Provision for loan losses 3,504,000 1,950,000 1,904,500
Depreciation and amortization 5,212,091 5,148,255 4,950,807
Gain on sale of loans (7,229,368) (4,578,209) (6,009,720)
Loans originated for sale (365,279,273) (243,114,015) (251,781,768)
Proceeds from sale of
loans held for sale 362,446,396 135,955,259 250,676,820
Decrease (increase) in
other assets 3,441,735 (5,443,982) (1,689,307)
Increase (decrease) in
other liabilities 5,740,238 (2,186,480) 1,782,807
Other - - 798,211
Net cash provided by used
in operating activities 20,298,174 (101,069,974) 9,715,586
Cash flows from investing
activities
Purchase of investment securities
Available-for-sale (7,046,767) (9,435,643) (722,785)
Held-to-maturity 1,464,131 - (9,155,293)
Proceeds from maturities of
investments
Available-for-sale 5,009,306 8,006,556 4,503,907
Held-to-maturity 154,113 198,000 3,306,785
Proceeds from sales of
investments
Available-for-sale - - 4,385,281
Net increases in loans and lease
financing (44,351,586) (84,941,273) (158,775,397)
Proceeds from sale of portfolio
loans 17,276,924 38,679,408 51,405,022
Purchases of premises and
equipment (712,729) (1,235,856) (613,576)
Net cash used in investing
activities (28,206,608) (48,728,808) (105,666,056)
Cash flows from financing
activities
Net (decrease) increase in
deposits (4,794,023) 10,519,829 19,181,624
Net increase in short-term
borrowings 18,620,607 92,000,000 41,468,884
Proceeds from issuance of
long-term debt 30,916,680 47,500,000 74,500,000
Repayment on long-term debt (28,000,000) - (25,168,822)
Repayment on other borrowings - - (922,176)
Redemption of common stock (15,000) (68,000) (310,366)
Dividends paid (4,281,119) (4,341,889) (4,056,132)
Net cash provided by financing
activities 12,447,145 145,659,940 104,693,012
Increase (decrease) in cash
and cash equivalents 4,538,711 (4,138,842) 8,742,542
Cash and cash equivalents,
beginning of year 17,150,534 21,289,376 12,546,834
Cash and cash equivalents,
end of year $ 21,689,245 $ 17,150,534 $ 21,289,376
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of investing and financing activities:
1997 1996 1995
Unrealized gain (loss)
on investment
available-for-sale $ 404,935 $ (318,812) $ 1,675,619
Common stock cancelled
against allowance for
loan losses $ 9,114 $ 21,390 $ 288,585
Contributions of excess
concentration to NCBRFC $ - $ - $ 2,697,010
Interest paid $40,722,565 $34,582,531 $30,177,706
Income taxes paid $ 1,223,695 $ 670,122 $ 709,879
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization
National Consumer Cooperative Bank, doing business as
National Cooperative Bank (NCB), is a U.S. Government-chartered
corporation organized under the National Consumer Cooperative
Bank Act (the Act). NCB provides loans and financial services to
cooperatives. NCB Capital Corporation (NCBCC), previously named
NCB Mortgage Corporation, a wholly-owned subsidiary, originates,
sells and services real estate and commercial loans for
cooperatives. Cooperative Funding Corporation (CFC), a
wholly-owned subsidiary, is a registered broker-dealer and
provides corporate financial services. NCB Investment Advisers,
Inc. (NCBIA), a wholly-owned subsidiary, provides investment
advisory services to cooperatives. NCB Financial Corporation
(NCBFC), a wholly-owned subsidiary, is the holding company of NCB
Savings Bank, FSB (NCBSB), a federally-chartered thrift
institution. NCB I, Inc. (NCB 1), a wholly-owned subsidiary, is a
special purpose corporation that holds credit enhancement
certificates related to the securitization and sale
of cooperative real estate loans. NCB Retail Finance Corporation
(NCBRFC), a wholly-owned subsidiary, purchases and sells
commercial loans which are then securitized into commercial
paper.
The Act also provided for the formation of NCB Development
Corporation (NCBDC), an affiliate, which is a non-profit
organization without capital stock organized under the laws of
the District of Columbia. NCBDC provides loans and technical
support to cooperative enterprises. NCBDC's bylaws provide for
six directors from the NCB board to serve on the NCBDC board,
along with three outside directors elected by NCB directors.
Consistent with the Act, NCB makes deductible, voluntary
contributions to NCBDC.
Borrowers from NCB are required to own Class B Stock in NCB.
Stock owned by a borrower may be cancelled by NCB, at NCB's sole
discretion, in case of certain events, including default.
Principles of Consolidation
The consolidated financial statements include the accounts
of NCB and its subsidiaries. All significant intercompany
balances and transactions have been eliminated. The financial
statements of NCB do not include the net assets or results of
operations of NCBDC.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Investments
Securities are accounted for under Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115
requires, among other things, for NCB to classify and account for
debt and equity securities as follows:
Available-for-sale- Securities that will be held for
indefinite periods of time, including those that may be sold in
response to changes in market interest rates and related changes
in the security's prepayment risk, needs for liquidity and
changes in the availability of and the yield of alternative
investments are classified as available-for-sale. These assets
are carried at fair value. Unrealized gains and losses are
determined on an aggregate basis, excluded from earnings and
reported as a separate component of members' equity. Gains and
losses on the sale of investment securities are determined using
the adjusted cost of the specific security sold and are included
in earnings.
Held-to-maturity- Securities that management has the
positive intent and ability to hold until maturity are classified
as held-to-maturity. They are reported at amortized cost.
Interest Rate Futures, Forward Contracts and Interest Rate Swaps
Gains and losses on futures and forward contracts to hedge
certain interest-sensitive assets and liabilities are deferred
and unamortized hedging gains or losses are recognized at the
time of disposition of the assets or liabilities being hedged.
They are amortized over the life of the hedged asset or liability
as an adjustment to interest income or interest expense.
Interest rate swap agreements are used to shorten the
functional repricing period of fixed rate debt. The interest
income and expense is earned or charged based on the outstanding
balances of the receivable and payable positions, respectively,
applying the related market rates at which the agreements were
purchased and the term outstanding during the period. The
interest income and expense are treated as an adjustment to
interest expense on the hedged liability.
Loans and Lease Financing
Loans are carried at their principal amounts outstanding,
except for loans held for sale which are carried at the lower of
cost or market as determined on an aggregate basis. NCB
discontinues the accrual of interest on loans when principal or
interest payments are ninety days or more in arrears or sooner
when there is reason-able doubt as to collectibility. Loans may
be reinstated to accrual status when all payments are brought
current and, in the opinion of management, collection of the
remaining balance can reasonably be expected.
Leasing operations consist principally of leasing equipment
under direct financing leases expiring in various years through
2004. All lease financing transactions are full payout direct
financing leases. Lease income is recorded over the term of the
lease contract which provides a constant rate of return on the
unrecovered investment. Lease financing is carried net of
unearned income.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance which
management believes to be adequate to cover estimated loan and
lease financing losses in the existing portfolio. A provision for
loan losses is added to the allowance and charged to expense.
Loan and lease charge-offs, net of recoveries, are deducted from
the allowance. When a portion of a loan is deemed uncollectible,
a full or partial charge-off against the allowance for loan
losses is made. The factors utilized by management in determining
the adequacy of the allowance include, but are not limited to,
the following: the present and prospective financial condition of
the borrowers and the values of any underlying collateral;
evaluation of the loan and lease financing portfolio in
conjunction with historical loss experience; portfolio
composition; and current and projected economic conditions. The
allowance for loan losses is maintained at a level believed by
management to be adequate to absorb potential losses inherent in
the loan portfolio. Changes in economic conditions and economic
prospects of borrowers can occur quickly; consequently losses
that NCB ultimately realizes could differ from the estimates made
by management.
The major risk classifications that management uses to
assess impairment are nonaccrual, restructured and loans
otherwise rated doubtful because collection is in question. When
a loan is impaired, NCB measures impairment based on the present
value of the expected future cash flows discounted at the loan's
effective interest rate or the fair value of the collateral, less
estimated selling costs, if the loan is collateral-dependent and
foreclosure is probable. NCB recognizes an impairment by creating
a valuation allowance. A loan is impaired when, based on current
information, it is probable NCB will be unable to collect all
amounts due under the contractual terms of the loan.
Loan-Origination Fees, Commitment Fees, and Related Costs
Loan fees received and direct origination costs are
accounted for in accordance with SFAS No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." Loan fees
and certain direct loan origination costs are deferred, and the
net fee or cost is recognized as an adjustment to interest income
over the contractual life of the loans. Fees relating to expired
commitments are recognized as non-interest income. If a
commitment is exercised during the commitment period, the fee at
the time of exercise is recognized over the life of the loan as
an adjustment of yield.
Servicing Assets and Interest-Only Receivables
Effective January 1, 1997, NCB adopted Statement of
Financial Accounting Standards No. 125 ("SFAS No. 125"),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which supersedes, but generally
retains, the requirements of SFAS No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS No. 122"). Both statements
require that entities that acquire servicing assets through
either purchase or origination of loans and sells or securitizes
those loans with servicing assets retained must allocate the
total cost of the loans to the servicing assets and the loans
(without the servicing assets) based on their relative fair
value.
Upon NCB's adoption of SFAS No. 125, previously recognized
excess spread assets were reclassified as interest-only
receivables. Interest-only receivables represent rights to
certain future net cash flows from securitized assets that are
available after all expenses of the transaction have been paid
("residual cash flow"). Interest-only receivables are amortized
using the effective yield method over the estimated lives of the
underlying loans.
Servicing assets and interest-only receivables, stated net
of accumulated amortization, are amortized in proportion to the
remaining net servicing revenues estimated to be generated by the
underlying loans using the effective yield method over the
remaining lives of the underlying loans.
SFAS No. 125 requires a periodic assessment of the carrying
of interest-only receivables. Because these assets can be
contractually prepaid or otherwise settled such that NCB would
not recover substantially all of its recorded investment, the
assets are being measured like available-for-sale securities
under SFAS No. 115.
Substantially all interest-only receivables pertain to
blanket loans made to cooperative housing corporations as first
mortgages. These mortgages are typically structured with
prepayment lockouts followed by prepayment penalties or yield
maintenance provisions through maturity. In calculating
interest-only receivables, NCB discounts the cash flows through
the lockout period. Cash flows beyond the lockout period are
discounted only to the extent that NCB is entitled to receive the
prepayment or yield maintenance penalty.
The cost of loan-servicing rights, the interest-only
receivables and the amortization thereon are periodically
evaluated in relation to estimated future net servicing revenues.
NCB evaluates the carrying value of the servicing portfolio by
estimating the future net servicing income of the portfolio based
on management's best estimate of remaining loan lives. Experience
could differ from the estimates used by management. As a result,
actual amounts NCB ultimately realizes could differ from the
estimates made by management.
Interest-only receivables that are certificated have been
included as investment securities consistent with SFAS No. 115.
Interest-only receivables that are not certificated are included
as other assets.
Other Assets
Foreclosed property pending disposition is carried at fair
value less estimated costs to sell. Goodwill relating to the
acquisition of NCBSB by NCBFC is being amortized over the
estimated remaining lives of the long-term interest-bearing
assets acquired. Interest-only receivables are carried at fair
value with unrealized gains and losses carried as an adjustment
to members' equity.
Premises and equipment are carried at cost less accumulated
depreciation and include equipment owned under lease financing
arrangements. Depreciation is computed using an accelerated
method. Leasehold improvements are amortized on a straight-line
basis over the terms of the leases.
Income Taxes
The Act Amendments of 1981 (P.L. 97-35) provide that,
effective January 1, 1982, NCB shall be treated as a cooperative
and subject to the provisions of Subchapter T of the Internal
Revenue Code. Under Subchapter T, NCB issues its member-borrowers
patronage refunds, which are tax deductible to NCB thereby
reducing its taxable income. NCB has determined that all income
generated by NCB and its subsidiaries, with the exception of
NCBSB, qualifies as patronage income under the Internal Revenue
Code, with the consequence that NCB is able to issue tax
deductible patronage refunds with respect to all such income.
Section 109 of the Act, as amended, provides that NCB is exempt
from state and local taxes with the exception of real estate
taxes. Certain NCB subsidiaries, however, are subject to federal
and state income taxes.
NCB provides for income taxes under SFAS No. 109,
"Accounting for Income Taxes." The asset and liability approach
of SFAS No. 109 requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences
of temporary differences between the financial statement carrying
amounts of the existing assets and liabilities and their
respective tax bases.
Reclassifications
Certain prior year amounts have been reclassified to conform
to the 1997 presentation.
2. Cash and Cash Equivalents
Cash and cash equivalents consist of cash and investment
securities with original maturities of less than ninety days. The
balances at December 31 are as follows:
1997 1996
Cash in bank $ 8,082,813 $ 5,186,085
Federal funds 5,949,195 4,377,837
Overnight investments 7,657,237 7,586,612
$21,689,245 $17,150,534
3. Investment Securities
The composition of investment securities available-for-sale
at December 31 is as follows:
1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury and agency
obligations $18,027,503 $140,820 $ 28,840 $18,139,483
Corporate bonds 12,169,073 129,615 8,368 12,290,320
Mutual funds 1,164,610 - 2,493 1,162,117
Money market 1,068,825 - 112,403 956,422
Interest-only receivables 28,481,697 238,401 - 28,720,098
$60,911,708 $508,836 $152,104 $61,268,440
1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury and agency
obligations $17,119,960 $ 93,710 $ 86,408 $17,127,262
Corporate bonds 10,975,813 68,635 23,667 11,020,781
Mutual funds 1,296,968 - 4,985 1,291,983
Money market 1,009,133 - 112,059 897,074
Interest-only receivables 27,566,066 - - 27,566,066
$57,967,940 $162,345 $227,119 $57,903,166
Interest-only receivables substantially pertain to blanket
loans to cooperative housing corporations.
The maturities of investment securities available-for-sale
at December 31, 1997 are as follows:
Weighted
Amortized Average
Cost Yield Fair Value
Within 1 year $ 7,637,639 6.27% $ 7,523,541
After 1 year through 5 years 30,660,024 6.79% 31,080,652
After 5 years through 10 years 19,208,305 6.88% 19,255,536
After 10 years 3,405,740 6.56% 3,408,711
$60,911,708 6.74% $61,268,440
The composition of investment securities held-to-maturity
at December 31 is as follows:
1997
Gross
Amortized Unrealized Fair
Cost Losses Value
Mortgage-backed security $1,942,312 $ 30,707 $1,911,605
1996
Gross
Amortized Unrealized Fair
Cost Losses Value
Certificates of deposit $ 200,000 $ - $ 200,000
Mortgage-backed securities 2,746,425 652,131 2,094,294
$2,946,425 $ 652,131 $2,294,294
The 1997 mortgage-backed security held-to-maturity has a
weighted average yield of 9.4% and matures after ten years.
In 1997 and 1996, NCB had no sales of securities
available-for-sale. In 1995, securities available-for-sale
totaling $4,459,219, were sold resulting in a loss of $73,938.
There were no sales of securities classified as held-to-maturity
during 1997, 1996, or 1995. NCB held callable investment
securities with amortized costs of $8,323,643 and $6,824,483 at
December 31, 1997 and 1996, respectively. The fair values of the
callable securities are $8,478,587 and $6,950,818 in the same
respective periods.
4. Loan Servicing
Mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid principal
balances of these loans at December 31, 1997 and 1996 are
$1,366,353,000 and $1,194,113,000, respectively.
5. Loans and Lease Financing
Loans and leases outstanding, including loans held for sale,
by category at December 31 are as follows:
1997 1996
Commercial loans
Portfolio $344,849,332 $337,717,275
Loans held for sale 2,808,807 4,493,469
Real estate loans
Residential 202,828,605 204,258,591
Loans held for sale 186,323,523 179,776,403
Commercial 7,025,073 8,742,343
Lease financing 29,932,983 15,106,370
$773,768,323 $750,094,451
NCB's commercial and real estate loan portfolio is diversified
both in terms of industry and geography. The following is the
distribution of the loans outstanding at December 31:
Commercial Loans Real Estate Loans
1997 1996 1997 1996
By Region
Northeast 21.4% 19.7% 75.6% 70.0%
South Atlantic 7.0 6.7 10.2 7.9
Central 33.5 29.3 12.0 14.1
West 38.1 44.3 2.2 8.0
100.0% 100.0% 100.0% 100.0%
Percentage of Total
Loan Portfolio
1997 1996
By Borrower Type
Real estate
Residential 50.4% 51.3%
Commercial .8 1.2
Commercial
Food processing and distribution 19.6 8.9
Financial services 4.4 5.5
Medical service and supplies 2.1 4.7
Hardware 6.1 4.9
Alaskan native corporations 4.4 4.9
Other 8.3 16.6
Lease financing 3.9 2.0
100.0% 100.0%
NCB originates multi-family blanket mortgages to
predominantly owner-occupied housing cooperatives. A significant
portion of NCB's mortgage loans is secured by real estate in New
York City due to that city's extensive cooperative market. At
December 31, 1997, $239 million of real estate loans are secured
by real estate in New York. The collateral for almost all of the
real estate loans consists of first mortgage liens on the land
and improvements of cooperatively owned, multi-family residential
properties and property leases. The real estate portfolio also
includes loans secured by second mortgage liens and, in several
rare circumstances, unsecured loans to residential cooperative
corporations. The loans are repaid from operations of the real
estate cooperative. NCB's exposure to credit loss in the event of
nonperformance by other parties to the loans is the carrying
amounts of the loans.
NCB's commercial portfolio has a concentration in the food
processing and distribution industry. The loan types include
lines of credit, revolving credits, and term loans. These loans
are typically collateralized with general business assets (e.g.,
inventory, receivables, fixed assets, and leasehold interests).
The loans are expected to be repaid from cash flows generated by
the borrower's operating activities. NCB's exposure to credit
loss in the event of nonperformance by the other parties to the
loan is the carrying amounts of the loans.
The carrying amounts and respective estimated fair values of
loans and leases outstanding at December 31 are as follows
(amounts in thousands):
Carrying Amount Estimated Fair Value
1997 1996 1997 1996
Commercial
Fixed rate loans $137,723 $157,727 $140,855 $160,979
Adjustable rate loans 207,126 179,990 207,872 180,732
Loans held for sale 2,809 4,493 2,818 4,459
Real Estate
Loans held for sale 186,324 179,777 187,453 181,243
Portfolio-fixed rate 45,326 59,188 44,905 60,405
Portfolio-adjustable 164,528 153,813 170,675 152,913
Lease financing 29,932 15,106 31,426 15,570
$773,768 $750,094 $786,004 $756,301
6. Receivables Sold with Recourse
At December 31, 1997 and 1996, restricted cash of $6,884,572
and $8,348,703, respectively, is held by a trustee for the
benefit of certificate holders in the event of a loss on certain
loans sold with balances totaling $37,300,000 and $92,623,000 in
1993 and 1992, respectively. At December 31, 1997 and 1996, the
outstanding balances of the 1993 and 1992 recourse loan sales
totaled $76,636,254 and $108,755,626, respectively. These loans
are primarily concentrated in New York. NCB's exposure to credit
loss in the event of nonperformance by the other parties to the
loan is limited to the required restricted cash balance. To date
NCB has not incurred any losses on these loan sales.
In an unrelated 1993 transaction, NCB sold loans totaling
$25,924,380 of which any losses on the subordinate tranche are
repaid from a security held by NCB totaling $1,942,312 and
$2,746,425 at December 31, 1997 and 1996, respectively. At
December 31, 1997 and 1996, the outstanding balances of the 1993
recourse loan sale totaled $14,832,919 and $19,013,777,
respectively. These loans are primarily concentrated in New York.
NCB's exposure to credit loss in the event of nonperformance by
the other parties to the loan is limited to the required balance
of the security held. NCB is prohibited from disposing of this
security until all senior holders of the security have been
repaid. To date NCB has not incurred any losses on these loan
sales.
7. Impaired Assets
Loans that became impaired after January 1, 1994 totaled
$4,057,539 and $3,878,357 at December 31, 1997 and 1996,
respectively, and averaged $4,909,000 and $3,443,000 during the
same respective periods. Nonaccrual loans totaled $3,030,448 and
$2,829,221 at December 31, 1997 and 1996, respectively.
Restructured loans totaled $1,027,091 and $1,049,136 at December
31, 1997 and 1996, respectively. Specific allowances of $911,938
and $1,535,000 have been set aside for these loans in 1997 and
1996, respectively, as management's best estimate of their fair
value is less than the recorded investment in the loans. During
1997 and 1996, the interest collected on the nonaccrual loans was
applied to reduce the outstanding principal. Interest earned on
the restructured loans totaled $112,000 and $109,000 during 1997
and 1996, respectively.
At December 31, 1997, there are no commitments to lend
additional funds to borrowers whose loans are non-performing.
At December 31, 1997 and 1996, NCB had real estate owned of
$5,114,991 and $376,708, respectively, which is classified as
other assets.
8. Allowance for Loan Losses
The following is a summary of the activity in the allowance
for loan losses:
1997 1996 1995
Balance at beginning of year $15,504,510 $14,554,240 $13,031,499
Provision for loan losses 3,504,000 1,950,000 1,904,500
Charge-offs (1,555,226) (1,137,229) (699,014)
Recoveries of loans previously
charged-off 184,852 137,499 317,255
Balance at end of year $17,638,136 $15,504,510 $14,554,240
The allowance for loan losses was 2.3%, 2.1%, and 2.5% of
loans and leases outstanding at December 31, 1997, 1996, and
1995, respectively.
9. Transactions with Related Parties
Section 103 of the Act, as amended, requires that twelve of
the fifteen members of NCB's Board of Directors be elected by
holders of Classes B and C Stock and that they have actual
cooperative experience. NCB stock is, by law, owned only by
borrowers and entities eligible to borrow. The election rules
require that candidates for the Board of Directors have
experience as a director or senior officer of a cooperative
organization that currently holds Class B or Class C Stock. NCB
has conflict of interest policies which require, among other
things, that a Board member be disassociated from decisions which
pose a conflict of interest or the appearance of a conflict of
interest. Loan requests from cooperatives with which members of
the board may be affiliated are subject to the same eligibility
and credit criteria, as well as the same loan terms and
conditions, as all other loan requests.
In addition, NCB through its subsidiary, NCBSB, enters into
transactions in the normal course of business with its directors,
officers, and their family members.
For the year ended December 31, 1997, loans to affiliated
cooperatives, directors, officers, and their family members have
the following outstanding balances:
January 1, December 31,
1997 Additions Deductions 1997
Loans to affiliated
cooperatives $60,552,761 $19,198,198 $12,160,395 $67,590,564
Loans to directors,
officers, and
family members 923,220 - 829,849 93,371
$61,475,981 $19,198,198 $12,990,244 $67,683,935
Percent of loans
outstanding 8.2% 8.7%
During 1997, 1996, and 1995, NCB recorded interest income of
$6,412,886 $3,216,776, and $2,957,590, respectively, on loans to
related parties.
Included in the analysis of loans outstanding to affiliated
cooperatives as of December 31, 1997, is a $30 million revolving
line of credit to the Co-operative Central Bank. This line of
credit is 50% participated to outside banks without recourse to
NCB. At December 31, 1997, none of the loan is outstanding. The
loan is secured by U.S. Government guaranteed obligations equal
to 110% of the outstanding balance. The Co-operative Central Bank
is an organization with which an NCB director serves as the chief
executive officer.
Certain NCB affiliates, and certain directors and officers
of NCB and NCBSB, have deposits with NCBSB. Such deposits
aggregated $1,307,365 and $1,092,299 as of December 31, 1997 and
1996, respectively.
10. Premises and Equipment
Premises and equipment are included in other assets and
consist of the following as of December 31:
1997 1996
Furniture and equipment $3,046,361 $3,366,620
Leasehold improvements 846,538 1,128,359
Other 2,461,694 2,196,400
6,354,593 6,691,379
Less: Accumulated depreciation
and amortization (4,286,837) (4,434,017)
$2,067,756 $2,257,362
11. Leases
NCB leases its headquarters in Washington, D.C. through
April 1, 2002. NCB also leases premises for its regional offices
with expiration dates between January 6, 1999 to July 31, 2000.
These leases are all non-cancelable operating leases.
Minimum future rental payments on premises and office
equipment under non-cancelable operating leases having remaining
terms in excess of one year as of December 31, 1997 are as
follows:
1998 $1,686,336
1999 1,471,836
2000 1,424,161
2001 1,422,516
2002 355,629
$6,360,478
Rental expense on premises and office equipment in 1997,
1996, and 1995 is $1,689,415, $1,686,788, and $1,744,329,
respectively.
During 1992, NCB deferred incentives received in connection
with a new lease for office space. These incentives are being
amortized over the ten year life of the lease. At December 31,
1997 and 1996, the unamortized lease incentive is $955,892 and
$1,092,627, respectively.
12. Deposits
Deposits as of December 31 are summarized as follows:
1997 1996
Weighted Weighted
Average Average
Balance Rate Balance Rate
Balances by type
Passbook accounts $ 4,937,068 2.72% $ 5,647,482 2.71%
Money market demand
and NOW accounts 15,578,000 2.26% 18,260,850 2.24%
Fixed-rate certificates
Less than $100,000 45,397,875 5.74% 42,122,451 5.93%
$100,000 or greater 17,913,036 5.51% 22,589,219 5.28%
$83,825,979 4.87% $88,620,002 4.80%
The remaining contractual maturities of certificate accounts at
December 31, 1997 are as follows:
Less than $100,000
$100,000 or greater Total
Three months or less $ 5,813,377 $ 2,438,924 $ 8,252,301
Three to six months 11,048,122 4,511,613 15,559,735
Six to twelve months 12,589,617 4,371,608 16,961,225
Twelve months or longer 15,946,759 6,590,891 22,537,650
$45,397,875 $17,913,036 $63,310,911
The estimated fair value of deposits is $83,281,000 and
$88,211,000 at December 31, 1997 and 1996, respectively.
13. Short-Term Borrowings
Revolving credit facilities
NCB has $320 million of revolving lines of credit, $130
million of which is committed until May 27, 2000 and $130 million
of which is committed until May 27, 1998. The remaining balance
of $60 million is uncommitted at December 31, 1997.
Interest expense from borrowings under the revolving line of
credit facilities was $8,732,851, $6,671,725, and $5,004,701 in
1997, 1996, and 1995, respectively. The following is a summary of
the borrowings under the facilities for the years ended December
31:
1997 1996
Borrowings outstanding
at December 31 $206,000,000 $218,000,000
Unfunded capacity
at December 31 114,000,000 33,000,000
Average line of credit
borrowings outstanding
during the year 186,157,083 120,576,776
Maximum borrowings
during the year 227,000,000 218,000,000
Weighted average borrowing
rate
During the year 5.9% 5.9%
At December 31 6.5% 6.6%
Borrowing rates under the revolving credit facility are
indexed off the prime rate, federal funds rate or the London
Interbank Offered Rate (LIBOR) and vary with the amount of
borrowings outstanding. As of December 31, 1997, commitment fees
for the line of credit are .15% on $130 million and .125% on $130
million. Total commitment fees paid for revolving credit
facilities were $479,000 in 1997, and $340,000 in 1996 and 1995.
All borrowings under the facility which are outstanding at
expiration of the facility are due at that time.
NCB is required under these revolving lines of credit
agreements to maintain $25 million of cash, cash equivalents, and
investments and have, among other items, an effective net worth
of not less than $290 million (defined as total members' equity
plus subordinated debt). NCB shall not at any time permit
consolidated senior debt to exceed 650% of consolidated adjusted
net worth.
Other Short-term Borrowings
In an effort to reduce NCB's cost of funds, NCB developed a
program under which it borrows, on a short-term basis, from
certain customers. At December 31, 1997 and 1996, the short-term
borrowings outstanding totaled $12.2 million and $6.5 million,
respectively. In 1997, NCB also implemented a commercial paper
program to further reduce NCB's cost of funds. At December 31,
1997, commercial paper totaled $24.9 million.
During 1997 and 1996, NCB also entered into a series of
reverse repurchase agreements. The average balances of reverse
repurchase agreements outstanding during 1997 and 1996 were
$14,364,135 and $9,288,258, respectively, and the maximum
borrowings during 1997 and 1996 were $17,047,000 and $13,523,500,
respectively. The weighted average rates on the reverse
repurchase agreements during 1997 and 1996 were 5.73% and 5.65%,
respectively. There were no reverse repurchase agreements
outstanding at December 31, 1997 and 1996.
The carrying amounts of short-term borrowings at December 31
are as follows (amounts in thousands):
Carrying Amount
1997 1996
Line of credit $206,000 $218,000
Commercial paper 24,921 -
Other 12,200 6,500
$243,121 $224,500
14. Long-term Debt
NCB has entered into various agreements for extension of
credit with third parties. NCB has an agreement for a $30 million
extension of credit with a major insurance company which expires
on June 30, 1999. $10 million has been borrowed under this
agreement. In January 1997, NCB received approval to issue up to
$100 million under the medium term note program. As of December
31, 1997, NCB had $40 million outstanding under this program. In
addition, as of December 31, 1997, NCB had outstanding $154.8
million of private placements issued to various institutional
investors. The majority of the long-term debt has semi-annual
interest with principal payments due on a 30/360 basis.
NCB is required under these lending agreements to, among
other things, maintain $25 million of cash, cash equivalents and
investments and have an effective net worth of not less than $290
million (defined as total members' equity plus subordinated
debt). NCB shall not at any time permit consolidated senior debt
to exceed 650% of consolidated adjusted net worth.
The following is a schedule of outstanding long-term debt at
December 31, 1997:
Amount Rate Maturity
$ 47,951,623 7.45% 1998
19,979,843 5.92% 1999
31,967,749 8.51% 2000
29,969,765 7.15% 2001
74,924,412 6.75% 2002 and thereafter
$204,793,392
NCB has entered into a series of interest rate swap
agreements which have a combined notional amount of $63 million.
The effect of the agreements is to convert $63 million of the
long-term debt from a weighted average fixed rate of 7.02% to a
floating rate based on LIBOR.
The interest rate swap agreements are tied to the three and
six month LIBOR rates plus a spread and reprice at different
times throughout the year. At December 31, 1997 the three and six
month LIBOR were 5.81% and 5.84%, respectively. These agreements
expire as follows:
Maturity LIBOR
Amount Date Index
$ 13,000,000 1998 Six month
20,000,000 1999 Three month
30,000,000 2001 Six month
$ 63,000,000
15. Subordinated Debt
On December 31, 1981, NCB issued unsecured subordinated debt
to the U.S. Treasury in the amount of $184,270,000 as provided in
the Act, as amended, in full redemption of the Class A Preferred
Stock previously owned by the Government. The notes and all
related payments are subordinated to any secured and unsecured
notes and debentures thereafter issued by NCB, but the notes have
first preference with respect to NCB's assets over all classes of
stock issued by NCB. NCB cannot pay any dividend on any class of
stock at a rate greater than the statutory interest rate payable
on subordinated debt.
The notes require that proceeds from the sale of Classes B
and C Stock be applied annually toward the repayment of the
notes. In 1997 and 1996, no payments were made. In February 1993
and November 1994, NCB adopted plans to maintain a schedule to
ensure accumulation of the funds needed to repay these notes
which mature on October 31, 2020. This involves the creation of a
reserve fund and the issuance of preferred stock or subordinated
debt. Total contributions to the fund, including interest
thereon, would approximate $100 million. The remaining $80
million would be obtained through the issuance of preferred stock
or subordinated debt. NCB had designated investments totaling $4
million and $3 million, respectively, plus accrued interest at
December 31, 1997 and 1996.
The Act states that the amount of NCB borrowings which may
be outstanding at any time shall not exceed 10 times the paid-in
capital and surplus which, as defined by the Act, includes the
subordinated debt.
The annual interest payments for each tranche are determined
in accordance with the following schedule which also includes the
carrying amounts, excluding hedge gains, and respective estimated
fair values of the subordinated debt at December 31, 1997 (in
thousands):
Next Carrying Estimated
Index Rate Repricing Date Amount Fair Value
91-day Treasury rate 5.06% January 1, 1998 $ 53,553 $ 53,437
3-year Treasury rate 6.28% October 1, 1999 36,854 37,847
5-year Treasury rate 6.01% October 1, 2000 55,281 56,593
10-year Treasury rate 8.82% October 1, 2000 36,854 40,866
$182,542 $188,743
In addition to the $63 million of interest rate swaps on the
long-term debt, NCB has entered into a series of interest rate
swap agreements totaling $60 million which have the effect of
converting the subordinated debt from a fixed rate of 7.42% to a
floating rate based on LIBOR.
The interest rate swap agreements are tied to the one, three
and six month LIBOR rates and reprice at different times
throughout the year. At December 31, 1997, the one, three and
six month LIBOR rates were 5.72%, 5.81% and 5.84%, respectively.
The agreements, which expire in the year 2000, are described
below:
Debt LIBOR
Swapped Amount Index
Five year $30,000,000 Six month
Ten year 10,000,000 Six month
Ten year 10,000,000 Three month
Ten year 10,000,000 One month
$60,000,000
16. Common Stock and Members' Equity
NCB's common stock consists of Class B stock owned by its
borrowers, Class C stock owned by entities eligible to borrow
from NCB, and Class D non-voting stock owned by others.
1997 1996
Class B Class Class D Class B Class C Class D
Par value per share $ 100 $ 100 $ 100 $ 100 $ 100 $ 100
Shares authorized 900,000 300,000 100,000 800,000 300,000 100,000
Shares issued and
outstanding 840,045 219,004 3 786,004 217,516 3
The changes in each class of common stock are described below:
Class B Class C Class D Total
Balance, December 31, 1994 $67,823,071 $24,844,625 $300 $92,667,996
Cancellation and redemption
of common stock (1,135,617) (2,408,962) - (3,544,579)
1994 patronage dividend
distributed in common stock 4,746,618 211,185 - 4,957,803
Reclassification of
stock surplus 915,682 (915,682) - -
Balance, December 31, 1995 72,349,754 21,731,166 300 94,081,220
Proceeds from issuance
of common stock - 1,000 - 1,000
Cancellation and
redemption of common stock (468,024) (190,460) - (658,484)
1995 patronage dividend
distributed in common stock 6,718,686 209,878 - 6,928,564
Balance, December 31, 1996 78,600,416 21,751,584 300 100,352,300
Proceeds from issuance
of common stock - 500 - 500
Cancellation and
redemption of common stock (1,088,713) (45,205) - (1,133,918)
1996 patronage dividend
distributed in common stock 6,492,799 197,568 - 6,690,367
Balance, December 31, 1997 $84,004,502 $21,904,447 $300 $105,909,249
Members' equity includes the three classes of common stock,
and allocated and unallocated retained earnings. Allocated retained earnings
have been designated for patronage dividend distribution, whereas
unallocated retained earnings have not been designated for patronage
dividend distribution.
17. Regulatory Capital and Retained Earnings of NCBSB
In connection with the insurance of savings accounts, NCBSB
is required to maintain minimum amounts of regulatory capital. If
NCBSB fails to meet its minimum required capital, the appropriate
regulatory authorities may take such actions, as they deem
appropriate, to protect the Savings Association Insurance Fund
(SAIF), NCBSB, and its depositors and investors. Such actions may
include various operating restrictions, limitations on liability
growth, limitations on deposit account interest rates, and
investment restrictions.
NCBSB's capital exceeds the minimum capital
requirements at December 31, 1997. The following table summarizes NCBSB's
capital at December 31, 1997:
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1997:
Total capital
(to risk-weighted assets) $10,822,000 21.60% $4,008,000 8.0% $5,011,000 10.0%
Tier I capital
(to risk-weighted assets) $10,170,000 20.30% N/A $3,006,000 6.0%
Tier I capital
(to adjusted assets) $10,170,000 10.63% $2,871,000 3.0% $4,785,000 5.0%
As of December 31, 1996:
Total capital
(to risk-weighted assets) $ 9,600,000 17.52% $4,384,000 8.0% $5,480,000 10.0%
Tier I capital
(to risk-weighted assets) $ 8,863,000 16.17% N/A $3,288,000 6.0%
Tier I capital
(to adjusted assets) $ 8,863,000 9.04% $2,942,000 3.0% $4,903,000 5.0%
NCBSB's management believes that, under the current
regulations, NCBSB will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond
the control of NCBSB, such as increased interest rates or a
downturn in the economy in areas where NCBSB has most of its
loans, could adversely affect future earnings and, consequently,
the ability of NCBSB to meet its future minimum capital
requirements.
The Office of Thrift Supervision regulations impose certain
restrictions on NCBSB's payment of dividends. At December 31,
1997, substantially all retained earnings were available for
dividend declaration without prior regulatory approval.
18. Employee Benefits
Substantially all employees are covered by a
non-contributory, defined contribution retirement plan. Total
expense for the retirement plan for 1997, 1996, and 1995 is
$428,676, $362,621, and $329,471, respectively.
NCB maintains an employee thrift plan organized under
Internal Revenue Code Section 401(k) and contributes up to 6% of
each participant's salary. Contributions and expense for 1997,
1996, and 1995 are $359,401, $278,720, and $275,457,
respectively.
Effective January 1, 1997, the Board of Directors approved
the Executive Long-Term Incentive Plan (the Plan) to provide
incentive compensation to certain key executives of NCB. NCB
expensed $210,000 for the Plan in 1997.
19. Income Taxes
Each year under the Act, NCB must declare tax deductible
patronage refunds in the form of cash, stock, or allocated
surplus which effectively reduce NCB's federal income tax. In
1998, NCB anticipates that it will declare a patronage dividend
for 1997 of $13,983,000. The anticipated cash portion of the 1997
patronage dividend is included in patronage dividends payable at
December 31, 1997. The anticipated stock portion of the patronage
dividend of 1997 earnings to be distributed has been added to
allocated retained earnings at December 31, 1997. Patrons of NCB
receiving such patronage dividends consent to include them in
their taxable income.
The provision for income taxes consists of the following:
Year Ended December 31,
1997 1996 1995
Current tax expense
Federal $1,270,100 $674,728 $665,429
State and local 143,504 148,054 19,184
Total current 1,413,604 822,782 684,613
Deferred tax expense (benefit)
Federal (38,106) (25,868) (14,858)
State and local - - 107,928
Total deferred (38,106) (25,868) 93,070
Total provision $1,375,498 $796,914 $777,683
The provision for income taxes differs from the amount of
income tax determined by applying the applicable U.S. statutory
federal income tax rate to pretax income as a result of the
following differences:
Year Ended December 31,
1997 1996 1995
Statutory U.S. tax rate $ 5,884,348 $ 4,242,158 $ 4,510,339
Patronage dividends (4,754,097) (3,567,430) (3,844,910)
State and local taxes 143,504 148,054 127,112
Other 101,743 (25,868) (14,858)
Income tax provision $ 1,375,498 $ 796,914 $ 777,683
Deferred tax assets net of liabilities, included in other
assets, are comprised of the following at December 31, 1997 and
1996:
1997 1996
Deferred commitment fees $ 133,609 $ 129,067
Allowance for loan losses 313,112 280,185
Other 146,925 96,455
Gross deferred tax assets 593,646 505,707
Mortgage servicing rights (60,994) -
Loan bad debt expense - (56,342)
Federal Home Loan Bank stock dividends (65,175) (48,697)
Other (58,078) (14,412)
Gross deferred tax liabilities (184,247) (119,451)
Net deferred tax asset $ 409,399 $ 386,256
20. Income Available for Dividends on Stock
Under a existing long-term debt agreements, the aggregate
amount of cash dividends on Class C or Class D Stock, together
with patronage dividends payable in cash, is limited to the sum
of $15,000,000 plus 50% of NCB's consolidated adjusted net income
accumulation (or minus 100% of NCB's consolidated adjusted net
income in case of a deficit) from January 1, 1992 through the end
of the most current fiscal year ended. If the aggregate amount of
cash dividends and patronage dividends payable in cash exceeds
the limitation previously described, total patronage dividends
payable in cash and cash dividends payable on any calendar year
may not exceed 20% of NCB's taxable income for such calendar year.
Notwithstanding the above restriction, NCB is prohibited by
law from paying dividends on its Class C Stock at a rate greater
than the statutory interest rate payable on the subordinated
debt. Those rates for 1997, 1996, and 1995 are 6.4%, 6.1% and
6.7%, respectively. Consequently, the amounts available for
payment on the Class C Stock for 1997, 1996, and 1995 are
$1,399,694, $1,326,847, and $1,455,988, respectively. In
addition, under the Act and its bylaws, NCB may not pay dividends
on its Class B Stock.
21. Financial Instruments with Off-Balance Sheet Risk
NCB's policy is to prohibit the use of derivative financial
instruments for any purpose other than managing interest rate
risk. NCB is a party to financial instruments with off-balance
sheet risk. NCB uses such instruments in the normal course of
business to reduce its own exposure to fluctuations in interest
rates. These financial instruments may include commitments to
extend credit, standby letters of credit, interest rate swaps,
forward commitments to sell loans and financial futures
contracts. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of
the amount recognized in the balance sheets. The contract or
notional amounts of those instruments reflect the extent of
involvement, but not exposure, that NCB has in particular classes
of financial instruments.
NCB's exposure to credit loss in the event of nonperformance
by the other parties to the commitments to extend credit and
standby letters of credit written is represented by the contract
or notional amounts of those instruments. NCB uses the same
credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. For interest rate
swap transactions, forward commitments, and financial futures
contracts, the contract or notional amounts do not represent
exposure to credit loss. Unless noted otherwise, NCB does not
require collateral or other security to support financial
instruments with credit risk.
In the normal course of business, NCB makes loan commitments
which are not reflected in the accompanying financial statements.
The commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to
expire without being completely drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
NCB evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by
NCB upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral varies but may include
accounts receivable, inventory, property, plant, equipment,
residential and income-producing commercial properties.
Standby letters of credit are conditional commitments by NCB
to guarantee the payment performance of a customer to a third
party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan
facilities to customers.
The contract or notional amounts and the respective
estimated fair value of NCB's off-balance sheet financial
instruments at December 31, are as follows (amounts in
thousands):
Contract or Estimated
Notional Amounts Fair Value
1997 1996 1997 1996
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $414,905 $184,625 $1,899 $ 435
Standby letters of credit $116,814 $100,845 $1,309 $1,157
Derivative Financial Instruments Held or Issued for Purposes
Other Than Trading
NCB uses derivative financial instruments in the normal
course of business for the purpose of reducing its own exposure
to fluctuations in interest rates. Existing NCB policies prohibit
the use of derivative financial instruments for any purpose other
than managing interest rate risk. These instruments included
interest rate swaps, financial future contracts, and forward
commitments.
Interest rate swaps are executed to manage the interest rate
risk associated with specific assets or liabilities. An interest
rate swap agreement commits each party to make periodic interest
payments to the other based on an agreed-upon fixed rate or
floating rate index. There are no exchanges of principal amounts.
Entering into an interest rate swap agreement involves the risk
of default by counterparties and interest rate risk resulting
from unmatched positions. The amounts potentially subject to
credit risk are significantly smaller than the notional amounts
of the agreements. NCB is exposed to credit loss in the event of
nonperformance by its counterparties in the aggregate amount of
$3.1 million representing the estimated cost of replacing, at
current market rates, all outstanding swap agreements. NCB does
not anticipate nonperformance by any of its counterparties.
Income or expense from interest rate swaps is treated as an
adjustment to interest expense/income on the hedged asset or
liability.
Financial futures are contracts for delayed delivery of
specific securities at a specified future date and at a specified
price or yield. NCB purchases/sells these contracts to hedge the
interest rate risk associated with originating mortgage loans
that will be held for sale. NCB has minimal credit risk exposure
on these financial instruments since changes in market value of
financial futures are settled in cash on the following business
day, and payment is guaranteed by the clearinghouse. Gains and
losses from these contracts are deferred until the time of
disposition of the asset or liability.
NCBSB and NCB enter into forward commitments to sell a
portion of their production of loans to Federal National Mortgage
Association (Fannie Mae) and Residential Funding Corporation. The
market value of forward commitments is considered in the lower of
cost or market valuation of the loan portfolio held for sale.
The contract or notional amounts and the respective
estimated fair value of NCB's off-balance sheet financial
instruments at December 31, are as follows: (amounts in
thousands):
Contract or
Notional Amounts Estimated Fair Value
1997 1996 1997 1996
Financial instruments whose
notional or contract amounts
exceed the amount of
credit risk:
Financial futures
contracts $218,200 $167,200 $217,050 $170,421
Interest rate swap
agreements $123,000 $161,000 $126,144 $164,722
At December 31, 1997 and 1996, NCB had deferred gains and
(losses) outstanding on financial futures contracts totaling
$81,156 and ($3,688,563), $15,313 and ($1,347,082), respectively,
which are included in loans held for sale.
22. Fair Value of Financial Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial
Instruments," requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance
sheet, for which it is practicable to estimate that value. In
cases where quoted market prices are not available for identical
or comparable instruments, fair values are based on estimates
using the present value of estimated cash flows using a discount
rate commensurate with the risks involved or other valuation
techniques. The resultant fair values are affected by the
assumptions used, including the discount rate and estimates as to
the amounts and timing of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by
comparison to independent markets and, accordingly, the fair
values may not represent actual values of the financial
instruments that could have been realized as of year end or that
will be realized in the future.
The following methods and assumptions were used to estimate
the fair value of each class of financial instrument for which it
is practicable to estimate that value:
Cash and cash equivalents - The carrying amount approximates
fair value.
Investments - Fair values are based on quoted market prices
for identical or comparable securities.
Loans and lease financing - For adjustable rate commercial
loans that reprice frequently and with no significant changes in
credit risk, fair values are based on carrying values. The fair
market value of other adjustable rate loans is estimated by
discounting the future cash flows assuming that the loans mature
on the next repricing date 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. The
fair value of loans held for sale is based on market prices for
similar loans sold in the secondary market adjusted for
differences in loan characteristics.
Interest-only receivables - The fair value of interest-only
receivables is estimated by discounting the future cash flows
using current market investor pass-through rates for similar
securities and loans for which the interest-only receivable
relates.
Deposit liabilities - The fair value of demand deposits,
savings accounts, and certain money market deposits is the amount
payable on demand at the reporting date. The fair value of fixed-
maturity certificates of deposit is estimated using a discounted
cash flow calculation that applies interest rates currently being
offered on certificates of deposits of similar remaining
maturities.
Short-term and other borrowings - The carrying amounts of
the revolving line of credit balances, other borrowings
approximate fair value.
Long-term debt - The fair value of long-term debt is
estimated by discounting the future cash flows using the current
borrowing rates at which similar types of borrowing arrangements
with the same remaining maturities could be obtained by NCB.
Subordinated debt - The fair value of subordinated debt is
estimated by discounting the future cash flows using the current
borrowing rates at which similar types of borrowing arrangements
with the same remaining maturities could be obtained by NCB.
Interest rate swap agreements - The fair value of interest
rate swaps (used for interest rate risk management purposes) is
the estimated amount that NCB would receive or pay to terminate
the swap agreements at the reporting date, taking into account
current interest rates and the current creditworthiness of the
swap counterparties.
Financial futures and forward contracts - The fair value of
interest rate futures is based on the closing price of the
Chicago Board of Trade at December 31, 1997 and 1996. The fair
value of forward contracts is based on current market prices for
similar contracts.
Commitments to extend credit, standby letters of credit, and
financial guarantees written - The fair value of commitments is
estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates
and committed rates. The fair value of guarantees and letters of
credit is based on fees currently charged for similar agreements
or on the estimated cost to terminate them or otherwise settle
the obligations with the counterparties at the reporting date.
The estimated fair value of the Bank's financial instruments as
of December 31, 1997 and 1996 are as follows (dollars in
thousands):
1997 1996
Financial Assets: Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and cash equivalents $ 21,689 $ 21,689 $ 17,150 $ 17,150
Investments
Available-for-sale 61,268 61,268 57,903 57,903
Held-to-maturity 1,942 1,912 2,946 2,294
Interest-only receivables 4,450 4,450 3,192 2,791
Loans and lease financing 773,768 786,004 750,094 756,301
Financial Liabilities:
Deposits 83,826 83,281 88,620 88,211
Short-term and other borrowings 243,121 243,121 224,500 224,500
Long-term debt 204,793 207,079 202,137 204,824
Subordinated debt 182,785 189,137 182,853 188,743
Off-Balance Sheet Financial
Instruments:
Interest rate swap agreements 123,000 126,144 161,000 164,722
Financial futures and
forward commitments 218,200 217,050 167,200 170,421
Commitments to extend credit 414,905 1,899 184,625 435
Standby letters of credit 116,814 1,309 100,845 1,157
23. New Accounting Standards
In June 1997, SFAS Nos. 130 and 131 were issued: "Reporting
Comprehensive Income" and "Disclosures about Segments of an
Enterprise and Related Information," respectively. SFAS No. 130
requires that certain financial activity typically disclosed in
members' equity be reported in the financial statement as an
adjustment to net income in determining comprehensive income.
Items applicable to NCB would include unrealized gain/loss on
securities available-for-sale. Items identified as comprehensive
income should be reported in the statements of condition and the
statements of changes in members' equity, under separate
captions. SFAS NO. 130 is effective for NCB on January 1, 1998,
including the restatement of prior periods reported consistent
with this pronouncement. NCB does not anticipate any financial
impact from the implementation of SFAS NO. 130.
SFAS No. 131 requires the reporting of selected segment
information in quarterly and annual reports. Information from
operating segments is derived from methods used by NCB's
management to allocate resources and measure performance. SFAS
No. 131 is effective for NCB on January 1, 1998, including the
restatement of prior periods reported consistent with this
pronouncement, if practical. NCB does not anticipate any material
impact from the implementation of SFAS No. 131.
24. Subsequent Events
On January 15, 1998, the Board of Directors authorized the
dissolution of CFC at which time NCB will assume all liabilities
of CFC and receive a distribution of all assets after
satisfaction of CFC's liabilities. Management expect the dissolution to
occur by December 31, 1998.
In February 1998, NCB sold and securitized $130 million in
real estate loans generating gains of $3 million. The gain on
sale of loans will be included in the first quarter 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS,
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On May 13, 1997, the Registrant filed a report on Form 8-K
that reported a change in the Registrant's Certifying
Accountant.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of NCB and the
positions held by each are as follows:
Year First End of
Position Appointed Term Age
Alfred A. Plamann Chairman of the Board of
Directors and Director 1995 1998 55
Charles E. Snyder President and Chief
Executive Officer 1983 - 44
Leo H. Barlow Director 1993 1999 45
Harry J. Bowie Director 1991 1998 62
James L. Burns, Jr. Vice Chairman of the Board
Of Directors and Director 1996 1999 59
Joseph Cabral Director 1995 1998 49
Kirby J. Erickson Director 1997 2000 57
Jackie Jenkins-Scott Director 1997 2000 48
Marilyn J. McQuaide Director 1996 1999 48
Michael J. Mercer Director 1997 1998 44
Mary Ann Rothman Director 1993 1999 55
Anthony J. Scallon Director 1995 1998 52
Sheila A. Smith Director 1995 1998 52
Peter C. Young Director 1997 2000 52
Thomas K.Zaucha Director 1997 2000 53
Year First End of
Position Appointed Term Age
Caroline Blakely Managing Director, Chief
Marketing Officer
President, NCB Capital
Corporation
President and Director,
NCB 1, Inc.
President and Director,
NCB Insurance Brokers, Inc. 1992 - 43
Charles H. Hackman Managing Director, Chief
Credit Officer
President,
NCB Financial Corporation
Vice President and Director,
NCB Savings Bank, FSB
Vice President and Director,
NCB Insurance Brokers, Inc. 1984 - 53
Mark W. Hiltz Managing Director, Chief
Credit Risk Officer 1982 - 50
Richard L. Reed Managing Director, Chief
Financial Officer
Treasurer, NCB Mortgage
Corporation
Vice President and Director,
NCB Savings Bank, FSB
Vice President, Treasurer and
Director, NCB Investment
Advisers, Inc.
Treasurer, NCB Retail
Finance Corporation 1985 - 39
Thomas C. Schoettle President, NCB Savings
Bank,FSB 1997 - 42
Alfred A. Plamann has been the President and Chief
Executive Officer of Certified Grocers of California, Ltd. since
1994. He was the Senior Vice President and Chief Financial
Officer of Certified Grocers from 1989 to 1993. He has served in
an executive capacity with Atlantic Richfield Co. (ARCO)
and has served on the Board of Directors of several of the
cooperative's subsidiaries. Additionally, he has served on the
Board of Directors of the National American Wholesale Grocers
Association (NAWGA) and the California Grocer's Association
(CGA), and has been a member of the Industry Relations Committee
of the Food Marketing Institute (FMI).
Charles E. Snyder was named President and Chief
Executive Officer of NCB in January, 1992. He had been Corporate
Vice President and Chief Financial Officer of NCB from 1983 to
December 1991.
Leo H. Barlow is a shareholder of Sealaska
Corporation. Previously, he was President & Chief Executive
Officer of Sealaska Timber Corporation from August, 1992 until
August 31, 1997. Prior to that, he was President and Chief
Executive Officer of Sealaska Timber Corporation.
Harry J. Bowie has been the President and Chief
Executive Officer of Delta Foundation, Inc., a community
development corporation located in Greenville, Mississippi,
since 1986. He has also served as a Director of the Southern
Regional Council located in Atlanta and the Housing Assistance
Council located in Washington, D.C.
James L. Burns, Jr. has been the President and
Chief Executive Officer of The Co-operative Central Bank since 1972. He
also has been the President and Chief Executive Officer of
Co-operative Investment Fund since 1984. In addition, he has
served as a consultant to the Australian government and the
Australian and New Zealand banking industry.
Joseph Cabral has been the President and Chairman
of the Board of Chatsworth Products, Inc. since its inception
in June, 1991. He also serves as President of the California
chapter of the ESOP Association and a member of the Executive
Board of the ESOP Association State/Regional Council. Prior to
June, 1991, he was associated with Arthur Andersen & Co.
Kirby J. Erickson has been the Executive Vice
President of Group Health Inc. (GHI)/HealthPartners, Inc. since
1992. He also had served in various capacities since 1965 at
Aetna Health Plans, United Health Care, Inc., Fairview Community
Hospitals and Fairview Southdale Hospital.
Jackie Jenkins-Scott is the President and Chief
Executive Officer of the New England Hospital d/b/a Dimock
Community Health Center for the past 14 years. Prior to her
position with Dimock, she served as Director of the Roxbury
Court Clinic and held several positions with the Commonwealth of
Massachusetts, Department of Public Health from 1973 to 1977.
She has been a Board Member of the Massachusetts League
of Commmunity Health Centers and a member of the National
Association of Community Health Centers, Inc.
Michael J. Mercer has been the President of
Georgia Credit Union Affiliates since 1985 and Vice Chairman of
the Association of Credit Union League Executives since 1996. He
was also one of the founders of the Credit Union Service
Corporation and was its former Chairman.
Mary Ann Rothman has been Executive Director of
the Council of New York Cooperatives since 1980. She also serves
on the executive committee of the National Association of
Housing Cooperatives and is Vice Chairman of the NCBDC's Board
of Directors.
Anthony J. Scallon has been Chairman of the Board
of Directors, Federal Home Loan Bank of Des Moines since
1994. He also has been a Vocational Coordinator, Independent
School District # 197, West St. Paul, Minnesota from 1994 to
the present time. He was elected as a Minneapolis City Council
Member in 1979 and served until 1993.
Sheila A. Smith has been President and Chief
Operating Officer of Advanced Rubber Concept Inc., (ARC) since
1979. In addition to her position at ARC, she is also President
of GRC Industries and Vice President of TQS Group, Inc.
Peter C. Young has been the Executive Director of
Area Cooperative Educational Services for almost 26 years.
Currently, he is a member of the Board of Trustees and the
Finance Committee of CT Hospital Association/Workers Compensation
Trust. He is also the Fiscal Agent (Treasurer) and was a member
of the Governing Board of the American Association of Educational
Service Agencies.
Thomas K.Zaucha has been the President and Chief
Executive Oficer of the National Grocers Association (NGA) since
1982. He served as President and Chief Executive Officer of the
Grocers Fixtures & Equipment Company from 1978 to 1982 prior to
its merger with NGA. He is also currently serving as a Board
Member of NCB Retail Finance Corporation and Cooperative
Development Foundation.
Caroline E. Blakely is a Managing Director and
Chief Marketing Officer with NCB. She was formerly a Corporate
Vice President, Real Estate Division in 1994, a Senior Vice
President from 1993 to 1994 and a Vice President from 1992 to
1993. Previously, she was a shareholder and attorney in Fields
and Director, PC with a practice in corporate and real estate law
from 1991 to 1992. She was also a shareholder and attorney with
Golden Freda & Schraub, PC with a practice in corporate and real
estate law from 1985 to 1991.
Charles H. Hackman is a Managing Director and
Chief Credit Officer with NCB. He was formerly Corporate Vice
President and Chief Financial Officer from 1992 to 1994. He was
Corporate Vice President, Credit Policy, of NCB from 1984 to
1992, and President of NCB Financial Corporation since its
inception in 1988.
Mark W. Hiltz is a Managing Director and Chief
Risk Officer with NCB. He was a Corporate Vice President and
Manager of Special Assets from 1994 to 1996 and a Senior Vice
President of the Special Assets Department from 1986 to 1994.
Previously he was Vice President of Loan Administration from 1983
to 1986 and General Auditor from 1982 to 1983.
Richard L. Reed is a Managing Director and Chief
Financial Officer with NCB. He was named Senior Vice President
and Chief Financial Officer in 1994. Prior to that, he was Vice
President and Treasurer from 1992 to 1994. He was Vice
President, Treasury from 1989 to 1992.
Thomas C. Shoettle was named President and Chief
Executive Officer of NCB Savings Bank, FSB in 1997. He was the
Executive Vice President of the Savings Bank from 1995 to 1996.
Previously, he served for eight years as Vice President,
Commercial and Residential Lending and Regional Manager with
Merchants National Bank and for three years as Manager, Special
Assets with Farm Credit System.
Non-Incumbent Nominees for Directorships
Harold L. Citrin
David A. Cox
Kenneth L. Hartung
Lynn M. Hoopingarner
Donald E. Lien
Alex N. Miller
Harold L. Citrin has been a Board Member of 1036
Park Corporation for three years. He is also a Managing
Director of Bear, Stearns and Company. Prior to joining the
board of 1036 Park Corporation, he was the Chairman of the Board
of Appeals of the Village of Kings Point, Long Island and was a
Board Member for 12 years.
David A. Cox has served as President and Treasurer
of 718 Apartments, Inc. He is currently employed as Director of
Economic Development in the South Bronx. Dave founded Dave's
Distributing, a food distribution company in New York City. He
was also a member of the High Falls Food Co-op for three
years and was an ex-officio Board Member and Chairman of the
Legislative and Education Committee of Bethex Federal Credit
Union.
Kenneth L. Hartung has been a Vice President of
FoodService Purchasing Cooperative since 1993. He also serves as
President of the Cooperative's Canadian subsidiary (FoodService
Purchasing of Canada) since 1994 and currently is the Chairman of
the Cooperative's insurance subsidiary (Kenco Insurance
Agency). He is also a Board Member of Bridgehaven, a member
health provider agency.
Lynn M. Hoopingarner is the Owner/President of
Hoopingarner, a business and management consulting company
founded in 1992. She has been the President of White House
Owners Association for the past four years and held various
positions at the Association for three years. She also
previously worked as a banker at Chase Manhattan Bank and Wells
Fargo Bank.
Donald E. Lien has been the President and Chief
Executive Officer of Panhandle Cooperative Association for two
years. He is also the Vice Chairman of the North Platte
Petroleum Partnership, a joint venture with twenty one other
co-ops to buy and sell petroleum products. He was also a
Regional Manager of Farmland Industries, Inc. for four years and
a General Manager of Central Farmer Co-op for twelve years.
Alex N. Miller has been the President of G & M
Management Corporation since 1974 and President and Chief
Executive Officer of CAM Systems, Inc. since 1986. In 1996, he
founded and now serves as the President of Share Credit
Corporation which provides low cost share financing to limited
equity housing cooperatives. He founded the Registered
Cooperative Manager Program and serves on its Board of Governors.
He also served as a member of the Board of Directors of the
National Association of Housing Cooperatives for four consecutive
terms.
COMPOSITION OF BOARD OF DIRECTORS
The Act provides that the Board of Directors of
NCB shall consist of 15 persons serving three-year terms. An
officer of NCB may not also serve as a director. The President
of the United States is authorized to appoint three directors
with the advice and consent of the Senate. Of the Presidential
appointees, one must be selected from among proprietors of small
business concerns which are manufacturers or retailers; one must
be selected from among the officers of the agencies and
departments of the United States; and one must be selected from
among persons having extensive experience representing low-income
cooperatives eligible to borrow from NCB. Sheila A. Smith is the
Presidential appointee from among proprietors of small business
concerns. There is a vacancy for the Presidential appointee from
among the officers of U.S. agencies and departments. Anthony J.
Scallon is the Presidential appointee from among persons
representing low-income cooperatives.
The remaining 12 directors are elected by the
holders of Class B and Class C stock. Under the bylaws of
NCB, each stockholder-elected director must have at least three
years experience as a director or senior officer of the class of
cooperatives which he or she represents. The five classes
of cooperatives are: (a) housing, (b) consumer goods, (c)
low-income cooperatives, (d) consumer services, and (e) all other
eligible cooperatives. At all times each class must have at
least one, but not more than three, directors representing it on
the Board.
Only holders of NCB's Class B and Class C stock have
voting rights, and they vote as one class under the terms of the
weighted voting system adopted by NCB to comply with the Act.
The NCB by-laws and voting policy provide that (a) each
stockholder of record who is also a borrower from NCB (a
"borrower-stockholder") is entitled to five votes, (2) each
borrower-stockholder is entitled to additional votes, up to a
total of 120, based on a formula measuring the proportion that
such borrower-stockholder's patronage with NCB bears to the total
patronage during a period of time fixed by the election rules,
and (3) each stockholder who is not a borrower from NCB shall
receive one vote, and non-borrower stockholders as a class shall
receive at least 10% of the votes allocated.
The by-laws and voting policy further provide that,
notwithstanding any allocations of votes which would
otherwise result from the foregoing rules (1) no stockholder
shall be entitled to more than 5% of the total voting control
held by all stockholders, (2) the total votes allocated to any
class of cooperatives shall not exceed 45% of the total, and (3)
no stockholder which is a "developing cooperative" shall be
entitled to more than five votes. A developing cooperative is
defined as a cooperative that is in a developmental or fledgling
state of operation and that does not have members who are
ultimate consumers or primary consumers.
NCB has reserved the right to alter its voting policy at
any time to comply with the requirement of the Act that its
voting system should not result in: (1) voting control of NCB
becoming concentrated with larger, more affluent or smaller, less
affluent organizations, (2) a disproportionate concentration of
votes in any housing cooperatives or low-income cooperatives or
consumer goods and services cooperatives, or (3) the
concentration of more than 5% of the voting control in any one
Class B or Class C stockholder.
NCB may refuse to honor any stockholder's voting rights,
except to the extent of one vote, if the stockholder is more than
90 days late on any payment to NCB at the time such rights
would otherwise be exercised.
Committees of the Board
The Board of Directors directs the management of
NCB and establishes the policies of NCB governing its funding,
lending, and other business operations. In this regard, the
Board has established a number of committees, including
Executive, Loan and Business Development, Finance, Audit, Low
Income Policy, and Strategic Planning and Nominating Committees.
The Executive Committee is responsible for exercising
all powers of the Board of Directors when waiting for the
next regular meeting will adversely affect the best interest
of NCB. It also reviews and recommends CEO's annual compensation
and benefit plans, authorizes contracts in excess of
$100,000, recommends to the board rules and procedures governing
the board, reviews and recommends policies or actions not within
the authority of any other committee, serves as the appeal
authority for loan turn-down, recommends to the board appointment
of representatives to other boards where NCB is entitled to
such representation and approves exceptions to policies not
within the athority of another committee. The members of the
committee are Leo H. Barlow, Harry J. Bowie, James L. Burns, Jr.,
Joseph Cabral, Alfred A.Plamann(Chair), Mary Ann Rothman, and
Sheila A. Smith.
The Loan and Business Development Committee is
responsible for providing policy to management and for monitoring
the lending, fee for service and business development efforts of
NCB and its subsidiaries, consistent with the board's approved
strategic plan. The members of the committee are Harry J.
Bowie(Chair), James L. Burns, Jr., Jackie Jenkins-Scott, Mary Ann
Rothman, Anthony J. Scallon, Sheila A. Smith and Thomas K.
Zaucha.
The Finance Committee is responsible for
monitoring NCB's financial planning, budgeting process, asset
liability management and funding strategies. The members of the
committee are Leo H. Barlow(Chair), Joseph Cabral, Kirby J.
Erickson, Marilyn J. McQuaide, Michael J. Mercer, Anthony J.
Scallon, Peter C. Young and Alfred A. Plamann.
The Audit Committee is responsible for assisting
the Board of Directors in fulfilling its statutory and fiduciary
responsibilities for NCB and its subsidiaries and affiliate by
overseeing all examinations and audits, monitoring all accounting
and financial reporting practices, determining that there are
adequate administrative and internal accounting controls and
assuring that NCB and its subsidiaries and affiliate are
operating within prescribed policies and procedures and in
conformance with the applicable conflict of interest policies.
The members of the Committee are Leo H. Barlow, Joseph
Cabral(Chair), Kirby J. Erickson, Marilyn J. McQuiade, Michael J.
Mercer and Anthony J. Scallon.
The Low Income Policy Committee is responsible for
evaluating NCB's best efforts to achieve 35% of loans outstanding
to low income cooperatives in accordance with established
policies and for recommending to management ways NCB can increase
low income lending. The members of the committee are Harry J.
Bowie, James L. Burns, Jr., Jackie Jenkins-Scott, Mary Ann
Rothman, Sheila A. Smith(Chair), Thomas K. Zaucha and Peter C.
Young.
The Strategic Planning Committee monitors and
reviews all NCB related entities' planning activities delegated
to them by the board. The members of the committee are the full
Board of Directors.
The Nominating Committee annually oversees the
election for NCB directors. The committee also periodically
drafts election rules on behalf of the Board of Directors. The
committee consists of those members of the Board whose terms are
not expiring during the current year.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF THE OFFICERS
The following table sets forth the compensation during the
three fiscal years of NCB's Chief Executive Officer and its four
other most highly compensated executive officers.
All Other
Annual Compensation Compensation
(a) (b) (c) (d) (e)
Name and
Principal Position Year Salary Bonus
Charles E. Snyder, 1997 $310,013 $103,250 $20,440
President & CEO 1996 295,000 96,670 19,380
1995 275,534 86,450 19,320
Caroline Blakely 1997 203,678 59,500 20,440
Managing Director, Chief 1996 170,627 53,375 19,267
Marketing Officer 1995 138,130 44,750 17,669
Charles H. Hackman 1997 189,387 63,591 20,440
Managing Director, Chief 1996 182,664 63,591 19,380
Credit Officer 1995 175,147 52,950 19,320
Richard L. Reed 1997 150,005 52,500 19,037
Managing Director, Chief 1996 117,500 36,575 15,010
Financial Officer 1995 102,918 20,000 13,148
Mark Hiltz 1997 145,005 48,125 18,592
Managing Director, Chief 1996 137,505 45,719 15,520
Risk Officer 1995 124,147 20,400 8,481
* The "All Other Compensation" reported for 1997 consists of
NCB's contributions to the defined contribution retirement plan
accounts of the named officers, NCB's matching contributions to
the 401(k) plan accounts of the named officers, and NCB's
payments of term insurance premiums for the named officers as
follows:
Retirement Plan Matching 401(k) Term Insurance
Contribution Contribution Premiums
Mr. Snyder $9,500 $9,500 $1,440
Ms. Blakely 9,500 9,500 1,440
Mr. Hackman 9,500 9,500 1,440
Mr. Reed 9,000 9,000 1,037
Mr. Hiltz 8,700 8,700 1,192
COMPENSATION OF THE BOARD
Under the Act, directors appointed by the President from
among proprietors of small businesses and from persons with
experience in low-income cooperatives, are entitled to (1)
compensation at the daily equivalent of the compensation of a
GS18 civil servant (now "Senior Executive Service") which
amounted in 1997 to $471.88 a day, and (2) travel expenses.
Typically, they receive compensation for no more than nine days a
year. Directors elected by shareholders are entitled to (1)
annual compensation of $7,000, (2) $1,000 for the chairman of
each committee, (3) $1,000 for each board meeting attended, (4)
$250 for each committee meeting attended up to two meetings only,
and (5) travel expenses. The Chairman of the Board is entitled
to $8,000 in compensation in addition to the above amounts.
Directors of subsidiary corporations are entitled to (1) $500 for
each board meeting attended when not held in conjunction with NCB
board meetings and (2) travel expenses.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Stock Ownership of Certain Stockholders and Management
Several of NCB's stockholders own in excess of 5 percent of
the outstanding shares of NCB's Class B or Class C stock. The
shareholders purchased a portion of this stock in connection with
sizable loans made by NCB to them and received a portion of the
stock as patronage dividends from NCB. NCB's voting policy,
however, does not allocate voting rights solely based on the
number of shares of Class B or Class C stock held and prohibits
any one stockholder from being allocated more than five percent
of the votes allocated in connection with any stockholder action.
The following table shows those cooperatives which owned
more than 5 percent of NCB's Class B or Class C stock as of
December 31, 1997.
Class B Stock Class C Stock
Name and Addresses No. of Percent No. of Percent
of Shareholders Shares of Class Shares of Class
Co-op Central Bank 30,500.00 3.63% 28,281.01 12.91%
265 Franklin Street
Boston, MA. 92110
Greenbelt Homes Inc. 14,424.28 1.71% 29,451.26 13.44%
Hamilton Place
Greenbelt, MD. 20770
Group Health, Inc (1) 11,637.75 1.38% 14,249.60 6.50%
2829 Univ. Ave., S.E.
Minneapolis, MN 55414
(1) Included in the above are 2,878.79 shares
and 2,769.48 shares of Class B and C stock, respectively, held of
record by Central Minnesota Group Health Plan which is affiliated
with GHI.
Because the Act restricts ownership of NCB's Class B and
Class C stock to eligible cooperatives, NCB's officers and
directors do not own any Class B or Class C stock, although
cooperatives with which they are affiliated may own such
stock.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Certain Transactions
The following table sets forth information
concerning certain transactions by which NCB and its subsidiaries
have made loans or leases to organizations with which NCB
directors or executive officers are affiliated. The first column
lists the name of the director or executive officer who is
related with the loan or lease recipient. The second column sets
forth the name of the organization to which the loan or lease was
made. (Loans labeled as "personal" were made to the named
director or officer). The last three columns list loan balances
and interest rates as of the specified dates. The text following
the table further describes the nature of the transactions set
forth in the table.
The following loans and leases were made in the
ordinary course of NCB's business on substantially the same
terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other
persons and did not involve more than the normal risk of
uncollectability or present other unfavorable features.
National Cooperative Bank Largest Interest
Balance Balance as Rate as
in of of
1997 12/31/97 12/31/97
Leo H. Barlow Sealaska Timber Corp $7,953,690 $6,389,603 9.18%
Sealaska Corp 1,519,226 1,074,584 9.15%
Sealaska Corp 5,800,000 3,816,666 8.10%
James L. Burns, Jr. Co-op Central Bank 15,00,000 0
Joseph Cabral Chatsworth Products 325,200 111,600 8.97%
Chatsworth Products 411,714 411,350 8.97%
Chatsworth Products 616,724 477,081 8.97%
Chatsworth Products 3,824,602 3,440,471 8.97%
Kirby J. Erickson Central Minnesota
Group Health 3,474,220 3,123,085 8.10%
Central Minnesota
Group Health 3,008,280 3,008,280 7.63%
Alfred A. Plamann Grocers Cap Revolver 1,250,000 0
Grocers Cap Revolver 1,750,000 0
Mollie Stone 7,151,227 7,102,455 9.50%
K.V. Mart 1,964,244 1,964,244 9.87%
Major Market 732,790 574,512 10.00%
Andronico's 2,363,603 2,091,188 8.84%
Andronico's 2,915,000 2,420,000 8.84%
Andronico's 2,400,000 2,340,000 8.38%
Superior Warehouse 9,425,130 8,450,520 9.00%
Grocers Cap Program
Purchase 5,815,949 4,701,140 7.25%
Mary Ann Rothman 110-118 Riverside
Tenants 1,000,000 0
Largest Interest
Balance Balance as Rate as
in of of
1997 12/31/97 12/31/97
Peter C. Young Area Coop Education
Services 670,000 670,000 9.00%
Area Coop Education
Services 1,291,760 1,135,310 8.75%
Area Coop Education
Services 145,184 93,466 8.95%
Charles H. Hackman Watergate South 0 0
Charles E. Snyder National Cooperative
Business Association 400,000 0
National Cooperative
Business Association 108,160 100,990 Lease
Nominees for Directorship
Harold L. Citrin 1036 Park Corporation 1,398,769 1,397,330 7.32%
David A. Cox 718 Apartments, Inc. 1,646,028 0
718 Apartments, Inc. 1,800,000 1,793,129 7.42%
Kenneth L. Hartung KFC National
Purchasing Coop 3,000,000 0
Kazi HFP 1,075,556 1,002,222 7.72%
Kazi/NJ 701,110 689,447 7.72%
Best Mexican Foods,
Inc. 332,240 297,240 8.72%
Quality Foods, Inc. 380,000 340,000 8.72%
Italian American Foods 225,000 175,000 8.72%
KFC/Cerritos 345,833 295,833 8.97%
Dinsmoor Mini Mart 741,667 725,000 8.75%
Tollgate Foods, Inc. 296,429 253,571 9.00%
Siegel Food Services 446,037 405,488 8.47%
Ross Point KFC, Inc. 271,726 234,134 11.68%
Dev. Diversified Corp 1,385,556 1,288,889 8.50%
Dev. Diversified Corp 850,000 576,842 11.50%
Marvin L & Phyllis
White 1,079,117 1,040,658 8.50%
E.A.P. Management
Corp 136,000 104,000 8.20%
Karbach 580,000 504,148 8.75%
KFC/Southgate 15,000 13,750 9.50%
KFC/Ecorse 15,500 14,208 9.50%
KFC/Lincoln 13,000 11,917 9.50%
KFC/River Rou 10,000 9,167 9.50%
KFC/Wyandote 15,000 13,750 9.50%
Easter Food 350,000 326,667 9.25%
Carolina Bell 150,000 140,854 9.25%
Lynn M. Hoopingarner White House Owners
Corp 200,000 189,585 9.38%
Donald E. Lien Panhandle Cooperative 2,300,000 600,000 8.50%
Panhandle Cooperative 83,333 0
Panhandle Cooperative 1,075,862 827,586 8.63%
Alex N. Miller The Columns at
East Hill 205,148 205,148 9.24%
Tanglewood Garden
Coop 872,491 864,859 9.69%
NCB Savings Bank, FSB
Charles H. Hackman Personal 113,593 93,371 7.00%
NCB has one direct loan outstanding and one
participation through National Bank of Alaska outstanding to
Sealaska Corporation of which Mr. Barlow is a shareholder. The
proceeds of the loan were used to refinance real estate while the
proceeds of the participation were used for general working
purposes. In addition, NCB has a $6.4 million loan participation
with National Bank of Alaska which was used to acquire timber.
NCB has a $15 million participation in a $30 million
revolving line of credit with Co-operative Central Bank of which
Mr. Burns is the President and Chief Executive Officer.
NCB has one term loan and two lines of credit
outstanding to Chatsworth Products, Inc. of which Mr. Cabral is
the President. The term loan was used to facilitate an Employee
Stock Ownership Purchase. The lines of credit are used for the
purchase of machinery and equipment and are termed out after the
initial draw periods.
NCB has two outstanding commercials loans with Central
Minnesota Group Health Plan, Inc. (CMGHP). Mr. Erickson
is the Executive Vice President of Group Health, Inc.
(GHI)/HealthPartners, Inc. HealthPartners, Inc. is GHI's parent
company and GHI is the sole corporate member of CMGHP. These
loans were used to fund a new healthcare center and refinance an
existing term loan.
NCB has loans outstanding to members of Certified
Grocers of California (CERGRO) of which Mr. Plamann is the
President and Chief Executive Officer CERGRO provides guarantees
for two K.V. Mart loans of which one has been sold and is not
reflected on NCB's books. NCB also provides a line of credit to
CERGRO's financing arm, Grocers Capital Company. Finally, NCB
has entered into an agreement to purchase at par member loans
held by Grocers Capital Company.
NCB has a line of credit outstanding to 110-118
Riverside Tenants Cooperative of which Ms. Rothman is a member.
The line of credit is used to fund capital improvements for the
housing cooperative.
NCB has three commercial loans outstanding with Area
Cooperative Educational Services of which Peter C. Young is the
Executive Director. The first is a line of credit used for
working capital; the second consolidated an existing line of
credit and first deed of trust and the third one is a term
facility to finance the reroofing of the Educational Center for
the Arts Building.
NCB has a line of credit outstanding to Watergate South,
Inc. of which Mr. Hackman, an officer of NCB, is the President of
the Board. The purpose of the line of credit is for capital
improvements to the property.
NCB has a line of credit outstanding and a lease
financing to National Cooperative Business Association of which
Mr. Snyder, President and CEO of NCB, is a Board Member. The
line of credit is to provide working capital while the lease
financing is for computer hardware and software purchased.
Board nominee Harold L. Citrin is presently a Board
Member of 1036 Park Avenue Corporation. NCB has a real estate
loan to 1036 Park Avenue Corporation which was used to refinance
an existing mortgage and to provide capital reserves. This loan
has been sold and is not reflected on NCB's books.
Board nominee David A. Cox is the President and
Treasurer of 781 Apartments, Inc. NCB has a real estate loan to
781 Apartments, Inc. which was used to refinance an existing
mortgage and to finance repairs and improvements. This loan has
been sold and is not reflected on NCB's books.
Board nominee Kenneth L. Hartung is a Vice President of
FoodService Purchasing Cooperative(FSPC). NCB has a line of
credit to KFC National Purchasing Cooperative, Inc. d/b/a
FoodService Purchasing Cooperative which is available for working
capital purposes. NCB also has started a member finance program
whereby NCB provides financing to KFC and Taco Bell retail
members for store renovation, purchase of new stores and the
purchase of equipment and inventory. FSPC provides guarantees
for these member loans. The remaining loans listed with respect
to Mr. Hartung were made under this program.
Board nominee Lynn M. Hoopingarner is the President of
White House Owners Association. NCB has an outstanding real
estate loan to the White House Owners which was used to finance
capital improvements.
Board nominee Donald E. Lien is the President and Chief
Executive Officer of Panhandle Cooperative Association. NCB has
two outstanding commercial loans with Panhandle Cooperative.
These loans were used to finance equipment purchases and provide
operating capital.
Board nominee Alex N. Miller is the President of G & M
Management Company. NCB has outstanding loans to The Columns at
East Hill and Tanglewood Garden Coop. G & M provides management
services for these cooperatives. The purposes of these loans
were to refinance acquisition and for capital improvements.
These loans have been sold and are not reflected on NCB's books.
In its normal course of business, NCB Savings Bank makes
loans to employees at competitive market rates. NCB Savings Bank
has issued a home mortgage to Charles Hackman.
NCB believes that the foregoing transactions contain
terms comparable to those obtainable in an arm's length
transaction. NCB had determined that these loans are in
accordance with its lending policies, were properly approved and
were within the applicable regulatory limitations and any or all
were evaluated for disclosure in the financial statements.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are filed as a part
of this report.
Financial Statements as of December 31, 1995, 1996, and 1997.
Page #
27 Report of Independent Public Accountants
28 Independent Auditors' Report
29 Consolidated Balance Sheets
30 Consolidated Statements of Income
31 Consolidated Statements of Changes in Members' Equity
32-33 Consolidated Statements of Cash Flows
34-61 Notes to the Consolidated Financial Statements
(a)(2) Not applicable
All other schedules are omitted because they are not
applicable or the required information is shown in the financial
statements, or the notes thereto.
(a)(3) The following exhibits are filed as a part of this report.
Exhibit No.
(a) 3.1 National Consumer Cooperative Bank Act, as
amended through 1981.
(c) 3.2 1989 Amendment to National Consumer Cooperative Bank
Act.
(d) 3.3 Bylaws of NCB
(g) 4.1 Election Rules of the NCB. For other instruments
defining the rights of security holders, see
Exhibits 3.1 and 3.2.
(h) 4.2 Form of Assumption Agreements and Amended and
Restated Senior Note Agreements
(h) 4.3 Schedule Concerning Senior Note Agreements
(l) 4.4 Financing Agreement with U.S. Treasury
(m) 4.5 Note Purchase Agreement with Lutheran Brotherhood et
al.
(n) 4.6 Master Shelf Agreement with Prudential Insurance Co.
of America et al.
(o) 4.7 Senior Note Agreement (Dec. 1996)
(s) 4.8 First Amendment Agreement to Master Shelf Agreement
with Prudential Insurance Co. of America
(s) 4.9 First Amendment Agreements to the Assumption
Agreement and Amended and Restated Note Purchase
Agreements
(s) 4.10 First Amendment Agreements to the Note Purchase
Agreements with Lutheran Brotherhood et al.
(p) 4.11 Form of Indenture for Debt Securities
(q) 4.12 Form of Fixed Rate Medium Term Note
(r) 4.13 Form of Floating Rate Medium Term Note
*(u) 10.1 Chief Executive Officer Incentive Plan
10.2 (No Exhibit)
*(i) 10.3 Deferred Compensation Agreement with Charles E.
Snyder
*(f) 10.4 Severance Agreement with Charles E. Snyder
(t) 10.5 Third Amended and Restated Loan Agreement with Fleet
Bank as Agent
*(a) 10.6 Insurance Plan for NCB Executive Officers
(b) 10.7 Subordination Agreement with Consumer Cooperative
Development Corporation (now NCB Development
Corporation)
(t) 10.8 Master Shelf Agreement with Prudential Insurance Co.
of America et al. (June 1997)
10.11 (No Exhibit)
(d) 10.12 Lease on Headquarters of NCB
*(u) 10.13 NCB Executive Long-Term Incentive Plan
*(g) 10.14 Employment Agreement with Marlon W. Pickles
10.15 (No Exhibit)
10.16 (No Exhibit)
10.17 (No Exhibit)
(i) 10.18 Term Loan Agreement with Credit Suisse (Feb. 1996)
10.19 (No Exhibit)
(j) 10.20 Term Loan Agreement with Credit Suisse (Sept.
1996)
10.21 (No Exhibit)
10.22 (No Exhibit)
(j) 10.23 Term Loan Agreement with Comerica Bank (Dec. 1995)
10.24 (No Exhibit)
(k) 10.25 Term Loan Agreement with PNC Bank (Aug. 1997)
*(u) 10.26 Incentive Plan for NCB Executive Officers
10.27 (No Exhibit)
(s) 10.28 Amendment No. 1 to Term Loan Agreement with
Credit Suisse (Feb. 1995)
(s) 10.29 Amendment No. 1 to Term Loan Agreement with
Credit Suisse (Sept. 1995)
(s) 10.30 Amendment to Term Loan Agreement with Comerica Bank
(Dec. 1995)
(j) 22.1 List of Subsidiaries and Affiliates of the NCB
(u) 23.1 Consent of Arthur Andersen LLP
(j) 25.1 Power of Attorney by Joseph Cabral
(h) 25.2 Power of Attorney by Leo Barlow
(u) 25.3 Power of Attorney by Kirby J. Erickson
(e) 25.4 Power of Attorney by Harry J. Bowie
(u) 25.5 Power of Attorney by Jackie Jenkins-Scott
(s) 25.6 Power of Attorney by James L. Burns, Jr.
(h) 25.7 Power of Attorney by Mary Ann Rothman
(u) 25.8 Power of Attorney by Michael J. Mercer
(u) 25.9 Power of Attorney by Peter C. Young
(u) 25.10 Power of Attorney by Thomas K.Zaucha
(j) 25.11 Power of Attorney by Alfred A. Plamann
(j) 25.12 Power of Attorney by Anthony J. Scallon
(j) 25.13 Power of Attorney by Sheila A. Smith
25.14 (No Exhibit)
(s) 25.15 Power of Attorney by Marilyn J. McQuaide
(u) 27 Financial Data Schedule
* Exhibits marked with an asterisk are management contracts
or compensatory plans.
(a) Incorporated by reference to the exhibit of the
same number filed as part of Registration Statement
No.2-99779 (Filed August 20, 1985).
(b) Incorporated by reference to the exhibit of the
same number filed as part of Amendment No. 1 to
Registration Statement No. 2-99779 (Filed May 7,
1996).
(c) Incorporated by reference to the exhibit of the
same number filed as part of the registrant's annual
report on Form 10-K for the year ended December 31,
1989 (File No.2-99779).
(d) Incorporated by reference to the exhibit of the
same number filed as part of Registration Statement
No. 33-42403 (filed September 6, 1991 ).
(e) Incorporated by reference to the exhibit of the
same number filed as part of the registrant's annual
report on Form 10-K for the year ended December 31,
1991(File No. 2-99779).
(f) Incorporated by reference to the exhibit of the
same number filed as part of the registrant's
quarterly report on Form 10-Q for the three months
ended June 30, 1992 (File No. 2-99779).
(g) Incorporated by reference to the exhibit of the
same number filed as part of the registrant's annual
report on Form 10-K for the year ended December 31,
1992 (File No.2-99779).
(h) Incorporated by reference to the exhibit of the
same number filed as part of the registrant's annual
report on Form 10-K for the year ended December 31,
1993 (File No. 2-99779).
(i) Incorporated by reference to the exhibit of the
same number filed as part of the registrant's annual
report on Form 10-K for the year ended December 31,
1994 (File No. 2-99779).
(j) Incorporated by reference to the exhibit of the
same number filed as part of the registrant's annual
report on Form 10-K for the year ended December 31,
1995 (File No. 2-99779).
(k) Incorporated by reference to the exhibit of the
same number filed as part of the registrant's
quarterly report on Form 10-Q for the three months
ended September 30, 1996 (File No. 2-99779).
(l) Incorporated by reference to Exhibit 10.16 filed as
part of the registrant's annual report on Form 10-K
for the year ended December 31, 1989 (File No.
2-99779).
(m) Incorporated by reference to Exhibit 10.13 filed as
part of the registrant's annual report on Form 10-K
for the year ended December 31, 1994 (File No.
2-99779).
(n) Incorporated by reference to Exhibit 10.15 filed as
part of the registrant's annual report on Form 10-K
for the year ended December 31, 1994 (File No.
2-99779).
(o) Incorporated by reference to Exhibit 10.22 filed as
part of the registrant's annual report on Form 10-K
for the year ended December 31, 1995 (File No.
2-99779).
(p) Incorporated by reference to Exhibit 4.1 filed as
part of Amendment No. 1 to Registration Statement No.
333-17003 (Filed January 21, 1997).
(q) Incorporated by reference to Exhibit 4.2 filed as
part of Amendment No. 1 to Registration Statement No.
333-17003( Filed January 21, 1997).
(r) Incorporated by reference to Exhibit 4 to the
registrant's report on Form 8-K filed February 11,
1997 (File No. 2-99779).
(s)Incorporated by reference to the exhibit of the
same number filed as part of the registrant's annual
report on Form 10-K for the year ended December 31,
1996 (File No. 2-99779).
(t) Incorporated by reference to the exhibit of the
same number filed as part of the registrant's
quarterly report on Form 10-Q for the quarter ended
June 30, 1997 (File No. 2-99779).
(u) Filed herewith
(b) The Registrant did not file any report on Form 8-K
during the last quarter of 1997.
SIGNATURES
Pursuant to the requirements of Section 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf of the undersigned,
thereunto duly authorized.
NATIONAL CONSUMER COOPERATIVE BANK
DATE March 30, 1998 BY/s/Charles E. Snyder
Charles E. Snyder
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates noted:
Signature Title Date
*/s/Alfred A. Plamann Chairman of the Board and 3/30/98
Alfred A. Plamann Director
/s/Richard L. Reed Managing Director, 3/30/98
Richard L. Reed (Principal Financial Officer)
/s/Marietta J. Orcino Vice President, Tax & 3/30/98
Marietta J. Orcino Regulatory Compliance
/s/Patricia A. Ferrick Vice President (Principal 3/30/98
Patricia A. Ferrick Accounting Officer)
*/s/Leo H. Barlow Director 3/30/98
Leo H. Barlow
*/s/Harry J. Bowie Director 3/30/98
Harry J. Bowie
*/s/James L. Burns, Jr. Director 3/30/98
James L. Burns, Jr.
*/s/Joseph Cabral Director 3/30/98
Joseph Cabral
*/s/Kirby J. Erickson Director 3/30/98
Kirby J. Erickson
*/s/Jackie Jenkins-Scott Director 3/30/98
Jackie Jenkins-Scott
Signature Title Date
*/s/Marilyn J. McQuiade Director 3/30/98
Marilyn J. McQuiade
*/s/Michael J. Mercer Director 3/30/98
Michael J. Mercer
*/s/Mary Ann Rothman Director 3/30/98
Mary Ann Rothman
*/s/Anthony J. Scallon Director 3/30/98
Anthony J. Scallon
*/s/Sheila A. Smith Director 3/30/98
Sheila A. Smith
*/s/Peter C. Young Director 3/30/98
Peter C. Young
*/s/Thomas K. Zaucha Director 3/30/98
Thomas K. Zaucha
* By /s/Richard L. Reed
Richard L. Reed
(Attorney-in-Fact)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
With this report, the registrant is furnishing to the
Commission for its information the registrant's election
materials for its 1997 annual meeting. The registrant has not yet
distributed an 1997 annual report to security holders and will
furnish such report to the Commission when it is sent to security
holders.
INDEX TO EXHIBITS
Exhibit No. Description
10.1 Chief Executive Officer Incentive Plan
10.13 NCB Executive Long-Term Incentive Plan
10.26 Incentive Plan for NCB Executive Officers
23.1 Consent of Arthur Andersen LLP
25.3 Power of Attorney by Kirby J. Erickson
25.5 Power of Attorney by Jackie Jenkins-Scott
25.8 Power of Attorney by Michael J. Mercer
25.9 Power of Attorney by Peter C. Young
25.10 Power of Attorney by Thomas K. Zaucha
27 Financial Data Schedule
Supplemental Information
Registrant's 1998 Election Materials