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THIS DOCUMENT IS A COPY OF THE (SPECIFY DOCUMENT) FILED ON (DATE) PURSUANT TO A
RULE 201 TEMPORARY HARDSHIP EXEPMTION.
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, 1998 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
2.74% 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, 1998
Class C
(Common stock, $100.00 par value) 221,996
Class B
(Common stock, $100.00 par value) 922,096
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............................................. 31
Item 8 Financial Statements and Supplementary Data............... 37
Item 9 Changes in and Disagreements with Accountants,
on Accounting and Financial Disclosure.................. 77
PART III
Item 10 Directors and Executive Officers of the Registrant........ 77
Item 11 Executive Compensation.................................... 86
Item 12 Security Ownership of Certain
Beneficial Owners and Management........................ 88
Item 13 Certain Relationships and Related Transactions............ 89
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................. 95
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
members or those eligible to become its members.
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 fulfills 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 principally 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 Oakland. NCB
Financial Corporation, NCB Retail Finance Corporation and NCB I,
Inc. maintain offices in Wilmington, Delaware while NCB Savings
Bank, FSB maintains its office 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.
All loan approvals require at least two signatures and the
Bank's senior management approves credit commitments that exceed
individual or team lending authority.
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, borrower 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 requested loan
will be repaid in accordance with its terms.
NCB evaluates repayment ability based upon an analysis of a
borrower's historical cash flow and conservative projections of
future cash flows from operations. This analysis focuses on
determining the predictability of future cash flows as a primary
source of repayment.
Security
Loans made by NCB are generally secured by specific
collateral. If collateral security is required, the value of the
collateral must be reasonably sufficient to protect NCB from
loss, in the event that the primary sources of repayment of
financing from the normal operation of the cooperative, or
refinancing, prove to be inadequate for debt repayment.
Collateral security alone is not a sufficient basis for NCB to
extend credit. Unsecured loans 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, 1998, 24.8% of the outstanding loans were 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, 1998, approximately 10.83% 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, unitary thrift 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, 1998.
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 Subchapter T of
the Internal Revenue Code and the Act, NCB, in determining its
taxable income for federal income tax purposes, is allowed a
deduction for an amount equal to any patronage 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.
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.
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'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, 1999,
the face amounts and current maturities of the outstanding
replacement notes were as follows:
Current
Replacement Maturity Face
Note Date Amount Maturity
1 4/1/99 $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(as amended April 1998) 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 1998, 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
Oakland. NCB Financial Corporation, NCB Retail Finance Corporation
and NCB I, Inc. maintain offices in Wilmington, Delaware while NCB
Savings Bank, FSB maintains its office 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, 1998 was $1,318,000 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
1999 $1,478,000 $237,000
2000 $1,507,000 $221,000
2001 $1,537,000 $228,000
2002 $384,000 $232,000
2003 $244,000
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 1998.
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 repurchase from holders by the terms of the
contracts under which such stock was originally sold by NCB. At
December 31, 1998, the stock required to be repurchased was
approximately $105,000. 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 5.93% during 1998. 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 NCB's
Board of Directors. The Board declared an initial cash 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. On April 23, 1998, the Board declared a cash dividend of
$1.13 per share of Class C stock payable on or before June 30, 1998
to holders of record as of March 31, 1998. 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, 1998 there were 1,353 holders of Class B
stock, 388 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, 1998 of approximately $12.5 million of which $5.3
million will be distributed in cash and $7.2 million in Class B or
Class C stock.
Sales of Unregistered Shares of Class C Stock
During the fourth quarter of 1998, NCB sold two shares 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, 1998 1997 1996 1995 1994
Loans and lease financing $795,174 $773,768 $750,094 $597,190 $501,090
Allowance for loan losses 17,426 17,638 15,505 14,554 13,031
Total assets 933,415 869,304 839,336 684,532 567,321
Total capital* 322,838 314,376 307,714 300,995 295,749
Subordinated debt** 182,542 182,542 182,542 182,542 182,542
Long-term borrowings,
including subordinated debt 413,735 387,335 384,679 337,230 287,899
Members' equity 140,296 131,833 125,172 118,453 113,207
Other borrowed funds
including
Deposits 575,265 531,740 515,257 365,288 256,315
For the Years Ended December 31, 1998 1997 1996 1995 1994
Total interest income $ 71,187 $ 68,787 $ 61,265 $ 52,770 $ 41,714
Total interest expense 45,561 41,944 35,299 30,753 20,609
Net interest income 25,627 26,843 25,966 22,017 21,105
Net income 12,628 12,462 11,199 9,083 8,877
Ratios
Capital to assets 34.6% 36.2% 36.7% 44.0% 52.3%
Return on average assets 1.4% 1.5% 1.5% 1.5% 1.7%
Return on average assets
members' equity 9.3% 9.7% 9.2% 7.8% 7.9%
Net yield on interest
earning assets 2.9% 3.3% 3.7% 3.7% 4.2%
Average members' equity as
a percent of
Average total assets 14.8% 15.3% 16.5% 18.9% 21.5%
Average total loans and
lease financing 17.5% 17.9% 19.2% 21.9% 25.0%
Net average loans and
lease financing to average
total assets 84.9% 85.5% 84.3% 84.0% 83.4%
Net average earning assets to
average total assets 96.0% 95.9% 92.4% 92.7% 94.8%
Allowance for loan losses
to loans outstanding 2.2% 2.3% 2.1% 2.5% 2.6%
Provision for loan losses
to average loans outstanding 0.1% 0.5% 0.3% 0.4% 0.2%
* - 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
1998 and 1997
Net income for the year ended December 31, 1998 of $12.6
million showed a slight increase of $165 thousand or 1.3% compared
with $12.5 million in 1997. The positive effects of interest
income of $2.4 million and provision for possible credit losses of
$2.7 million were offset by increased interest expense and non-
interest expenses of $3.6 million and $.7 million, respectively
NCB continued to maintain strong credit quality. Impaired
assets amounted to .7% of total assets at year end. Net chargeoffs
as a percentage of total loans and leases outstanding at December
31, 1998 were .13%. The provision for loan losses as a percentage
of average loans and leases decreased to .1% in 1998 from .5% in
1997. In this same period, the allowance for loan losses as a
percentage of loans and leases decreased to 2.2% in 1998 from 2.3%
in 1997.
The return on average assets in 1998 and 1997 was 1.4% and
1.5%, respectively. The return on average equity decreased to 9.3%
in 1998 compared with 9.7% in 1997.
Total assets increased 7.4% or $64.1 million to $933.4 million
as of December 31, 1998 from $869.3 million at year end 1997 due
primarily to the growth in cash and cash equivalents and interest-
only receivables which resulted from real estate loan sales. In
addition, commercial and lease financing were ahead of last year.
Net Interest Income
Net interest income for 1998 was $25.6 million, $1.2 million
or 4.5% lower than $26.8 million in the prior year. Table 1
contains more detailed information on the $1.2 million decrease.
As shown on Table 2, while average interest earning assets at
December 31, 1998 were up 9.0%, average yield dropped 43 basis
points to 8.09% in 1998 from 8.52% in 1997. Net yield was 2.91%
and 3.32% in 1998 and 1997, respectively. The primary reason for
the decrease in net yield was the origination of new loans at
narrower spreads and excess liquidity.
For the year ended December 31, 1998, interest income
increased 3.5% to $71.2 million compared with $68.8 million from
the prior year. The increase in interest income was mostly due to
a higher average balance of real estate loans. Average loans and
leases outstanding at year end 1998 increased 8.0% to $778.2
million compared with $720.3 million at December 31, 1997.
Total interest expense increased $3.6 million to $45.6 million
for the year ended December 31, 1998 from $41.9 million in 1997. As
shown on Table 2, the average rate on interest bearing liabilities
at December 31, 1998 declined 17 basis points to 6.03% from 6.20%
at December 31, 1997. While there was an increase in interest
expense due to the repricing of $53.6 million of subordinated debt,
it was offset by lower interest payments on the increased usage of
the long term borrowing facilities and on higher volume of
deposits.
See Table 1 & Table 2
Credit quality
Credit quality improved and continued to remain strong in
1998. 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 process and an ongoing assessment of the credit condition
of the portfolio. In addition, a risk rating system is designed to
classify each loan according to the risks unique to each credit
facility.
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 future economic conditions, concentrations,
diversification, portfolio size and level of nonperforming and
delinquent credits, among other relevant factors.
The provision for loan losses decreased to $843 thousand in
1998 from $3.5 million in 1997. The decrease was largely
attributable to improved credit quality resulting in a decline of
classified loans. The provision as a percentage of average loans
and leases outstanding decreased to .1% in 1998 from .5% in 1997.
The allowance for loan losses slightly decreased 1.2% to $17.4
million as of December 31, 1998 from $17.6 million a year earlier.
The allowance as a percentage of loans and leases outstanding
decreased to 2.2% at December 31, 1998 from 2.3% at December 31,
1997. The allowance as a percentage of impaired assets increased
to 259% in 1998 compared with 192% in the prior year.
Table 1
CHANGES IN NET INTEREST INCOME
(dollars in thousands)
1998 Copared to 1997 1997 Compared to 1996
Increase (decrease) due to Increase (decrease) due to
change in: change in:
For the years ended December 31, Average Average Average Average
Volume* Rate Net** Volume* Rate Net**
Interest Income
Cash equivalents and
investment securities $ 959 $(1,453) $ (494) $ 162 $ 482 $ 644
Commercial loans and leases (215) 567 352 4,123 367 4,490
Real estate loans 4,984 (2,443) 2,541 3,440 (1,052) 2,388
Total interest income 5,728 (3,329) 2,399 7,725 (203) 7,522
Interest Expense
Deposits 1,046 (77) 969 53 (192) (139)
Notes payable 10,933 (8,660) 2,273 6,413 (236) 6,177
Subordinated debt 0 374 374 (22) 628 606
Total interest expense 11,979 (8,363) 3,616 6,444 200 6,644
Net interest income $(6,251) $ 5,034 $(1,217) $1,281 $ (403) $ 878
*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, 1998 1997 1996
Assets Avg. Avg. Avg.
Avg. Income/ Rate/ Avg. Income/ Rate/ Avg. Income/ Rate/
Balance Expense Yield Balance Expense Yeild Balance Expense Yield
Interest earning assets
Real estate loans $415,493 $33,493 8.06% $355,160 $30,951 8.71% $316,015 $28,565 9.04%
Commercial loans
and leases 362,670 31,950 8.81% 365,143 31,599 8.65% 317,427 27,106 8.54%
Total loans and
leases 778,163 65,443 8.41% 720,303 62,550 8.68% 633,442 55,671 8.79%
Investment securities
and cash equivalents 102,218 5,744 5.62% 87,386 6,237 7.14% 77,955 5,594 7.17%
Total interest
earning assets 880,381 71,187 8.09% 807,689 68,787 8.52% 711,397 61,265 8.61%
Allowance for loan
losses (17,722) (16,747) (14,976)
Non-interest earning
assets
Cash 1,327 5,028 4,577
Other 52,837 46,176 32,992
Total non-interest earning
assets 54,164 51,204 37,569
Total assets $916,823 $842,146 $733,990
Liabilities and members'
equity
Interest bearing
liabilities
Subordinated debt $182,542 $10,830 5.93% $182,542 $10,455 5.73% $182,943 $ 9,849 5.38%
Note payable 466,288 29,791 6.39% 409,767 27,518 6.72% 321,080 21,341 6.65%
Deposits 106,720 4,940 4.63% 84,147 3,971 4.72% 83,056 4,109 4.95%
Total interest bearing
liabilities 755,550 45,561 6.03% 676,456 41,944 6.20% 587,079 35,299 6.01%
Other liabilities 25,461 36,754 25,038
Members' equity 135,812 128,936 121,873
Total liabilities
and members' equity $916,823 $842,146 $733,990
Net interest earning
assets $124,831 $131,233 $124,289
Net interest revenues
and spread $25,626 2.06% $26,843 2.32% $25,966 2.60%
Net yield on interest
earning assets 2.91% 3.32% 3.65%
*Based on monthly balances. Average loan balances includes
nonaccrual loans.
Total impaired assets ( non-accruing and restructured loan and
real estate owned(REO)) decreased to $6.7 million at December 31,
1998 from $8.1 million at December 31, 1997. At December 31, 1998
and 1997, impaired assets as a percentage of total capital were
4.8% and 6.2%, respectively.
See Table 3 & Table 4
Non-accruing loans, as a percentage of loans and leases, were
.3% and .4% at year end 1998 and 1997, respectively. The decrease
of $772 thousand in REO was due to the sale of various parcels of
foreclosed real estate.
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 decreased 3.4% from $14.6 million at year
end 1997 to $14.1 million in 1998. 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. Gain on sale of loans of $5.8 million in 1998,
which represented 41.3% of non-interest income, decreased 19.7%
from $7.2 million for year ended December 31, 1997. The decrease
was attributable to lower gains on large loan sales in the fourth
quarter due to market conditions. Real estate loan sales in 1998 of
$569.3 million reflected an increase of 77.7% or $248.9 million
compared with $320.4 million in 1997. NCB maintains a conservative
interest rate risk policy; accordingly, warehoused loans were fully
hedged in 1998 and 1997.
Servicing income remained a stable source of non-interest
income for NCB in 1998. NCB earned servicing fee income of $2.6
million and $2.2 million in 1998 and 1997, respectively. As of
December 31, 1998, NCB serviced $1.8 billion in single and multi-
family real estate and commercial loans for investors compared with
$1.4 billion at year end 1997.
Other income increased 11.6% to $5.7 million for the year
ended December 31, 1998 compared with $5.1 million for the prior
year. The majority of the increase in other income was related to
a $700,000 prepayment penalty fee received before the end of the
year.
Table 3
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
For the years ended December 31, 1998 1997 1996 1995 1994
Balance at beginning of year $17,638 $15,504 $14,554 $13,031 $12,309
Charge-offs
Commercial 1,161 597 1,106 131 320
Real estate - residential 70 958 31 568 0
Total charge-offs 1,231 1,555 1,137 699 320
Recoveries
Commercial 101 133 137 125 164
Real estate residential 75 52 0 192 0
Total recoveries 176 185 137 317 164
Net charge-offs(recoveries) 1,055 1,370 1,000 382 156
Provision for loan losses 843 3,504 1,950 1,905 878
Balance at end of year $17,426 $17,638 $15,504 $14,554 $13,031
Table 4
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
At December 31, 1998 1997 1996 1995 1994
Per. Per. Per. Per. Per.
Amt. of Total Amt. of Total Amt. of Total Amt. of Total Amt. of Total
Loans and lease
financing
Commercial * $353,768 44.5% $347,658 44.9% $342,211 45.6% $327,215 54.8% $246,797 49.3%
Real estate -
residential* 386,565 48.6 389,153 50.3 384,035 51.2 247,524 41.5 234,526 46.7
Real estate -
commercial 7,350 .9 7,025 1.0 8,742 1.2 9,361 1.6 10,301 2.1
Lease financing 47,491 6.0 29,932 3.8 15,106 2.0 13,090 2.1 9,466 1.9
Total loans and lease
financing $795,174 100.0% $773,768 100.0% $750,094 100.0% $597,190 100.0% $501,090 100.0%
Allocation of allowance for
loan losses
Commercial $ 9,959 57.2% $10,348 58.7% $ 7,826 50.5% $ 7,158 49.2% $ 0 0.0%
Real estate -
residential 5,378 30.9 6,971 39.5 6,963 44.9 5,820 40.0 0 0.0
Lease financing 671 3.8 319 1.8 151 1.0 250 1.7 0 0.0
Unallocated 1,418 8.1 0 0.0 564 3.6 1,326 9.1 13,031 100.0
Total allowance for loan
losses $17,426 100.0% $17,638 100.0% $ 15,504 100.0% $14,554 100.0% $ 13,031 100.0%*
*Includes loans held for sale
Table 5
IMPAIRED ASSETS
(dollars in thousands)
At December 31, 1998 1997 1996 1995 1994
Real estate owned $4,343 $5,115 $ 377 $1,397 $ 300
Non-accruing 2,385 3,030 2,829 1,741 723
Restructured - - 1,049 709 -
$6,728 $8,145 $4,255 $3,847 $1,023
Non-interest expense
Non-interest expense for the year ended December 31, 1998
increased 2.9 % to $24.8 million compared with $24.1 million for the
prior year. Non-interest expense as a percentage of average assets
was 2.7% and 2.9% for 1998 and 1997, respectively. Salaries and
benefits, remaining by far the single largest component of non-interest
expenses, had a minimal increase of .6% or $78 thousand from last year.
Salaries and employee benefits accounted for 51.4% of non-
interest expenses in 1998 compared with 52.6% in 1997. As of December 31,
1998, NCB and its consolidated subsidiaries employed 172 employees
compared with 159 employees one year earlier. For the
year ended December 31, 1998, contractual services increased
$1.1 million or 27.7% to $4.9 million from $3.8 million in
1997. The increase in contractual services was mainly due to
higher audit fees and corporate development and marketing expenses.
Occupancy and equipment and other expenses went up by $572 thousand
due to increases in depreciation associated with new technology and
computer/internet related supplies and services. Under the provisions
of the Act, NCB makes tax deductible, voluntary contributions to NCB
Development Corporation. These contributions are discretionary and are
based upon the approval of NCB's Board of Directors. In 1998, there
was no contribution to NCBDC while in 1997 $1.0 million was made
to fund certain business activities. Non-interest expense, adjusted for the
contribution to NCBDC, as a percentage of average assets remained the
same at 2.7% in 1998 and 1997.
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 the basis of 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.
1997 and 1996
Net income for year ended 1997 of $12.5 million 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.
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. The net spread decreased 28 basis points to 2.32% at year
end 1997 compared with 2.60% at the prior year.
Credit quality in NBC's lending portfolio remained strong
during 1997. Nonperforming assets, which include nonaccrual loans and
foreclosed real estate, amounted to .7% 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.
Non-interest income increased by 32.6% to $14.6 million in 1997.
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. The majority of the increase was caused by the
higher amount of asset sales to the secondary market. Gains on loan sales
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.
Non-interest expense 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 expense as a percentage of
average assets decreased to 2.9% during 1997 compared with 3.1% in 1996.
Salaries and benefits went up 16.9% or $1.8 million. During 1997,
loan officers were paid greater 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. In 1997, NCB agreed to make a contribution to NCB Development
Corporation to fund certain business activities. The contribution to
NCBDC was $1.0 million in 1997 and $.72 million in 1996. Non-interest
expense, adjusted for the contribution to NCBDC, as a percentage of
average assets decreased to 2.7% in 1997 compared with 3.0% in 1996.
1998 and 1997 Fourth quarter results
Net income for the fourth quarter of 1998 decreased slightly
to $5.0 million compared with $5.1 million for the prior year's quarter.
The negative variance resulted primarily from a decrease of $3.3 million in
non-interest income due to timing of the loan sale which was offset by
a decline of $1.4 million and $2.0 million in provision for loan losses
and non-interest expenses, 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 1998 and 1997, total borrowing
capacity under these facilities was $402.5 million and $320.0
million, respectively. The outstanding balance at December 31,
1998 was $156.0 million compared with an outstanding balance of
$206.0 million at December 31, 1997. Usage, as measured by average
outstanding balances during the year, increased from $143.7 million
in 1997 to $165.8 million in 1998 due to growth in commercial loan
volume and additional activity to fund warehoused real estate
loans.
NCB developed a program under which it borrows, on a short-term
basis, from certain of its customers. At December 31, 1998 and
1997, the short-term borrowings outstanding were $34.7 million and
$12.2 million, respectively.
In 1997, steps were taken to move into the medium term note
market. In April 1998, NCB received Board approval to issue up to
$200.0 million under the medium term note program. As of December
31, 1998 and 1997, NCB had $55.0 million and $40.0 million
outstanding under this program. In addition, during 1997, NCB
implemented a commercial paper program. At year-end 1998 and 1997,
face values of $30.0 million and $25.0 million, respectively, were
outstanding.
Unused capacity under the short-term and long-term facilities
of approximately $181.8 million and $65.0 million, respectively, is
sufficient to meet anticipated disbursements in 1999.
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 1998, NCB sold $601.5 million of cooperative real estate,
commercial and share loans compared with $366.2 million in the prior
year.
In 1999, NCB expects to sell $437.0 million of cooperative real
estate, commercial and share loans in the secondary market. In April
1999, approximately $200.0 million is scheduled to be sold.
Table 6
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
(dollar in thousands)
1998 1997
For the three months
ended Dec. 31 Sept.30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
Interest income $17,561 $18,354 $17,895 $17,377 $16,248 $18,545 $17,088 $16,906
Interest expense 11,457 12,121 11,459 10,524 9,831 11,428 10,489 10,196
Net interest income 6,104 6,233 6,436 6,853 6,417 7,117 6,599 6,710
Provision for loan
losses 30 30 430 353 1,460 655 687 702
Income after provision
forloan losses 6,074 6,203 6,006 6,500 4,957 6,462 5,912 6,008
Non-interest income 4,587 1,903 2,054 5,524 7,852 1,860 1,783 3,069
Net revenue 10,661 8,106 8,060 12,024 12,809 8,322 7,695 9,077
Non-interest
expenses 5,298 6,246 7,004 6,222 7,308 6,076 5,589 5,092
Income before income
taxes 5,363 1,860 1,056 5,802 5,501 2,246 2,106 3,985
Provision for income
taxes 379 404 377 293 353 283 402 337
Net income $ 4,984 $ 1,456 $ 679 $ 5,509 $ 5,148 $ 1,963 $ 1,704 $ 3,648
Deposits
At NCB's wholly-owned subsidiary, NCB Savings Bank, FSB,
deposits increased 47.2% to $123.4 million in 1998 from $83.8
million a year earlier. The growth was attributable to an
aggressive campaign to attract local and national deposit accounts
and cooperative customers. The weighted average rates on deposits
at December 31, 1998 and 1997 were 4.7% and 4.9%, respectively. The
average maturity of the certificates of deposit at December 31, 1998
was 15.4 months compared with 18.5 months at same period in the
prior year. Although NCB relies heavily on funds raised through the
capital markets, deposits are a major portion of interest bearing
liabilities -- 16.3% in 1998 compared with 11.7% in 1997.
Management anticipates that deposits will represent an increasing
portion of its funding structure.
Uses of funds
Loans and leases
Loans and leases outstanding increased 2.8% to $795.2 million
at year-end 1998 from $773.8 million in 1997.
NCB's commercial loan portfolio expanded with new business
opportunities. The commercial loan and lease portfolio increased 6.3%
to $401.3 million at December 31, 1998 compared with $377.6 a year
earlier. The commercial loan portfolio reflects a decrease in the
areas of food processing and distribution, financial services, native
Alaskan and hardware wholesale cooperatives due to scheduled loan
repayments and maturities. Other commercial industries
including education, leisure and ESOP loans increased during the year.
NCB's real estate portfolio decreased .6% to $393.9 million at
the end of 1998 from $396.2 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 1999, NCB expects a decline in its origination and
secondary marketing activities. New disbursements and loan sales are
expected to decrease approximately $253.0 million and $164.5 million,
respectively.
Cash, Cash Equivalents, and Investment Securities
Cash, cash equivalents, and investments increased 32.7% or
$30.0 million to $121.8 million compared with $91.8 million in 1997.
Cash, cash equivalents, and investment securities, represent 13.5% of
interest earning assets in 1998 compared with 10.6% in 1997.
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, 1998, NCB held $66.6
million in cash and cash equivalents compared with $21.7 million in cash
and cash equivalents at year end 1997. These funds are normally used
to fund business operations.
NCB had at year end a $13.7 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 approximately 5 years for 1998 and 1997.
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 $402.5 million of revolving lines of credit. At
December 31, 1998, the following commitments were outstanding:
$159.5 million is committed until May 26, 1999
$130.5 million is committed until May 26, 2001
$50.0 million is committed until May 28, 1999
The remaining balance of $62.5 million is uncommitted at December 31, 1998.
Average outstanding balances were $165.8 million in 1998 compared with
$143.7 million in 1997.
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
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.
NCB has surveyed all mission critical internal software and
systems (See Table (1)) and has determined a remediation strategy.
Table (2) reflects the phase completion with respect to all mission
critical systems. NCB expects all testing to be completed by April
1, 1999.
With respect to "non-information technology items", NCB has
surveyed the vendors/providers with the results shown in Table (3).
NCB has surveyed all associated banks and financial
institutions with which a mission critical interdependence exists.
Based upon the results of this survey, NCB took actions which
involved testing of key systems or transitioning to alternative
institutional systems. All associated respondents indicated that
they were already Year 2000 compliant by December 31, 1998.
To date, direct costs relative to the Year 2000 efforts have
totalled less than $100,000. NCB does not anticipate exceeding
this amount in addressing all associated Year 2000 issues. All
costs to date are and in the future will be funded through
operating income and are not considered material. NCB converted to
a new Year 2000 compliant loan accounting system in November 1998
which replaced its existing systems that were not Year 2000
compliant. The cost of this replacement was less than $500,000.
NCB has surveyed the major portion of its customer base to
determine the ability of its customers to continue debt service
coverage and will follow with a specific review of annual financial
statements for Year 2000 disclosure. A primary risk for NCB lies in
the ability of its customers to continue debt service payment on
schedule in the Year 2000. To date, survey results indicated that
the issue is being addressed.
While NCB is confident that all core systems will be tested and
found to be compliant by April 1999, efforts are underway to
develop contingency plans at the business unit level as an added
precaution. The contingency plans will be completed by April 1999.
Table (1)
Total Mission Critical Systems (MCS) 58
Number of MCS to be:
Repaired 4
Replaced 2
Retired 2
Vendor Upgraded 50
Tested Only 0
Outsourced 0
Table (2)
Phase Completion Status
Phase Percent Complete Estimate or Actual #of MCS in Phase
Awareness 100% A 58
Assessment 100% A 58
Renovation 100% A 58
Validation 97% A 56
Implementation 95% A 55
Table (3)
Non-Information Technology Items (Infrastructure Items)
Compliant (Y=Yes)
Kastle System Y
Montgomery Kone(HVAC) Y
TRANE(Elevators) Y
Willtel(Phone) Y
PEPCO Y
Sungard Business Recovery Y
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 tables present 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, 1998 and December 31, 1997
as adjusted for each year-end by instantaneous parallel rate
changes upward and downward of up to 200 basis points. Each rate
scenario reflects unique prepayment and repricing assumptions.
Since there are limitations inherent in any methodology used
to estimate the exposure to changes in market interest rates, this
analysis is not intended to be a forecast of the actual effect of
a change in market interest rates. The net interest income
variability reflects NCB's interest sensitivity gap (defined
below).
1998
CHANGE IN CHANGE IN
CHANGE IN NET INTEREST MARKET VALUE OF
INTEREST RATES INCOME PORTFOLIO EQUITY
+200 1.2% (5.4)%
+100 .6 (2.6)
0 0.0 0.0
-100 (1.0) 3.0
-200 (2.4) 6.1
1997
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 assets maturing and repricing within one year exceed
liabilities maturing or reprising within one year) would tend to
have a positive impact on net interest income while a negative gap
would tend to have a detrimental impact. During a period of
declining interest rates, a negative gap would tend to have a
positive impact on net interest income while a positive gap would
tend to have a detrimental impact. NCB's one-year cumulative gap
positions at December 31, 1998 and 1997 were positive $26.0 million
or 2.78% of assets and positive $20.6 million or 2.37% of assets,
respectivly.
While the gap position is a useful tool in measuring interest
rate risk, it is difficult to predict the effect of changing
interest rates solely on that measure, without accounting for
alterations in the maturity or repricing characteristics of the
balance sheet that occur during changes in market interest rates.
For example, the gap position reflects only the prepayment
assumptions pertaining to the current rate environment. Assets
tend to prepay more rapidly during periods of declining interest
rates than during periods of rising interest rates. Because of
this and other risk factors not contemplated by the gap position,
an institution could have a matched gap position in the current
rate environment and still have its net interest income exposed to
interest rate risk.
The following tables set forth the expected maturity and
repricing characteristics of NCB's consolidated assets, liabilities
and off-balance sheet contracts at December 31, 1998 and 1997.
See Table 8 and 9
It is clear from Table 8 that on December 31, 1998 NCB had a
positive gap (as a percentage of total assets) of 2.78% and 2.35%
at the one year and 180 day time horizons, respectively. Table 9
indicated that on December 31, 1997, 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, 1998 and 1997,
NCB's static gap positions were in compliance with existing Board
policies.
Table 7
MATURITY SCHEDULE OF LOANS
(dollar in thousands)
One Year
One Year Through Over
At December 31, 1998 or Less Five Years Five Years Total
Commercial $37,325 $158,885 $157,702 $353,768
Real estate-residential 3,879 52,854 329,688 386,565
Real estate-commercial 5,732 1,618 7,350
Leases 447 34,688 12,356 47,491
Total loans and leases $41,651 $252,159 $501,364 $795,174
Fixed interest rate
loans $146,289 $319,620
Variable interest rate
loans 105,870 181,744
$252,159 $501,364
Table 8
Interest Rate Sensitivity
(dollar in thousands)
Over 12
At December 31, 1998 Interest Interest Interest Interest Interest Months and
-sensitive -sensitive -sensitive -sensitive -sensitive Non-interest
30 day 3 month 6 month 12 months Total Sensitive Total
Interest earning assets
Cash and cash
equivalents $ 57,483 $ 0 $ 0 $ 0 $ 57,483 $ 0 $ 57,483
Investment
securities 28,548 1,192 3,199 3,247 36,186 31,122 67,308
Loans and leases 183,155 194,839 31,097 62,457 471,548 323,439 794,987
Total interest
earning assets $269,186 $196,031 $ 34,296 $65,704 $565,217 $354,561 $919,778
Interest bearing liabilities
Deposits $ 6,823 $ 10,870 $ 28,872 $24,806 $ 71,371 $ 52,049 $123,420
Short-terms
borrowings 240,653 0 0 0 240,653 0 240,653
Long-term debt* 19,193 0 0 0 19,193 192,000 211,193
Subordinated debt* 53,717 0 0 36,854 90,571 92,135 182,706
Total interest bearing
liabilities 320,386 10,870 28,872 61,660 421,788 336,184 757,972
Other
Other non-interest
bearing, net 0 0 0 0 0 161,806 161,806
Effect of interest
rate swaps and
financial futures 0 72,450 45,000 0 117,450 (117,450) 0
Total $320,386 $ 83,320 $ 73,872 $61,660 $539,238 $380,540 $919,778
Repricing difference $(51,200) $112,711 $(39,576) $ 4,044 $ 25,979 $(25,979)
Cumulative gap $(51,200) $ 61,511 $ 21,935 $25,979
Cumulative gap as
% total assets -5.45% 6.55% 2.35% 2.78%
* Net of premiums/discounts.
Table 9
Interest Rate Sensitivity
(dollar in thousands)
Over 12
At December 31, 1997 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 14.8% in 1998 compared with 15.3% in
1997. When including NCB's subordinated debt, NCB's average
total capital to average assets was 34.7% and 37.0% in 1998 and 1997,
respectively. The Bank Act limits NCB's outstanding debt to ten times
its capital and surplus (including the subordinated debt). As of
December 31, 1998, NCB Savings Bank, FSB, had a risk-based capital
ratio of 20.8%, 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 1998, NCB distributed $14.6 million to its active member-borrowers.
Of this total, approximately $5.6 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 38 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 sheets of National
Cooperative Bank and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of income, comprehensive
income, changes in members' equty, and cash flows for the years 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 audits.
We conducted our audits 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 audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial
position of National Cooperative Bank and subsidiaries as of December
31, 1998 and 1997, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted
accounting principles.
Washington, D.C.
January 27, 1999
INDEPENDENT AUDITORS'S REPORT
To the Board of Directors and
Members of National Cooperative Bank
We have audited the accompanying consolidated statements of income,
comprehensive income, changes in members' equity and cash flows of National
Cooperative Bank and subsidiaries for the year ended December 31, 1996.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our 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 consolidated statements
of income, comprehensive income, changes in members' equity and cash
flows are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated statements of income, comprehensive income, changes in
members' equity and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated
statements of income, comprehensive income, changes in members' equity
and cash flows. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated statements of income, comprehensive
income, changes in members' equity and cash flows referred to above
present fairly, in all material respects, the results of operations
and cash flows of National Cooperative Bank and subsidiaries for the
year ended December 31, 1996, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Washington, D.C.
January 30, 1997
NATIONAL COOPERATIVE BANK
CONSOLIDATED BALANCE SHEETS
December 31,
Assets 1998 1997
Cash and cash equivalents $ 66,563,160 $ 21,689,245
Restricted cash 13,202,725 6,884,572
Investment securities
Available-for-sale (amortized cost of
$38,732,390 and $60,911,708) 39,127,948 61,268,440
Held-to-maturity (fair value of
$2,861,605 and $1,911,605) 2,892,312 1,942,312
Loans held for sale 184,000,331 189,132,330
Loans and lease financing 611,174,140 584,635,993
Less: Allowance for loan losses (17,426,450) (17,638,136)
Net loans and lease financing 593,747,690 566,997,857
Other assets 33,881,044 21,389,059
Total assets $933,415,210 $869,303,815
Liabilities and Members' Equity
Liabilities
Deposits $123,419,544 $ 83,825,979
Patronage dividends payable in cash 5,275,325 5,872,708
Other liabilities 29,872,655 17,072,271
Borrowings
Short-term 220,652,186 243,120,607
Long-term 231,193,174 204,793,392
451,845,360 447,913,999
Subordinated debt 182,706,417 182,785,385
Total borrowings 634,551,777 630,699,384
Total liabilities 793,119,301 737,470,342
Members' equity
Common stock
Class B 92,209,648 84,004,502
Class C 22,199,604 21,904,447
Class D 300 300
Retained earnings
Allocated 7,245,656 8,109,931
Unallocated 17,097,102 17,474,132
Accumulated other comprehensive
income 1,543,599 340,161
Total members' equity 140,295,909 131,833,473
Total liabilities and members' equity $933,415,210 $869,303,815
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998 1997 1996
Interest income
Loans and lease financing $65,443,587 $62,549,700 $55,671,365
Investment securities 5,743,674 6,237,441 5,593,678
Total interest income 71,187,261 68,787,141 61,265,043
Interest expense
Deposits 4,939,806 3,970,498 4,109,098
Short-term borrowings 14,614,417 11,229,046 7,851,964
Long-term debt, other borrowings
and subordinated debt 26,006,479 26,744,347 23,338,194
Total interest expense 45,560,702 41,943,891 35,299,256
Net interest income 25,626,559 26,843,250 25,965,787
Provision for loan losses 842,881 3,504,000 1,950,000
Net interest income after
provision for loan losses 24,783,678 23,339,250 24,015,787
Non-interest income
Gain on sale of loans 5,808,568 7,229,368 4,578,209
Loan and deposit servicing fees 2,569,098 2,237,082 2,125,131
Other 5,689,462 5,097,382 4,283,566
Total non-interest income 14,067,128 14,563,832 10,986,906
Non-interest expense
Compensation and employee benefits 12,736,507 12,658,409 10,828,385
Contractual services 4,862,537 3,808,267 4,182,131
Occupancy and equipment 4,395,558 4,016,118 4,140,589
Contribution to NCB Development
Corporation - 1,000,000 720,000
Other 2,775,414 2,582,435 3,135,476
Total non-interest expense 24,770,016 24,065,229 23,006,581
Net income before taxes 14,080,790 13,837,853 11,996,112
Provision for income taxes 1,453,165 1,375,498 796,914
Net income $12,627,625 $12,462,355 11,199,198
Distribution of net income
Patronage dividends $12,520,982 $13,982,639 $10,492,444
Retained earnings 106,643 (1,520,284) 706,754
$12,627,625 $12,462,355 $11,199,198
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1998 1997 1996
Net income $12,627,625 $12,462,355 $11,199,198
Other comprehensive income,
net of tax:
Net unrealized holding
gains (losses) before tax 1,201,899 405,577 (318,812)
Tax benefit (expense) 1,539 (642) -
Comprehensive income $13,831,063 $12,867,290 $10,880,386
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, 1998, 1997 and 1996
Retained Retained Accumulated Other Total
Common Earning Earnings Comprehensive Members'
Stock Allocated Unallocared Income Equity
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
stock 1,000 - - - 1,000
Cancellation and
redemption of stock (658,484) - 590,484 - (68,000)
1995 patronage dividends
distributed in stock
and cash 6,928,564 (6,219,707) 101,189 - 810,046
Other dividends 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
stock 500 - - - 500
Cancellation and
redemption of stock (1,133,918) - 247,597 - (886,321)
1996 patronage dividends
distributed in stock
and cash 6,690,367 (5,770,844) (144,882) - 774,641
Other dividends 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
Net income 12,627,625 12,627,625
Adjustment to 1996
patronage dividends
paid in 1997 (40,338) - - - (40,338)
Proceeds from issuance of
stock 300 - - - 300
Cancellation and
redemption of stock (403,294) - 23,112 - (380,182)
1997 patronage dividends
distributed in stock
and cash 8,943,635 (8,109,931) (249,824) - 583,880
Other dividends paid - - (256,961) - (256,961)
1998 patronage dividends
To be distributed in
cash - - (5,275,326) - (5,275,326)
Retained in form of
equity - 7,245,656 (7,245,656) - -
Unrealized gain on
investment securities
available-for-sale - - - 1,203,438 1,203,438
Balance, December 31, 1998 $114,409,552 $ 7,245,656 $17,097,102 $1,543,599 $140,295,909
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 1998 1997 1999
Cash flows from operating activities
Net income $ 12,627,625 $ 12,462,355 $ 11,199,198
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities
Provision for loan losses 842,881 3,504,000 1,950,000
Depreciation and amortization 5,357,156 5,212,091 5,148,255
Gain on sale of loans (5,808,568) (7,229,368) (4,578,209)
Loans originated for sale (586,305,753) (365,279,273) (243,114,015)
Proceeds from sale of loans
held for sale 585,050,379 362,446,396 135,955,259
(Increase) decrease in
other assets (853,805) 3,441,735 (5,443,982)
Increase (decrease) in other
liabilities 12,800,384 5,740,238 (2,186,480)
Net cash provided by (used in)
operating activities 23,710,299 20,298,174 (101,069,974)
Cash flows from investing
activities
Increase in restricted cash (6,318,153) - -
(Purchase) sale of investment
securities
Available-for-sale (350,000) (7,046,767) (9,435,643)
Held-to-maturity (950,000) 1,464,131 -
Proceeds from maturities of
investments
Available-for-sale 15,677,261 5,009,306 8,006,556
Held-to-maturity - 154,113 198,000
Proceeds from sales of
investments
Available-for-sale 3,460,0000 - -
Net increases in loans and lease
financing (35,401,178) (44,351,586) (84,941,273)
Proceeds from sale of portfolio
loans 8,156,399 17,276,924 38,679,408
Purchases of premises and
equipment (953,488) (712,729) (1,235,856)
Net cash used in investing
activities (16,679,159) (28,206,608) (48,728,808)
Cash flows from financing activities
Net increase (decrease) in deposits 39,593,565 (4,794,023) 10,519,829
Net (decrease) increase in
short-term borrowings (22,468,421) 18,620,607 92,000,000
Proceeds from issuance of
long-term debt 74,303,558 30,916,680 47,550,000
Repayment on long-term debt (48,000,000) (28,000,000) -
Redemption of common stock - (15,000) (68,000)
Dividends paid (5,585,927) (4,281,119) (4,341,889)
Net cash provided by financing
activities 37,842,775 12,447,145 145,659,940
Increase (decrease) in cash
and cash equivalents 44,873,915 4,538,711 (4,138,842)
Cash and cash equivalents,
beginning of year 21,689,245 17,150,534 21,289,376
Cash and cash equivalents,
end of year $ 66,563,160 $ 21,689,245 $ 17,150,534
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:
1998 1997 1996
Unrealized gain (loss) on
investment available-for-sale $ 1,203,438 $ 404,935 $ (318,812)
Common stock cancelled against
allowance for loan losses $ 403,294 $ 9,114 $ 21,390
Interest paid $45,195,243 $40,722,565 $34,582,531
Income taxes paid $ 1,263,362 $ 1,223,695 $ 670,122
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, was a registered broker-dealer and
provided corporate financial services. NCB Investment Advisers, Inc. (NCBIA), a
wholly-owned subsidiary, provided investment advisory services to cooperatives.
CFC and NCBIA were both dissolved effective December 31, 1998 with NCB assuming
all their assets and liabilities. 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), a related entity, 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 assets,
liabilities or results of operations of NCBDC.
Comprehensive Income
In June 1997, Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income, " was issued. In
1998, NCB adopted this standard which requires the display of
comprehensive income and its components in the financial statements.
In NCB's case, comprehensive income includes net income and
unrealized gains and losses on securities available-for-sale.
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 other comprehensive income. 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 amortized over the
life of the hedged asset or liability as an adjustment to interest income or
interest expense. Unamortized hedging gains or losses are recognized at the time
of disposition of the assets or liabilities being hedged.
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 reasonable doubt as to collectibility. Loans may be reinstated to
accrual status when all payments are brought current and, in the opinion of
management, collection of the remaining balance can 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 expected losses inherent in the loan portfolio at the
balance sheet date. 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.
A loan is considered impaired when, based on current information, it is
probable NCB will be unable to collect all amounts due under the contractual
terms of the loan. 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.
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
sell or securitize those loans with servicing assets retained must allocate
the total cost of the loans to the servicing assets and the loans (without the
servicing assets) based on their relative fair value.
Servicing assets, stated net of accumulated amortization, are amortized in
proportion to the remaining net servicing revenues estimated to be generated by
the underlying loans using the effective yield method over the remaining lives
of the underlying loans.
Under SFAS No. 125, servicing assets are assessed for
impairment based an fair value. In addition, mortgage servicing
assets must be stratified based on one or more predominant risk
characteristics of the underlying loans and impairment is recognized
through a valuation allowance for each impaired stratum.
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.
SFAS No. 125 requires a periodic assessment of the carrying value 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.
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 recorded as other comprehensive income.
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, as amended by the Act with respect
solely to NCB. Under Subchapter T and the Act, 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 1998
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:
1998 1997
Cash in bank $ 9,416,039 $8,082,813
Federal funds 33,570,870 5,949,195
Overnight investments 23,576,251 7,657,237
$66,563,160 $21,689,245
3. Investment Securities
The composition of investment securities available-for-sale at December 31
is as follows:
1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury and agency
obligations $ 4,142,322 $ 37,702 $ 7,373 $ 4,172,651
Corporate bonds 7,224,045 113,553 4,857 7,332,741
Mutual funds 1,198,418 - 5,484 1,192,934
Money market 1,125,615 - 108,777 1,016,838
Interest-only
receivables 25,041,990 370,794 - 25,412,784
$38,732,390 $522,049 $126,491 $39,127,948
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
Interest-only receivables substantially pertain to blanket loans to
cooperative housing corporations.
The maturities of investment securities available-for-sale at December 31,
1998 are as follows:
Weighted
Amortized Average
Cost Yield Fair Value
Within 1 year $ 3,824,033 6.65% $ 3,720,232
After 1 year through
5 years 11,071,021 6.90% 11,142,166
After 5 years through
10 years 22,487,295 7.11% 22,909,234
After 10 years 1,350,041 6.72% 1,356,316
$38,732,390 6.99% $39,127,948
The composition of investment securities held-to-maturity at December 31
is as follows:
1998
Gross
Amortized Unrealized Fair
Cost Losses Value
Mortgage-backed security $1,942,312 $ 30,707 $1,911,605
Private debt security 950,000 - 950,000
$2,892,312 $ 30,707 $2,861,605
1997
Gross
Amortized Unrealized Fair
Cost Losses Value
Mortgage-backed security $1,942,312 $ 30,707 $1,911,605
Private debt security - - -
$1,942,312 $ 30,707 $1,911,605
The 1998 mortgage-backed security held-to-maturity has a
weighted average yield of 9.4% and matures after ten years.
In 1997, NCB had no sales of securities available-for-sale. In 1998,
securities available-for-sale totalling $3,460,000, were sold resulting in a
gain of $10,150. There were no sales of securities classified as held-to-
maturity during 1998, 1997, or 1996. NCB held callable investment securities
with amortized costs of $1,992,553 and $8,323,643 at December 31, 1998 and
1997, respectively. The fair values of the callable securities are
$2,016,170 and $8,478,587 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, 1998 and 1997 are $1,763,050,000 and $1,366,353,000, respectively.
5. Loans and Lease Financing
Loans and leases outstanding, including loans held for sale, by category at
December 31 are as follows:
1998 1997
Commercial loans
Portfolio $346,570,990 $344,849,332
Loans held for sale 7,197,347 2,808,807
Real estate loans
Residential 209,762,519 202,828,605
Loans held for sale 176,802,984 186,323,523
Commercial 7,349,882 7,025,073
Lease financing 47,490,749 29,932,983
$795,174,471 $773,768,323
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
1998 1997 1998 1997
By Region
Northeast 20.5% 21.4% 72.6% 75.6%
South Atlantic 4.5 7.0 7.5 10.2
Central 25.6 33.5 10.8 12.0
West 49.4 38.1 9.1 2.2
100.0% 100.0% 100.0% 100.0%
Percentage of Total
Loan Portfolio
1998 1997
By Borrower Type
Real estate
Residential 48.6% 50.4%
Commercial .9 .8
Commercial
Food processing and distribution 17.1 19.6
Financial services 3.9 4.4
Medical service and supplies 2.3 2.1
Hardware 5.9 6.1
Alaskan native corporations 4.3 4.4
Other 11.0 8.3
Lease financing 6.0 3.9
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, 1998, $226.0 million of real estate loans are secured by
real estate in New York City. 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 (dollars in thousands):
Carrying Amount Estimated Fair Value
1998 1997 1998 1997
Commercial
Fixed rate loans $144,445 $137,723 $154,706 $140,855
Adjustable rate loans 202,126 207,126 206,671 207,872
Loans held for sale 7,197 2,809 7,004 2,818
Real Estate
Loans held for sale 176,803 186,324 191,425 187,453
Portfolio-fixed rate 91,313 45,326 93,716 44,905
Portfolio-adjustable 125,799 164,528 127,509 170,675
Lease financing 47,491 29,932 51,265 31,426
$795,174 $773,768 $832,296 $786,004
6. Receivables Sold with Recourse
In 1998, of the Bank's restricted cash totalling $13,202,725, $7,512,630
related to loans sold with balances totalling $188,481,079. At December 31, 1998
and 1997, restricted cash of $5,690,095 and $6,884,572, 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 $81,879,000 and $92,623,000 in 1993
and 1992, respectively. At December 31, 1998 and 1997, the outstanding
balances of the 1994 and 1993 recourse loan sales totaled $49,449,633 and
$55,504,322, respectively. These loans are primarily concentrated in New
York City. 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 at December 31, 1998 and 1997, respectively. At December
31, 1998 and 1997, the outstanding balances of the 1993 recourse loan sale
totaled $9,681,480 and $14,832,919, respectively. These loans are primarily
concentrated in New York City. 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 this loan sale.
7. Impaired Assets
Impaired loans, representing the nonaccrual loans at December 31, 1998 and
1997, totaled $2,384,691 and $3,030,448, respectively, and averaged $3,097,000
and $3,785,000 during the same respective periods. Specific allowances of
$557,267 and $706,520 were established at December 31, 1998 and 1997,
respectively. During 1998 and 1997, the interest collected on the nonaccrual
loans was applied to reduce the outstanding principal.
At December 31, 1998, there are no commitments to lend additional funds to
borrowers whose loans are impaired.
At December 31, 1998 and 1997, NCB had real estate owned of $4,342,739 and
$5,114,991, 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:
1998 1997 1996
Balance at beginning of year $17,638,136 $15,504,510 $14,554,240
Provision for loan losses 842,881 3,504,000 1,950,000
Charge-offs (1,230,892) (1,555,226) (1,137,229)
Recoveries of loans previously
charged-off 176,325 184,852 137,499
Balance at end of year $17,426,450 $17,638,136 $15,504,510
The allowance for loan losses was 2.2%, 2.3% and 2.1% of loans and leases
outstanding at December 31, 1998, 1997, and 1996, 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, 1998, loans to affiliated cooperatives,
directors, officers, and their family members have the following outstanding
balances:
January 1, December 31,
1998 Additions Deductions 1998
Loans to affiliated
cooperatives $63,330,098 $25,716,312 $33,521,910 $55,524,500
Loans to directors,
officers, and
family members 93,371 - 93,371 -
$63,423,469 $25,716,312 $33,615,281 $55,524,500
Percent of loans
outstanding 8.2% 7.0%
During 1998, 1997, and 1996, NCB recorded interest income of $5,352,355,
$6,412,886, and $3,216,776, respectively, on loans to related parties.
Included in the analysis of loans outstanding to affiliated cooperatives
as of December 31, 1998 is a $20.0 million revolving line of credit to the Co-
operative Central Bank. At December 31, 1998, 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.
10. Premises and Equipment
Premises and equipment are included in other assets and consist of the
following as of December 31:
1998 1997
Furniture and equipment $2,461,610 $3,046,361
Leasehold improvements 1,321,816 846,538
Other 1,548,155 2,461,694
5,331,581 6,354,593
Less: Accumulated depreciation
and amortization (3,262,369) (4,286,837)
$2,069,212 $2,067,756
11. Leases
NCB leases its headquarters in Washington, D.C. through March 31, 2002. NCB
also leases premises for its regional offices with expiration dates from
June 30, 1999 to January 30, 2008. 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, 1998 are as follows:
1999 $1,681,943
2000 1,680,768
2001 1,679,123
2002 612,236
2003 299,251
$5,953,321
Rental expense on premises and office equipment in 1998, 1997, and 1996 is
$1,687,183, $1,689,415, and $1,686,788, 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, 1998 and 1997, the unamortized lease
incentive is $750,891 and $955,892, respectively.
12. Deposits
Deposits as of December 31 are summarized as follows:
1998 1997
Weighted Weighted
Average Average
Balance Rate Balance Rate
Balances by type
Passbook accounts $ 4,695,457 2.65% $ 4,937,068 2.72%
Money market demand
and NOW accounts 22,949,597 1.21% 15,578,000 2.26%
Fixed-rate certificates
Less than $100,000 63,775,057 5.69% 45,397,875 5.74%
$100,000 or greater 31,999,433 5.56% 17,913,036 5.51%
$123,419,544 4.72% $83,825,979 4.87%
The remaining contractual maturities of certificate accounts at December 31,
1998 are as follows:
Less than $100,000
$100,000 or greater Total
Three months or less $10,640,921 $ 5,287,036 $15,927,957
Three to six months 12,725,177 5,236,449 17,961,626
Six to twelve months 18,186,403 6,120,010 24,306,413
Twelve months or
longer 22,222,556 15,355,938 37,578,494
$63,775,057 $31,999,433 $95,774,490
The estimated fair value of deposits is $121,313,000 and $83,281,000 at
December 31, 1998 and 1997, respectively.
13. Short-Term Borrowings
Revolving credit facilities
NCB has $402.5 million of revolving lines of credit, $130.5 million of
which is committed until May 26, 2001, $159.5 million of which is committed
until May 26, 1999, and $50.0 million of which is committed until May 28,
1999. The remaining balance of $62.5 million is uncommitted at December 31,
1998.
Interest expense from borrowings under the revolving line of credit
facilities was $9,689,345, $8,732,851, and $6,671,725 in 1998, 1997, and 1996,
respectively. The following is a summary of the borrowings under the facilities
for the years ended December 31:
1998 1997
Borrowings outstanding
at December 31 $156,000,000 $206,000,000
Unfunded capacity
at December 31 181,800,000 114,000,000
Average line of credit
borrowings outstanding
during the year 165,813,699 143,669,170
Maximum borrowings
during the year 256,500,000 227,000,000
Weighted average borrowing
rate
During the year 5.8% 5.9%
At December 31 6.7% 6.5%
Borrowing rates under the revolving credit facility are based on 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, 1998, commitment
fees for the line of credit are .15% on $130.5 million and .125% on $159.5
million. Total commitment fees paid for revolving credit facilities were
$524,000 in 1998, and $479,000 in 1997 and $340,000 in 1996. 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 $25.0 million of cash, cash equivalents, and investments and have,
among other items, an effective net worth of not less than $296.0 million
(defined as total members' equity plus subordinated debt). Additionally, NCB
may not 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,
1998 and 1997, the short-term borrowings outstanding totaled $34.7 million and
$12.2 million, respectively. In 1997, NCB also implemented a commercial paper
program to further reduce NCB's cost of funds. At December 31, 1998 and 1997,
commercial paper totaled $29.9 million and $24.9 million, respectively.
During 1998 and 1997, NCB also entered into a series of reverse repurchase
agreements. The average balances of reverse repurchase agreements outstanding
during 1998 and 1997 were $5,385,833 and $14,364,135, respectively, and the
maximum borrowings during 1998 and 1997 were $16,509,000 and $17,047,000,
respectively. The weighted average rates on the reverse repurchase agreements
during 1998 and 1997 were 5.62% and 5.73%, respectively. There were no reverse
repurchase agreements outstanding at December 31, 1998 and 1997.
The carrying amounts of short-term borrowings at December 31 are as follows
(dollars in thousands):
Carrying Amount
1998 1997
Line of credit $156,000 $206,000
Commercial paper 29,939 24,921
Other 34,713 12,200
$220,652 $243,121
14. Long-term Debt
NCB has entered into various agreements for extension of credit with third
parties. Under the medium term note program, NCB has approval to issue up to
$200 million. As of December 31, 1998, NCB had $55 million outstanding under
this program. In addition, as of December 31, 1998, NCB had outstanding
$177.0 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 $25.0 million of cash, cash equivalents and investments and have an
effective net worth of not less than $296.0 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,
1998:
Amount Rate Maturity
$ 19,930,446 5.92% 1999
31,888,714 8.51% 2000
49,826,115 6.79% 2001
69,756,561 6.37% 2002
59,791,338 6.53% 2003 and thereafter
$231,193,174
NCB has entered into a series of interest rate swap agreements which have
a combined notional amount of $65 million. The effect of the agreements is to
convert $65 million of the long-term debt from a weighted average fixed rate of
6.52% 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, 1998 the three and six month LIBOR were 5.07% and 5.07%,
respectively. These agreements expire as follows:
Maturity LIBOR
Amount Date Index
$ 15,000,000 2001 Three month
20,000,000 1999 Three month
30,000,000 2001 Six month
$ 65,000,000
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. At December 31, 1998, the current balance of the subordinated debt
was $182,542,000. 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 1998 and 1997, 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 $100.0 million. The remaining $80.0 million would be obtained
through the issuance of preferred stock or subordinated debt. In accordance
with these plans, NCB had designated investments totaling $5.0 million and
$4.0 million, respectively, plus accrued interest at December 31, 1998 and
1997.
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, 1998 (dollars in thousands):
Next Carrying Estimated
Index Rate Repricing Date Amount Fair Value
91-day Treasury rate 4.37% January 1, 1999 $ 53,553 $ 55,552
3-year Treasury rate 6.28% October 1, 1999 36,854 37,092
5-year Treasury rate 6.01% October 1, 2000 55,281 56,315
10-year Treasury rate 8.82% October 1, 2000 36,854 39,269
182,542 188,228
Premium on hedging 164 -
$182,706 $188,228
In addition to the $65.0 million of interest rate swaps on the long-term
debt, NCB has entered into a series of interest rate swap agreements totaling
$60.0 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,
1998, the one, three and six month LIBOR rates were 5.06%, 5.07% and 5.07%,
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.
1998 1997
Class B Class C Class D Class B Class C Class D
Par value per share $ 100 $ 100 $ 100 $ 100 $ 100 $ 100
Shares authorized 1,000,000 300,000 100,000 900,000 300,000 100,000
Shares issued and
outstanding 922,096 221,996 3 840,045 219,004 3
The changes in each class of common stock are described below:
Class B Class C Class D Total
Balance, December 31, 1995 $ 72,349,754 $21,731,166 $300 $ 94,081,220
Proceeds from issuance of 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
December 31, 1996 78,600,416 21,751,584 300 100,352,300
Proceeds from issuance of 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
Adjustment to 1996 patronage
dividends paid in 1997 (35,087) (5,251) - (40,338)
Proceeds from issuance of stock - 300 - 300
Cancellation and redemption
of common stock (400,980) (2,314) - (403,294)
1997 patronage dividend
distributed in common stock 8,641,213 302,422 - 8,943,635
Balance, December 31, 1998 $ 92,209,648 $22,199,604 $300 $114,409,552
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, 1998. The following table summarizes NCBSB's capital
at December 31, 1998:
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998:
Tangible Capital (to
tangible assets) $10,812,000 8.0% $2,031,984 1.5% N/A N/A
Total Risk-Based Capital
(to risk-weighted
assets) $11,612,000 20.8% $4,467,223 8.0% $5,584,029 10.0%
Tier I Risk-Based Capital
(to risk-weighted
assets) $10,812,000 19.4% N/A N/A $3,350,418 6.0%
Core Capital (to adjusted
tangible assets) $10,812,000 8.0% $4,063,969 3.0% $6,773,281 5.0%
As of December 31, 1997:
Tangible Capital (to
tangible assets) $10,170,000 10.6% $1,436,000 1.5% N/A N/A
Total Risk-Based Capital
(to risk-weighted
assets) $10,822,000 21.6% $4,008,000 8.0% $5,011,000 10.0%
Tier I Risk-Based Capital
(to risk-weighted
assets) $10,170,000 20.3% N/A N/A $3,006,000 6.0%
Core Capital (to adjusted
tangible assets) $10,170,000 10.6% $2,871,000 3.0% $4,785,000 5.0%
The Office of Thrift Supervision regulations impose certain
restrictions on NCBSB's payment of dividends. At December 31, 1998,
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 1998, 1997, and 1996 is $425,103, $428,676, and
$362,621, 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 1998, 1997, and
1996 are $365,942, $359,401, and $278,720, and 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 $388,000
and $210,000 for the Plan in 1998 and 1997, respectively.
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 liability. In
1999, NCB anticipates that it will declare a patronage dividend for
1998 of approximately $12,521,000. The anticipated cash portion of
the 1998 patronage dividend is included in patronage dividends
payable at December 31, 1998. The anticipated stock portion of the
patronage dividend of 1998 earnings to be distributed has been added
to allocated retained earnings at December 31, 1998. Patrons of NCB
receiving such patronage dividends consent to include them in their
taxable income.
The provision for income taxes consists of the following:
Years Ended December 31,
1998 1997 1996
Current tax expense
Federal $1,189,112 $1,270,100 $674,728
State and local 186,911 143,504 148,054
Total current 1,376,023 1,413,604 822,782
Deferred tax expense
(benefit)
Federal (42,262) (38,106) (25,868)
State and local 119,404 - -
Total deferred 77,142 (38,106) (25,868)
Total provision $1,453,165 $1,375,498 $796,914
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:
Years Ended December 31,
1998 1997 1996
Statutory U.S. tax rate $5,286,768 $ 5,884,348 $ 4,242,158
Patronage dividends (4,257,134) (4,754,097) (3,567,430)
State and local taxes 186,911 143,504 148,054
Other 236,620 101,743 (25,868)
Income tax provision $1,453,165 $ 1,375,498 $ 796,914
Deferred tax assets net of liabilities, included in other
assets, are comprised of the following at December 31, 1998 and
1997:
1998 1997
Deferred commitment fees $120,691 $ 133,609
Allowance for loan losses 295,321 313,112
Other 30,875 146,925
Gross deferred tax assets 446,887 593,646
Mortgage servicing rights (58,674) (60,994)
Federal Home Loan Bank stock dividends (85,698) (65,175)
Other (54,780) (58,078)
Gross deferred tax liabilities (199,152) (184,247)
Net deferred tax asset $247,735 $ 409,399
20. Income Available for Dividends on Stock
Under 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 1998, 1997, and 1996 are 5.93%, 5.73% and 5.38%, respectively.
Consequently, the amounts available for payment on the Class C Stock
for 1998, 1997, and 1995 are $1,316,437, $1,255,125, and $1,170,235,
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 is a party to financial instruments with off-balance sheet
risk. 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 off-balance sheet financial instruments.
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 and equipment; and 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 commitments to extend credit and standby letter
of credit at December 31, are as follows (dollars in thousands):
Contract or Estimated
Notional Amounts Fair Value
1998 1997 1998 1997
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $178,621 $414,905 $ 961 $1,899
Standby letters of credit $126,814 $116,814 $1,567 $1,309
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 exposure to fluctuations
in interest rates. These instruments include interest rate swaps,
financial future contracts, and forward commitments. Existing NCB
policies prohibit the use of derivative financial instruments for any
purpose other than managing interest rate risk.
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 $4.2 million at December
31, 1998 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 financial future contracts and interest rate
swaps at December 31, are as follows: (dollars in thousands):
Contract or
Notional Amounts Estimated Fair Value
1998 1997 1998 1997
Financial instruments whose
notional or contract amounts
exceed the amount of
credit risk:
Financial futures
contracts $180,700 $218,200 $ (512) $(1,150)
Interest rate swap
agreements $125,000 $123,000 $4,257 $ 3,144
At December 31, 1998 and 1997, NCB had deferred losses of
$3,361,937 and $3,607,407, respectively, outstanding on financial
futures contracts, 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.
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
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 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, 1998 and 1997. The fair value of
forward commitments 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 values of the Bank's financial instruments as of
December 31, 1998 and 1997 are as follows (dollars in thousands):
1998 1997
Financial Assets: Carrying Amount Fair Value Carrying Amount Fair Value
Cash and cash
equivalents $ 66,563 $ 66,563 $ 21,689 $ 21,689
Investments
Available-for-sale 39,128 39,128 61,268 61,268
Held-to-maturity 2,892 2,862 1,942 1,912
Interest-only receivables 16,041 16,041 4,450 4,450
Loans and lease financing 795,174 832,296 773,768 786,004
Financial Liabilities:
Deposits 123,420 121,313 83,826 83,281
Short-term and other
borrowings 220,652 220,652 243,121 243,121
Long-term debt 231,193 238,274 204,793 207,079
Subordinated debt 182,542 188,228 182,785 189,137
Off-Balance Sheet Financial
Instruments:
Interest rate swap
agreements - 4,257 - 3,144
Financial futures and
forward commitments - (512) - (1,150)
Commitments to extend
credit - 961 - 1,899
Standby letters of credit - 1,567 - 1,309
23. SEGMENT REPORTING
NCB reportable segments are stratgic business units that provide diverse
products and services within the financial servicess industry. NCB has four
reportable segments: commercial lending, real estate, NCB Saving Bank and
other. The commercial lending segment porvides financial services to
cooperative and member-owned businesses. The real estate lending segment
originates, sells and services real estate loand=s nationally, with a
concentration in New York City. NCB Saving Bank segments provides traditional
banking services such aslending and deposit gathering to retail, corporate
and commercial customers. "Other" consist of NCB's unallocated parent
company income and expense, and net interest income from investments
and corporatie debt after allocations to segments.
The corporation evaluates segments performance based on net
income before taxes. The accounting policies of the segments are
substantially the same as those described in the summary of
significant accounting policies. Overhead and support expenses are
allocated to each operating segment based on number of employees, and
other factors relevant to expenses incurred. Also included in
overhead and support is depreciation allocated based on equipment
usage.
The following is the segment reporting for the years ended
December 31, 1998, 1997 and 1996 (dollars in thousand):
1998 Commercial Real Estate NCB
Lending Lending NCBSB Other Consolidated
Net interest income
Interest income $ 29,769 $ 27,676 $ 8,814 $ 4,928
Allocated interest
expense 21,942 18,883 - (40,825)
Interest expense - - 4,941 40,620
Net interest income 7,827 8,793 3,873 5,133 $ 25,626
Provisions for loan
losses 49 (141) 125 810 843
Non-interest income-
external 3,912 9,480 781 (106) 14,067
Non-interest expense
Direct expense 4,622 5,314 2,632 12,202 24,770
Overhead and support 509 342 200 (1,051) -
Total non-interest
expense 5,131 5,656 2,832 11,151 24,770
Income(loss) before
taxes $ 6,559 $ 12,758 $ 1,697 $ (6,934) $ 14,080
Total average assets $356,320 $330,512 $124,533 $105,458 $916,823
1997
Net interest income
Interest income $ 27,989 $ 23,042 $ 7,664 $ 10,092
Allocated interest
expense 20,494 15,833 - (36,327)
Interest expense - - 3,966 37,978
Net interest income 7,495 7,209 3,698 8,441 $ 26,843
Provision for loan
losses 1,525 43 154 1,782 3,504
Non-interest income-
external 3,169 9,805 1,016 574 14,564
Non-interest expense
Direct expense 3,268 2,876 2,439 15,482 24,065
Overhead and support 509 452 450 (1,411) -
Income (loss) before
taxes $ 5,362 $ 13,643 $ 1,671 $ (6,838) $ 13,838
Total average assets $348,984 $283,590 $ 97,729 $111,843 $842,164
1996
Net interest income
Interest income $ 25,565 $ 17,191 $ 7,530 $ 10,979
Allocated interest
expense 18,158 11,610 - (29,768)
Interest expense - - 4,109 31,190
Net interest income 7,407 5,581 3,421 9,557 $ 25,966
Provisions for loan
losses 448 165 50 1,287 1,950
Non-interest income-
external 2,267 7,569 565 586 10,987
Non-interest expense
Direct expense 3,113 2,629 2,771 14,494 23,007
Overhead and support 528 405 650 (1,583) -
Total non-interest
expense 3,641 3,034 3,421 12,911 23,007
Income (loss) before
taxes $ 5,585 $ 9,951 $ 515 $ (4,055) $ 11,996
Total average assets $317,427 $225,158 $ 90,857 $100,548 $733,990
24. New Accounting Standards
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities, "which requires that every derivative
instruments, including derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability meaured at its
fair value. SFAS 133 requires that changes in the derivative instrument's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for derivative financial
instruments that qualify as fair value hedges allows a derivative
instrument's gains and losses to offset related results on the
hedged item in the income statement and requires that an entity
formally document, designate and assess the effectiveness of
transactions that receive hedge accounting treatment. Derivative
financial instruments that qualify as cashflow hedges are reported
as an adjustment to members' equity as a component of other
comprehensive income. The Statement could result in increased
period to period volatility in reported net income. Management is
continuing to assess the potential impact of the statement on NCB's
reported results of operations and financial position. NCB will
adopt SFAS No. 133 on January 1, 2000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS,
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
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 2001 56
(Term as Chairman expires
April 1999)
Charles E. Snyder President and Chief
Executive Officer 1983 - 45
James L. Burns, Jr. Vice Chairman of the Board
Of Directors and Director 1997 1999 60
Joseph Cabral Director 1995 2001 50
Kirby J. Erickson Director 1998 2000 58
Eben Hopson, Jr. Director 1998 1999 52
Jackie Jenkins-Scott Director 1998 2000 49
Marilyn J. McQuaide Director 1997 1999 49
Michael J. Mercer Director 1998 2001 45
Alex N. Miller Director 1998 2001 56
Mary Ann Rothman Director 1993 1999 56
Anthony J. Scallon Director 1995 - 53
Sheila A. Smith Director 1995 - 53
Peter C. Young Director 1998 2000 53
Thomas K.Zaucha Director 1998 2000 54
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 - 44
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 - 54
Mark W. Hiltz Managing Director, Chief
Risk Officer 1982 - 51
Richard L. Reed Managing Director, Chief
Financial Officer
Treasurer, NCB Capital
Corporation
Vice President and Director,
NCB Savings Bank, FSB
Treasurer, NCB Retail
Finance Corporation 1985 - 40
Thomas C. Schoettle President, NCB Savings
Bank,FSB 1998 - 43
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.
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 is past President of the California chapter of the ESOP
Association. He is also Secretary/Treasurer and member 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.
Eben Hopson, Jr. has been Treasurer and Board Member of Arctic
Slope Regional Corporation, Executive Director of Arctic Slope
Native Association and Executive Director of Bristol Bay Borough.
He was also a former Financial Director of the City of Barrow.
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.
Marilyn J. McQuaide has been Senior Vice President and Senior
Operations Officer of Vermont National Bank since 1989. She also
served on the Board of Northeast Cooperatives Association for
seven years and as Vice President for five years.
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 1997. He was also one of
the founders of the Credit Union Service Corporation and was its
former Chairman.
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 years.
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 of ARC Global Technologies,
Inc. since 1979 and also a Director of ARC Europe, Ltd. in
Scotland.
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 of 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 of 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 of
NCB. He was a Corporate Vice President and Manager of Special
Assets from 1994 to 1997 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 of NCB. He was named Senior Vice President and Chief
Financial Officer in 1994. Prior to that, he was Vice President
and Treasurer from 1992 to 1994. He was Vice President, Treasury
from 1989 to 1992.
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
Jim Edenso
Robert Friedrich
Kenneth L. Hartung
Richard B. Levine
Michael D. Ray
Stuart M. Saft
Calvin H. Simons
Jim Edenso has been an Executive Vice President and Chief
Financial Officer of Sealaska Corporation and Chairman of the
Board of Directors of Sealaska Timber Corporation. He previously
served as financial and management consultant and was President
of Pacific Structural Systems, Inc. He also served as Special
Assistant to the Governor of Alaska and Deputy Commissioner and
Treasurer for the State of Alaska.
Robert Friedrich has been President and Chief Financial
Officer of Glen Oaks Village Owners, Inc. for more than four
years.
Kenneth L. Hartung has been a Vice President of FoodService
Purchasing Cooperative, Inc. since 1993. He also serves as
President of the Cooperative's Canadian subsidiary (FoodService
Purchasing of Canada) since 1994. He is also a Board Member of
National Cooperative Business Association and Bridgehaven, a non-
profit mental health agency.
Richard B. Levine has been a Senior Vice President of
Salomon, Smith Barney, New York and past President of New York
Mercantile Exchange. He is also the Treasurer of 565 Equities,
Inc. for eight years and was a Member of the housing co-op board
for nine years.
Michael D. Ray has been a General Partner of Anderson-J.Ray
Development. He is also a Board Member of Discovery Science
Center and Chair and Co-founder of Art Spaces Irvine. He was
previously a real estate loan officer for Citibank of New York.
Stuart M. Saft has been Chairman, Council of New York
Cooperatives and New York City Workforce Development Board Task
Force. He is also currently a Vice Chair of the Board of
Directors of Private Industry Council of New York City, Advisory
Board Member of First American Title Insurance Company, Board
Member and General Counsel of American Women's Economic
Development Corporation, Member of the Board of Advisors for the
Real Estate Investments and Asset Management Newsletter and Member
of the New York State Attorney General's task force on the Martin
Act and the Condominium Act.
Calvin H. Simons has been the Chief Financial Officer of Santa
Rosa Creek Commons, Inc. He was a Co-founder and past President
and Treasurer of Santa Rosa Housing Cooperative.
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 (1) 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, such as Executive, Loan and
Business Development, Finance, Audit, Low Income Policy, and
Strategic Planning and Nominating Committees, including an Ad Hoc
Committee on Patronage and Capitalization.
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
authority of another committee. The members of the committee are
James L. Burns, Jr., Joseph Cabral, Jackie Jenkins-Scott, Marilyn
J. McQuaide, 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 James L. Burns, Jr., Eben Hopson,
Jr., Jackie Jenkins-Scott, Alex N. Miller, Mary Ann Rothman,
Sheila A. Smith(Chair) 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 Joseph
Cabral(Chair), Kirby J. Erickson, Marilyn J. McQuaide, Michael J.
Mercer, Alfred A. Plamann, Anthony J. Scallon and Peter C. Young.
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 Joseph Cabral, Kirby J. Erickson, Marilyn J.
McQuiade(Chair), Michael J. Mercer, Anthony J. Scallon and Peter
C. Young.
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 James L. Burns, Jr.,
Eben Hopson, Jr., Jackie Jenkins-Scott(Chair), Alex N. Miller,
Mary Ann Rothman, Sheila A. Smith and Thomas K. Zaucha.
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.
The Ad Hoc Committee on Patronage and Capitalization is
responsible for the consideration of the following: 1) education
and the dynamics of NCB as a cooperative, 2) exploring necessary
modifications and policy refinements, and 3) describing what the
capital structure of NCB should be in the future. The members of
the committee are James L. Burns, Jr., Joseph Cabral, Jackie
Jenkins-Scott, Michael J. Mercer, Alfred A. Plamann(Chair), Mary
Ann Rothman and Sheila A. Smith.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF THE OFFICERS
The following table sets forth the compensation during the
last 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 1998 $320,000 $155,000 $20,800
President & CEO 1997 310,013 103,250 20,440
1996 295,000 96,670 19,380
Caroline Blakely 1998 199,500 66,500 20,487
Managing Director, Chief 1997 203,678 59,500 20,440
Marketing Officer 1996 170,627 53,375 19,267
Charles H. Hackman 1998 196,450 66,115 20,800
Managing Director, Chief 1997 189,387 63,591 20,440
Credit Officer 1996 182,664 63,591 19,380
Richard L. Reed 1998 157,500 52,500 20,340
Managing Director, Chief 1997 150,005 52,500 19,037
Financial Officer 1996 117,500 36,575 15,010
Mark Hiltz 1998 150,800 50,750 19,488
Managing Director, Chief 1997 145,005 48,125 18,592
Risk Officer 1996 137,505 45,719 15,520
* The "All Other Compensation" reported for 1998 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 $9,600 $9,600 $1,600
Ms. Blakely 9,600 9,287 1,600
Mr. Hackman 9,600 9,600 1,600
Mr. Reed 9,450 9,450 1,440
Mr. Hiltz 9,048 9,048 1,392
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 1998 to $484.23
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, 1998.
Class B Stock Class C Stock
Name and Addresses No. of Percent No. of Percent
of Shareholders Shares of Class Shares of Class
The Co-operative 30,500.00 3.31% 28,555.32 12.86%
Central Bank
75 Park Plaza
Boston, MA 02116
Greenbelt Homes, Inc. 14,424.28 1.56% 29,482.80 13.28%
Hamilton Place
Greenbelt, MD 20770
Group Health, Inc (1) 12,111.75 1.31% 14,249.60 6.42%
2829 Univ. Ave., S.E.
Minneapolis, MN 55414
(1) Included in the above are 3,353.79 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
1998 12/31/98 12/31/98
James L. Burns, Jr. Co-op Central Bank 7,500,000 0
Joseph Cabral Chatsworth Products 111,600 0
Chatsworth Products 241,350 0
Chatsworth Products 477,089 349,089 8.54%
Chatsworth Products 3,440,417 2,710,270 8.54%
Kirby J. Erickson Central Minnesota
Group Health 3,008,280 3,008,280 7.14%
Central Minnesota
Group Health 3,123,085 2,825,668 8.10%
Alex N. Miller The Columns at
East Hill 205,148 202,699 9.24%
1261 La Vista 2,175,000 2,159,599 8.38%
Belvedere Point, Inc. 316,828 312,251 9.81%
Tanglewood Garden Coop 864,859 855,202 9.69%
Largest Interest
Balance Balance as Rate as
in of of
1998 12/31/98 12/31/98
Alfred A. Plamann Superior Warehouse 8,369,302 4,250,880 8.50%
Park/Shop-Andronico's 6,851,188 0
K. V. Mart 3,014,244 2,773,619 various
Mollie Stone Market 8,585,722 8,406,071 8.25%
Andronico's 4,526,268 3,721,746 8.75%
Certified Revolver 3,100,000 3,100,000 various
Certified Lease 98,608 39,443 lease
Green Frog Market 800,000 755,681 various
M&M Highland 316,500 310,121 9.26%
Major Market 2,739,257 2,063,153 9.00%
Yucaipa Trading 325,000 320,054 8.75%
Grocers Cap Revolver 1,000,000 0
Grocers Cap Program 18,322,075 17,638,600 6.19%
Mary Ann Rothman 110-118 Riverside
Tenants 1,000,000 0
Peter C. Young Area Coop Education
Services 670,000 0
Area Coop Education
Services 1,135,310 430,920 8.75%
Area Coop Education
Services 93,466 65,760 8.95%
Charles H. Hackman Watergate South 0 0
Charles E. Snyder National Cooperative
Business Association 100,990 68,512 lease
National Cooperative
Business Association 250,000 0
Nominees for Directorship Largest Interest
Balance Balance as Rate as
in of of
1998 12/31/98 12/31/98
Jim Edenso Sealaska Timber Corp. 6,389,603
Sealaska Corporation 1,074,580 0
Sealaska Corporation 4,766,667 0
Sealaska Corporation 3,500,000 3,500,000 6.53%
Sealaska Corporation 1,650,000 1,650,000 6.44%
Robert Friedrick Glen Oaks Village 34,811,342 33,925,937 6.00%
Glen Oaks Village 13,769,109 13,634,264 6.88%
Kenneth L. Hartung KFC National
Purchasing 3,000,000 3,000,000 6.65%
4M,Inc/C&N Ent. 525,802 509,700 9.00%
KFC/Southgate 13,333 8,750 9.50%
KFC/Ecorse, Inc 13,778 9,042 9.50%
KFC/Lincoln Park 11,556 7,583 9.50%
KFC/River Rouge 8,888 5,833 9.50%
KFC/River Rouge 2,061 860 10.00%
KFC/Wyandotte 13,333 8,750 9.50%
KFC/Wyandotte 2,061 861 10.00%
Best Mexican Foods,
Inc. 294,323 262,240 8.30%
Quality Foods, Inc. 336,667 300,000 8.30%
Italian American Foods 170,833 125,000 8.30%
KFC/Cerritos 295,833 245,833 8.55%
Dinsmoor Mini Mart 716,667 669,898 8.25%
Easter Food 323,750 291,667 8.88%
Carolina Bell 140,854 118,902 8.88%
Tollgate Foods, Inc. 253,571 210,714 8.63%
Siegel Food Services 399,695 335,976 8.05%
Ross Point KFC, Inc. 234,134 204,892 11.68%
Dev. Diversified Corp 1,288,889 0
Dev. Diversified Corp 576,842 0
Marvin L & Phyllis
White 1,045,658 0
E.A.P. Management
Corp 101,333 72,000 8.20%
Richard B.Levine 565 Equities, Inc. 2,985,918 2,982,203 7.53%
Calvin H. Simons Santa Rosa Creek
Commons 420,623 405,834 8.63%
NCB Savings Bank, FSB
Charles H. Hackman Personal 93,371 0
NCB has a $12.5 million committed line of credit facility and a
$7.5 million bid line facility with The Co-operative Central Bank of which
Mr. Burns is the President and Chief Executive Officer.
NCB has two term loans outstanding to Chatsworth Products, Inc.
of which Mr. Cabral is the President. The term loans were used for the
purchase of machinery and equipment and were termed out after the
initial draw periods.
NCB has two outstanding commercial 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 outstanding loans to Belvedere Point, Inc., 1261 La Vista,
The Columns at East Hill and Tanglewood Garden Coop. of which Mr. Miller is
the President of G & M Management Company. G & M provides management
services for these cooperatives. The purposes of these loans were to
refinance acquisition, for construction loan and for capital improvements.
These loans, with the exception of 1261 La Vista, have been sold and
are not reflected on NCB's books.
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.
In addition, NCB has entered into an agreement to purchase at par member
loans held by Grocers Capital Company.
NCB has a line of credit and a real estate loan outstanding to
110-118 Riverside Tenants Cooperative of which Ms. Rothman is a member.
The line of credit is used to fund capital improvements while the real
estate loan is to refinance existing mortgage. This loan has been sold
and is not reflected on NCB's books.
NCB has two commercial loans outstanding with Area Cooperative
Educational Services of which Peter C. Young is the Executive Director.
The first loan consolidated an existing line of credit and first
deed of trust while the second loan is a term facility to finance the
reproofing of the Educational Center for the Arts Building. Also
available is a $1.5 million line of credit for working capital needs.
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 lease financing to National Cooperative Business
Association of which Mr. Snyder, President and CEO of NCB, is a Board
Member. The lease financing is for computer hardware and software
purchased. Also available is a $.5 million working capital line of credit.
Board nominee Jim Edenso is the Executive Vice President and
Chief Financial Officer of Sealaska Corporation. NCB has two
participations through the Bank of America National Trust and
Savings Association outstanding to Sealaska Corporation. The
purpose of the facilities was to refinance outstanding obligations
and to provide working capital.
Board nominee Robert Friedrick is the President and Chief
Financial Officer of Glen Oaks Village Owners, Inc. NCB has two
mortgage loans to Glen Oaks Village Owners which were used to
finance closing costs, fund reserves and refinance existing
mortgages. These loans have been sold and are 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 had 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 provided guarantees for these member loans. The
remaining loans listed with respect to Mr. Hartung were made under
this program.
Board nominee Richard B. Levine is the Treasurer of 565
Equities, Inc. NCB has an outstanding real estate loan to 565
Equities to refinance existing mortgage and fund reserves. This
loan has been sold and is not reflected on NCB's books.
Board nominee Calvin H. Simons is the Chief Financial Officer
of Santa Rosa Creek Commons, Inc. NCB has an outstanding loans with
Santa Rosa Creek Commons to fund the purchase and construction of
24 units of housing.
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 which was fully paid off
at the end of the year.
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, 1996, 1997, and 1998.
Page #
38 Report of Independent Public Accountants
39 Independent Auditors' Report
40 Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
43 Consolidated Statements of Changes in Members' Equity
44-45 Consolidated Statements of Cash Flows
47-76 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
(f) 4.1 Election Rules of the NCB. For other
instruments defining the rights of security
holders, see Exhibits 3.1 and 3.2.
(g) 4.2 Form of Assumption Agreements and Amended and Restated
Senior Note Agreements
(g) 4.3 Schedule Concerning Senior Note Agreements
(k) 4.4 Financing Agreement with U.S. Treasury
(l) 4.5 Note Purchase Agreement with Lutheran Brotherhood et al.
(m) 4.6 Master Shelf Agreement with Prudential Insurance Co. of
America et al.
(n) 4.7 Senior Note Agreement (Dec. 1995)
(r) 4.8 First Amendment Agreement to Master Shelf Agreement
with Prudential Insurance Co. of America
(r) 4.9 First Amendment Agreements to the Assumption Agreement
and Amended and Restated Note Purchase Agreements
(r) 4.10 First Amendment Agreements to the Note Purchase
Agreements with Lutheran Brotherhood et al.
(o) 4.11 Form of Indenture for Debt Securities
(p) 4.12 Form of Fixed Rate Medium Term Note
(q) 4.13 Form of Floating Rate Medium Term Note
*(t) 10.1 Chief Executive Officer Incentive Plan
(u) 10.2 Term Loan Agreement with Credit Suisse First Boston
*(h) 10.3 Deferred Compensation Agreement with Charles E. Snyder
*(e) 10.4 Severance Agreement with Charles E. Snyder
(s) 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)
(s) 10.8 Master Shelf Agreement with Prudential
Insurance Co. of America et al. (June 1997)
(u) 10.11 Fleet Loan Agreement
(d) 10.12 Lease on Headquarters of NCB
*(t) 10.13 NCB Executive Long-Term Incentive Plan
*(f) 10.14 Employment Agreement with Marlon W. Pickles
(v) 10.15 First Amendment to Third Amended and Restated Loan
Loan Agreement with Fleet Bank as Agent
(w) 10.16 Amendment to Fleet Loan Agreement
(x) 10.17 Term Loan Agreement with Comerica Bank
(h) 10.18 Term Loan Agreement with Credit Suisse ( Feb. 1997)
(x) 10.19 Term Loan Agreement with Funding Corporation
and Credit Suisse First Boston (November 1998)
(i) 10.20 Term Loan Agreement with Credit Suisse (Sept. 1995)
10.21 (No Exhibit)
10.22 (No Exhibit)
(i) 10.23 Term Loan Agreement with Comerica Bank (Dec. 1995)
10.24 (No Exhibit)
(j) 10.25 Term Loan Agreement with PNC Bank (Aug 1996)
*(x) 10.26 Incentive Plan for NCB Executive Officers
10.27 (No Exhibit)
(r) 10.28 Amendment No. 1 to Term Loan Agreement with
Credit Suisse (Feb. 1995)
(r) 10.29 Amendment No. 1 to Term Loan Agreement with
Credit Suisse (Sept. 1995)
(r) 10.30 Amendment to Term Loan Agreement with
Comerica Bank (Dec. 1995)
(i) 22.1 List of Subsidiaries and Affiliates of the NCB
(x) 23.1 Consent of Arthur Andersen LLP
(i) 25.1 Power of Attorney by Joseph Cabral
(x) 25.2 Power of Attorney by Alex N. Miller
(t) 25.3 Power of Attorney by Kirby J. Erickson
(e) 25.4 (No Exhibit)
(t) 25.5 Power of Attorney by Jackie Jenkins-Scott
(r) 25.6 Power of Attorney by James L. Burns, Jr.
(g) 25.7 Power of Attorney by Mary Ann Rothman
(t) 25.8 Power of Attorney by Michael J. Mercer
(t) 25.9 Power of Attorney by Peter C. Young
(t) 25.10 Power of Attorney by Thomas K.Zaucha
(i) 25.11 Power of Attorney by Alfred A. Plamann
(i) 25.12 Power of Attorney by Anthony J. Scallon
(i) 25.13 Power of Attorney by Sheila A. Smith
(x) 25.14 Power of Attorney by Eben Hopson, Jr.
(r) 25.15 Power of Attorney by Marilyn J. McQuaide
(x) 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, 1986).
(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 quarterly report
on Form 10-Q for the three months ended June 30, 1992
(File No. 2-99779).
(f) 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).
(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, 1993 (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, 1994 (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, 1995
(File No. 2-99779).
(j) 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).
(k) 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).
(l) 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).
(m) 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).
(n) 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).
(o) Incorporated by reference to Exhibit 4.1 filed as part
of Amendment No. 1 to Registration Statement No. 333-17003 (Filed
January 21, 1997).
(p) Incorporated by reference to Exhibit 4.2 filed as part
of Amendment No. 1 to Registration Statement No. 333-17003( Filed
January 21, 1997).
(q) Incorporated by reference to Exhibit 4 to the
registrant's report on Form 8-K filed February 11, 1997 (File No.
2-99779).
(r) 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).
(s) 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).
(t) 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, 1997 (File No. 2-99779).
(u) 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 March 31, 1998 (File No. 2-99779).
(v) 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, 1998 (File No. 2-99779).
(w) 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 September 30,1998
(File No. 2-99779).
(x) Filed herewith
(b) The Registrant did not file any report on Form 8-K
during the last quarter of 1998.
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, 1999 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 3/31/99
Alfred A. Plamann Director
/s/Richard L. Reed Managing Director, 3/31/99
Richard L. Reed (Principal Financial Officer)
/s/Marietta J. Orcino Vice President, Tax & 3/31/99
Marietta J. Orcino Regulatory Compliance
/s/Patricia A. Ferrick Vice President (Principal 3/31/99
Patricia A. Ferrick Accounting Officer)
*/s/James L. Burns, Jr. Director 3/31/99
James L. Burns, Jr.
*/s/Joseph Cabral Director 3/31/99
Joseph Cabral
*/s/Kirby J. Erickson Director 3/31/99
Kirby J. Erickson
*/s/Eben Hopson, Jr. Director 3/31/99
Eben Hopson, Jr.
*/s/Jackie Jenkins-Scott Director 3/31/99
Jackie Jenkins-Scott
Signature Title Date
*/s/Marilyn J. McQuiade Director 3/31/99
Marilyn J. McQuiade
*/s/Michael J. Mercer Director 3/31/99
Michael J. Mercer
*/s/Alex N. Miller Director 3/31/99
Alex N. Miller
*/s/Mary Ann Rothman Director 3/31/99
Mary Ann Rothman
*/s/Anthony J. Scallon Director 3/31/99
Anthony J. Scallon
*/s/Sheila A. Smith Director 3/31/99
Sheila A. Smith
*/s/Peter C. Young Director 3/31/99
Peter C. Young
*/s/Thomas K. Zaucha Director
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 1998 annual
meeting. The registrant has not yet distributed the 1998 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
10.17 Term Loan Agreement with Comerica Bank
10.19 Term Loan Agreement with Greenwich Funding
Corporation and Credit Suisse First Boston
10.26 Incentive Plan for NCB Executive Officers
23.1 Consent of Arthur Andersen LLP
25.2 Power of Attorney by Alex N. Miller
25.14 Power of Attorney by Eben Hopson, Jr.
27 Financial Data Schedule
Supplemental Information
Registrant's 1999 Election Materials