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, 1999 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 2.68% 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, 1999
Class C
(Common stock, $100.00 par value) 223,807
Class B
(Common stock, $100.00 par value) 998,795
Class D
(Common stock, $100.00 par value) 3
INDEX
PART I
Item 1 Business...................................................1
Item 2 Properties.................................................9
Item 3 Legal Proceedings..........................................9
Item 4 Submission of Matters to a Vote
of Security Holders......................................9
PART II
Item 5 Market for the Registrant's Common Stock and Related
Stockholder Matters......................................10
Item 6 Selected Financial Data....................................13
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations............14
Item 7A Quantitative and Qualitative Disclosures about
Market Risk..............................................33
Item 8 Financial Statements and Supplementary Data................39
Item 9 Changes in and Disagreements with Accountants,
on Accounting and Financial Disclosure...................78
PART III
Item 10 Directors and Executive Officers of the Registrant.........78
Item 11 Executive Compensation.....................................87
Item 12 Security Ownership of Certain
Beneficial Owners and Management.........................89
Item 13 Certain Relationships and Related Transactions.............90
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K..................................94
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, Chicago, 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. NCB maintains member
finance programs for retailer members of wholesaler
cooperatives in the food and hardware industries. In
addition, organizations applying for loans must comply with
other technical requirements imposed by NCB.
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. 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
NCB charges interest rates approximately equal to the
market rates charged by other financial institutions for
comparable types of loans. NCB seeks to price its loans to
yield a reasonable risk adjusted return on its portfolio in
order to build and maintain its financial viability and to
encourage the development of new and existing cooperatives.
In addition, to ensure that NCB will have access to
additional sources of capital in order to sustain its
growth, NCB seeks to maintain a portfolio that is
competitively priced and of sound quality.
Interest Rates for Real Estate Loans
Real estate loans are priced under rate guidelines
issued by NCB's Principal Transactions Group for specific
types of loans with specific maturities. 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. NCB fixes rates based on a
basis point spread over U.S.Treasury securities with yields
adjusted to constant maturity of one, three, five or 10
years. Interest rates may be fixed at the time of
commitment for a period generally not exceeding 30 days.
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 constant 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, 1999, 20.5% 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, 1999, approximately 13.0% of NCB's total assets
consisted of loans which qualify under the residential cap.
OPERATIONS OF SUBSIDIARIES
NCB also attempts to fulfill its statutory mission by
providing financing opportunities to cooperatives through
several subsidiaries.
NCB Financial Corporation ("NCBFC") is a Delaware
chartered, wholly-owned, 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 1997.
Where incidental to NCB financing programs for cooperatives,
and to the development of cooperatives, NCBCC may make loans
to entities that are not operating on a cooperative basis.
NCB Insurance Brokers, Inc. ("NCBIB") is engaged in the
business of brokering 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. 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,
but that agency has no regulatory or enforcement powers over
NCB, 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. As a savings
and loan holding company, NCB is subject to limited
regulatory and enforcement powers of and examination by the
Office of Thrift Supervision pursuant to 12 U.S.C. 1467a.
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 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, 2000, the face
amounts and current maturities of the outstanding
replacement notes were as follows:
Current
Replacement Maturity Face
Note Date Amount Maturity
1 4/1/00 $53,553,328 3 months
2 10/1/02 $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
traunches 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 $25.0 million of Class
A notes in 2010 and $25.0 million in 2015.
FURTHER INFORMATION
For further information concerning the development of
NCB's business in 1999, please see the response to Item 7.
ITEM 2. PROPERTIES
NCB leases space for its Washington, D.C. headquarters
and for four regional offices located in Anchorage, Chicago,
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 39,264
square feet in size and regional offices average 1500 square
feet. The rental expense for the fiscal year ended December
31, 1999 was $1,458,407 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.
In December 1999, NCB signed a ten-year lease of
approximately 48,000 square feet for its headquarters. The
lease for the new space starts on April 1, 2001.
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
2000 $1,669,815 $254,146
2001 $2,725,916 $261,858
2002 $2,070,000 $267,407
2003 $2,167,000 $280,170
2004 $2,275,560 $292,863
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 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
NCB currently has three classes of stock outstanding
the rights of which 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 at a par
value equal to 1% of its loan amount. The Act prohibits NCB
from paying dividends on Class B stock. There are two
series of Class B stock. 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, 1999, the stock required to be
repurchased was approximately $5,000. Class B stock has
voting rights, but such voting rights are limited in
accordance with the weighted voting system described in Item
10.
Class C Stock - The Act permits Class C stock to be
held only by cooperatives eligible to borrow from NCB. The
Act allows NCB to pay dividends on Class C stock, but so
long as any Class A notes are outstanding, limits dividends
on Class C stock(or any other NCB stock) to the interest
rate payable on such notes, which was a blended rate of
6.21% during 1999. 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. 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. On
April 22, 1999, the Board declared a cash dividend of $1.13
per share of Class C stock payable on or before June 30,
1999 to holders of record as of March 31, 1999. In November,
1996, the Board approved a dividend de minimis provision
which states that Class C stock dividends shall not be
distributed to a stockholder until such time as the
cumulative amount of the dividend payable to the stockholder
is equal to, or exceeds, twenty-five dollars ($25.00) unless
specifically requested by the stockholder. Class C stock is
transferable to another eligible holder only with the
approval of NCB. Class C stock has voting rights, but such
voting rights are limited in accordance with the weighted
voting system described in Item 10.
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 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, 1999 there were 1,482 holders of
Class B stock, 398 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, which
became effective in 1995, as amended, 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 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
holdings of 12.5% or more of their loan amount. Beginning
January 1, 2001, NCB generally intends to pay a minimum 40%
of the patronage refund in cash to those patrons with stock
holdings of up to 5% or less of their loan amount and up to
60% to those patrons with stock holding of 10.0% or more of
their loan amount. NCB will also distribute 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 12.5% of
its loan amount and thereafter in Class C stock 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, 1999 of approximately $14.8 million, of which
$5.6 million will be distributed in cash and $9.2 million in
Class B or Class C stock.
ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
At December 31, 1999 1998 1997 1996 1995
Loans and lease financing $ 947,898 $795,174 $773,768 $750,094 $597,190
Allowance for loan losses 18,694 17,426 17,638 15,505 14,554
Total assets 1,056,510 933,415 869,304 839,336 684,532
Total capital* 329,825 322,838 314,376 307,714 300,995
Subordinated debt** 182,542 182,542 182,542 182,542 182,542
Long-term borrowings, including
subordinated debt 468,805 413,735 387,335 384,679 337,230
Members' equity 147,283 140,296 131,833 125,172 118,453
Other borrowed funds including
deposits 695,923 575,265 531,740 515,257 365,288
For the Years Ended December 31, 1999 1998 1997 1996 1995
Total interest income $ 79,917 $ 71,187 $ 68,787 $ 61,265 $ 52,770
Total interest expense 49,760 45,561 41,944 35,299 30,753
Net interest income 30,157 25,627 26,843 25,966 22,017
Net income 14,714 12,628 12,462 11,199 9,083
Ratios
Capital to assets 31.2% 34.6% 36.2% 36.7% 44.0%
Return on average assets 1.4% 1.4% 1.5% 1.5% 1.5%
Return on average members' equity 10.1% 9.3% 9.7% 9.2% 7.8%
Net yield on interest earning assets 3.0% 2.9% 3.3% 3.7% 3.7%
Average members' equity as a percent of
Average total assets 14.1% 14.8% 15.3% 16.5% 18.9%
Average total loans and lease financing 15.8% 17.5% 17.9% 19.2% 21.9%
Net average loans and lease financing
to average total assets 89.0% 84.9% 85.5% 84.3% 84.0%
Net average earning assets to
average total assets 97.4% 96.0% 95.9% 92.4% 92.7%
Allowance for loan losses
to loans outstanding 2.0% 2.2% 2.3% 2.1% 2.5%
Provision for loan losses
to average loans outstanding 0.1% 0.1% 0.5% 0.3% 0.4%
* - 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
1999 and 1998
Financial Summary
Net income for the year ended December 31, 1999 was $14.7
million, representing an increase of $2.1 million or 16.5%
compared with $12.6 million in 1998. The variance resulted
primarily from $4.5 million and $1.6 million increases in net
interest income and non-interest income, respectively, which was
partially offset by a combined increase in non-interest expense
and provision for income taxes of $4.0 million.
NCB continued to maintain strong credit quality. Impaired
assets amounted to .3% of total assets at year end. Total loans
charged off as a percentage of total loans and leases outstanding
at December 31, 1999 was .03%. The provision for loan losses as
a percentage of average loans and leases remained at .1% in 1999
and 1998. In this same period, the allowance for loan losses as
a percentage of average loans and leases decreased to 2.0% in
1999 from 2.2% in 1998.
The return on average assets was 1.4% for both 1999 and
1998. The return on average equity increased to 10.1% in 1999
compared with 9.3% in 1998.
Total assets were $1.06 billion at December 31, 1999, up
13.2% or $123.1 million from $933.4 million as of December 31,
1998. This resulted from an increase in net loans and lease
financing, loans held for sale and other assets of $161.1 million
partially offset by a decrease in cash and cash equivalents,
restricted cash and investment securities of $38.0 million.
Net interest income
Net interest income for 1999 was $30.2 million, which was an
increase of $4.5 million or 17.7% over $25.6 million in the
prior year. Table 1 contains more detailed information about the
$4.5 million increase.
As shown on Table 2, while average interest earning assets
at December 31, 1999 increased 15.0%, the average yield dropped
20 basis points to 7.89% in 1999 from 8.09% in 1998. The net
interest spread increased slightly by 1 basis point to 2.07% from
2.06% while net interest yield on interest earning assets was
2.98% and 2.91% for the twelve months ended December 31, 1999 and
1998, respectively.
For the year ended December 31, 1999, interest income
increased 12.3% to $79.9 million compared with $71.2 million from
the prior year. The increase in interest income was due to a
higher average balance of real estate loans and commercial loans
and leases. Average loans and leases outstanding at year end
1999 increased 18.8% to $924.7 million compared with $778.2
million at December 31, 1998.
Total interest expense increased $4.2 million or 9.2% to
$49.8 million for the year ended December 31, 1999 from $45.6
million in 1998. As shown on Table 2, the average rate on
interest bearing liabilities at December 31, 1999 declined 21
basis points to 5.82% from 6.03% at December 31, 1998.
See Table 1 & Table 2
Credit quality
Credit quality improved and continued to remain strong in
1999. 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, collateral and
guarantee support and level of nonperforming and delinquent
credits, among other relevant factors.
The provision for loan losses increased to $908.9 thousand
in 1999 from $842.9 thousand in 1998 due to loan growth. The
provision as a percentage of average loans and leases outstanding
was .1% in both 1999 and 1998.
The allowance for loan losses increased 7.3% to $18.7
million as of December 31, 1999 from $17.4 million a year
earlier. The allowance as a percentage of loans and leases
outstanding decreased to 2.0% at December 31, 1999 from 2.2% at
December 31, 1998. The allowance as a percentage of impaired
assets increased to 572% in 1999 compared with 259% in the prior
year.
Table 1
CHANGES IN NET INTEREST INCOME
(dollars in thousands)
1999 Compared to 1998 1998 Compared to 1997
Increase (decrease) due to Increase (decrease) due to
change in: change in:
Average Average Average Average
For the years ended December 31, Volume* Rate Net** Volume* Rate Net**
Interest Income
Cash equivalents and investment
securities $ (846) $ 346 $ (500) $ 959 $(1,453) $ (494)
Commercial loans and leases 8,039 (1,181) 6,858 (215) 567 352
Real estate loans 4,065 (1,693) 2,372 4,984 (2,443) 2,541
Total interest income 11,258 (2,528) 8,730 5,728 (3,329) 2,399
Interest Expense
Deposits 830 (128) 702 1,046 (77) 969
Notes payable 5,008 (1,144) 3,864 10,933 (8,660) 2,273
Subordinated debt 0 (367) (367) 0 374 374
Total interest expense 5,838 (1,639) 4,199 11,979 (8,363) 3,616
Net interest income $ 5,420 $ (889) $4,531 $(6,251) $ 5,034 $(1,217)
*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, 1999 1998 1997
Ave. Ave. Ave.
Assets Average Income/ Rate/ Average Income/ Rate/ Average Income/ Rate/
Balance* Expense Yield Balance* Expense Yield Balance* Expense Yield
Interest earning assets
Real estate loans $ 467,766 $35,865 7.67% $415,493 $33,493 8.06% $355,160 $ 30,951 8.71%
Commercial loans and
leases 456,885 38,808 8.49% 362,670 31,950 8.81% 365,143 31,599 8.65%
Total loans and leases 924,651 74,673 8.08% 778,163 65,443 8.41% 720,303 62,550 8.68%
Investment securities
and cash equivalents 87,787 5,244 5.97% 102,218 5,744 5.62% 87,386 6,237 7.14%
Total interest earning
assets 1,012,438 79,917 7.89% 880,381 71,187 8.09% 807,689 68,787 8.52%
Allowance for loan losses (18,330) (17,722) (16,747)
Non-interest earning assets
Cash 6,039 1,327 5,028
Other 39,259 52,837 46,176
Total non-interest earning
assets 45,298 54,164 51,204
Total assets $1,039,406 $916,823 $842,146
Liabilities and members' equity
Interest bearing liabilities
Subordinated debt $ 182,542 $10,463 5.73% $182,542 $10,830 5.93% $182,542 $ 10,455 5.73%
Note payable 547,143 33,655 6.15% 466,288 29,791 6.39% 409,767 27,518 6.72%
Deposits 125,058 5,642 4.51% 106,720 4,940 4.63% 84,147 3,971 4.72%
Total interest bearing
liabilities 854,743 49,760 5.82% 755,550 45,561 6.03% 676,456 41,944 6.20%
Other liabilities 38,470 25,461 36,754
Members' equity 146,193 135,812 128,936
Total liabilities and
members' equity $1,039,406 $916,823 $842,146
Net interest earning
assets $ 157,695 $124,831 $131,233
Net interest revenues and
spread $30,157 2.07% $25,626 2.06% $26,843 2.32%
Net yield on interest
earning assets 2.98% 2.91% 3.32%
*Based on monthly balances. Average loan balance includes nonaccrual loans.
Total impaired assets (non-accruing and restructured
loan and real estate owned(REO)) decreased to $3.3 million
at December 31, 1999 from $6.7 million at December 31, 1998.
At December 31, 1999 and 1998, impaired assets as a
percentage of total capital were 2.2% and 4.8%,
respectively.
See Table 3 & Table 4
Non-accruing loans, as a percentage of loans and
leases, were .06% and .3% at year end 1999 and 1998,
respectively. The decrease of $1.7 million in REO was due to
the sale of various parcels and the write down of foreclosed
real estate properties.
The majority of NCB's loans are to cooperatives in
industries such as owner-occupied multi-family residential
housing, food distribution, health care, and financial
services. NCB bases credit decisions on the cash flows of
its customers and views collateral as a secondary source of
repayment.
The real estate portfolio contains a concentration of
loans in the New York City area; however, the majority of
loans are to seasoned housing cooperatives with low loan-to-
value ratios. NCB also has minimal credit exposure to
highly leveraged transactions, commercial real estate and
construction loans. NCB has no foreign loan exposure.
See Table 5
Non-interest income
Non-interest income increased 11.4% to $15.7 million at
year end 1999 from $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, net origination fees on sold loans, management fees,
advisory and debt placement fees and other income. Gain on
sale of loans of $8.4 million in 1999, which represented
53.7% of non-interest income, increased 44.8% from $5.8
million for year ended December 31, 1998. Loan sales in
1999 and 1998 were $408.1 million and $578.8 million,
respectively. NCB maintains a conservative interest rate
risk policy; accordingly, warehoused loans were fully hedged
in 1999 and 1998.
Servicing income remained a stable source of non-
interest income for NCB in 1999. NCB earned servicing fee
income of $2.8 million and $2.6 million in 1999 and 1998,
respectively. As of December 31, 1999, NCB serviced $2.1
billion in single and multi-family real estate and
commercial loans for investors compared with $1.8 billion at
year end 1998.
Other income decreased 22.3% to $4.4 million for the
year ended December 31, 1999 compared with $5.7 million for
the prior year. The majority of the decrease in other
income was related to a write down of a real estate owned
property and reduced amortization of interest-only receivables.
Table 3
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
For the years ended December 31, 1999 1998 1997 1996 1995
Balance at beginning of year $17,426 $17,638 $15,504 $14,554 $13,031
Charge-offs
Commercial 244 1,161 597 1,106 131
Real estate - residential 20 70 958 31 568
Total charge-offs 264 1,231 1,555 1,137 699
Recoveries
Commerical 437 101 133 137 125
Real estate - residential 186 75 52 0 192
Total recoveries 623 176 185 137 317
Net charge-offs (recoveries) (359) 1,055 1,370 1,000 382
Provision for loan losses 909 843 3,504 1,950 1,905
Balance at end of year $18,694 $17,426 $17,638 $15,504 $14,554
Table 4
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
At December 31, 1999 1998 1997 1996 1995
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
Loans and lease financing
Commercial * $470,913 49.7% $353,768 44.5% $347,658 44.9% $342,211 45.6% $327,215 54.8%
Real estate - residential* 408,204 43.1 386,565 48.6 389,153 50.3 384,035 51.2 247,524 41.5
Real estate - commercial 8,677 .9 7,350 .9 7,025 1.0 8,742 1.2 9,361 1.6
Lease financing 60,104 6.3 47,491 6.0 29,932 3.8 15,106 2.0 13,090 2.1
Total loans and lease
financing $947,898 100.0% $795,174 100.0% $773,768 100.0% $750,094 100.0% $597,190 100.0%
Allocation of allowance for loan
losses
Commercial $ 10,659 57.0% $ 9,240 53.1% $ 10,348 58.7% $ 7,826 50.5% $ 7,158 49.2%
Real estate - residential 4,484 24.0 6,097 35.0 6,971 39.5 6,963 44.9 5,820 40.0
Lease financing 301 1.6 671 3.8 319 1.8 151 1.0 250 1.7
Unallocated 3,250 17.4 1,418 8.1 0 0.0 564 3.6 1,326 9.1
Total allowance for loan
losses $ 18,694 100.0% $ 17,426 100.0% $ 17,638 100.0% $ 15,504 100.0% $ 14,554 100.0%
*Includes loans held for sale
Table 5
IMPAIRED ASSETS
(dollars in thousands)
At December 31, 1999 1998 1997 1966 1995
Real estate owned $2,687 $4,343 $5,115 $ 377 $1,397
Non-accruing 580 2,385 3,030 2,829 1,741
Restructured - - - 1,049 709
$3,267 $6,728 $8,145 $4,255 $3,847
Non-interest expense
Non-interest expense for the year ended December 31,
1999 increased 15.3% to $28.6 million compared with $24.8
million for the prior year. Non-interest expense as a
percentage of average assets was 2.7% for 1999 and 1998.
Salaries and benefits, remaining by far the single largest
component of non-interest expense, increased 13.1% or $1.7
million from last year due to a higher employee count and
bonus accruals than the prior year. Salaries and employee
benefits accounted for 50.4% of non-interest expense in 1999
compared with 51.4% in 1998. As of December 31, 1999, NCB
and its consolidated subsidiaries employed 187 employees
compared with 172 employees one year earlier. For the year
ended December 31, 1999, contractual services increased
$214.6 thousand or 4.4% to $5.1 million from $4.9 million in
1998. The increase in contractual services was related to e-
commerce and corporate development and marketing expenses.
Occupancy and equipment and other expenses increased by $664
thousand due to additional rental space and increases in
maintenance contracts for various software packages and
computer/internet related supplies and services. Under the
provisions of the Act, NCB makes tax deductible, voluntary
contributions to NCB Development Corporation(NCBDC). These
contributions are discretionary and are based upon the
approval of NCB's Board of Directors. There was no
contribution to NCBDC in 1998 while in 1999 $1.0 million was
contributed to fund certain business activities. Other
expenses went up $250.2 thousand due mainly to increased
travel expenses associated with loan growth. Non-interest
expense, adjusted for the contribution to NCBDC, as a
percentage of average assets was 2.7% in both 1999 and 1998.
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.
1998 and 1997
Net income for 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
the increase in interest income of $2.4 million and the
decrease in the 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.
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 loan sales
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.
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 expense, had a
minimal increase of .6% or $78 thousand from 1997. Salaries
and employee benefits accounted for 51.4% of non-interest
expense 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 NCBDC. 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.
1999 and 1998 Fourth quarter results
Net income for the fourth quarter of 1999 decreased
82.0% or $4.1 million compared with $5.0 million for the
prior year's quarter. The negative variance resulted
primarily from a decrease of $1.9 million in non-interest
income due to timing of loan sales and increases of $3.4
million in non-interest expense and $121 thousand in
provision for income taxes. The majority of the increase in
non-interest expense was due to higher year-end bonus accruals
and e-commerce and marketing expenses. This decrease was
partially offset by an increase in net interest income of
$1.4 million.
See Table 6
Sources of funds
Capital Markets Access
NCB maintains line of credit facilities provided by a
consortium of banks. At year end 1999 and 1998, total
borrowing capacity under these facilities was $452.5 million
and $402.5 million, respectively. The outstanding balance
at December 31, 1999 was $79.5 million compared with an
outstanding balance of $156.0 million at December 31, 1998.
NCBSB is a member of the Federal Home Loan Bank of
Cincinnati, Ohio (FHLB) where it has a blanket pledge
agreement requiring advances to be secured by eligible
mortgages with a principal balance of 150% of such advances.
There were outstanding advances of $15.0 million at December
31, 1999. There were no outstanding advances at December
31, 1998.
NCB developed a program under which it borrows, on a
short-term basis, from certain of its customers. At
December 31, 1999 and 1998, the short-term borrowings
outstanding were $17.2 million and $34.7 million,
respectively.
Usage on all short term borrowings, as measured by
average outstanding balances during the year, increased from
$251.1 million in 1998 to $282.3 million in 1999 due to
growth in real estate and commercial loans and leases and
additional activity to fund warehoused real estate loans.
In 1998, steps were taken to move into the medium term
note market. In 1999, NCB received Board approval to issue
up to $400.0 million under the medium term note program. As
of December 31, 1999 and 1998, NCB had $100.0 million and
$55.0 million outstanding under this program. In addition,
during 1997, NCB implemented a commercial paper program. In
1999, NCB received Board approval to issue up to $250.0
million in commercial paper. At year-end 1999 and 1998,
face values of $172.4 million and $30.0 million,
respectively, were outstanding.
In August 1999, NCB also received Board approval to
issue up to $50.0 million in trust preferred securities,
preferred stock or subordinated debt. There was no
outstanding issuance at December 31, 1999.
Unused capacity under the short-term and long-term
facilities of approximately $183.3 million and $350.0
million, respectively, is sufficient to meet anticipated
disbursements in 2000.
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 1999, NCB sold $408.1 million
of cooperative real estate, commercial and share loans
compared with $578.8 million in the prior year.
In 2000, NCB expects to sell $464.0 million of
cooperative real estate and share loans in the secondary
market, some of which will be originated subsequent to December
31, 1999.
Table 6
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
(dollars in thousands)
1999 1998
For the three months ended Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
Interest income $21,091 $20,690 $19,634 $18,502 $17,561 $18,354 $17,895 $17,377
Interest expense 13,611 12,810 12,475 10,864 11,457 12,121 11,459 10,524
Net interest income 7,480 7,880 7,159 7,638 6,104 6,233 6,436 6,853
Provision for loan losses 32 42 418 417 30 30 430 353
Income after provision for
loan losses 7,448 7,838 6,741 7,221 6,074 6,203 6,006 6,500
Non-interest income 2,689 5,324 6,013 1,641 4,587 1,903 2,054 5,524
Net revenue 10,137 13,162 12,754 8,862 10,661 8,106 8,060 12,024
Non-interest expense 8,739 6,360 7,079 6,387 5,298 6,246 7,004 6,222
Income before income taxes 1,398 6,802 5,675 2,475 5,363 1,860 1,056 5,802
Provision for income taxes 500 409 403 324 379 404 377 293
Net income $ 898 $ 6,393 $ 5,272 $ 2,151 $ 4,984 $ 1,456 $ 679 $ 5,509
Deposits
At NCB's wholly-owned subsidiary, NCB Savings Bank, FSB,
deposits increased 2.1% to $126.1 million in 1999 from $123.4
million a year earlier. The average deposit growth of 17.2% 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, 1999 and 1998 were 4.5%
and 4.7%, respectively. The average maturity of the certificates
of deposit at December 31, 1999 was 14.7 months compared with
15.4 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 --
14.3% in 1999 compared with 16.3% in 1998. Management
anticipates that deposits will represent an increasing portion of
its funding structure.
Uses of funds
Loans and Leases
Loans and leases outstanding increased 19.2% to $947.9
million at year-end 1999 from $795.2 million in 1998.
NCB's commercial loan portfolio expanded with new business
opportunities. The commercial loan and lease portfolio increased
32.3% to $531.0 million at December 31, 1999 compared with
$401.3 million a year earlier. The commercial loan portfolio
reflects an increase in the areas of food processing and
distribution, financial services, native Alaskan and hardware
wholesale cooperatives due to loan growth. Loans to medical service
and supplies borrowers decreased due to scheduled loan repayments
and maturities.
NCB's real estate portfolio increased 5.8% to $416.9 million
at the end of 1999 from $393.9 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 2000, NCB expects continued growth in its origination
and secondary marketing activities. For both commercial and real
estate lines of business, new disbursements and loan sales are
expected to be approximately $301.8 million and $582.7 million,
respectively.
Cash, Cash Equivalents, and Investment Securities
Cash, cash equivalents, and investments decreased 31.2% or
$38.0 million to $83.8 million at December 31,1999, compared with
$121.8 million in 1998. Cash, cash equivalents, and investment
securities represent 8.1% of interest earning assets in 1999
compared with 13.5% in 1998.
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, 1999, NCB held
$29.9 million in cash and cash equivalents compared with $66.6
million in cash and cash equivalents at year end 1998. These
funds are normally used to fund business operations.
At December 31, 1999 and 1998, NCB had $25.8 million and
$13.7 million, respectively, of 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 3 years and 5 years
for 1999 and 1998, respectively.
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 $452.5 million of revolving lines of credit.
At December 31, 1999, the following commitments were outstanding:
$210.0 million is committed until May 24, 2000
$140.0 million is committed until May 24, 2002
$50.0 million is committed until April 14, 2000
The remaining balance of $52.5 million is uncommitted at December
31, 1999. Average outstanding balances were $118.0 million in
1999 compared with $165.8 million in 1998.
NCB maintains available committed capacity, under its short
term facilities, in an amount not less than the outstanding
commercial paper balance.
Additionally, NCB has authority to issue up to $400.0
million under the medium term program. As of December 31, 1999,
$100.0 million is outstanding under this program.
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
Many activities relating to NCB's corporate-wide year 2000 program
took place during the months before January 1, 2000 and the weeks immediately
thereafter. To manage these efforts, NCB employed a coordinated management
strategy to facilitate detection and resolution of potential Year 2000
disruptions, and to ensure efficient communications with NCB's management,
staff, customers, and third parties.
As a result of diligent monitoring, NCB's systems were available
earlier than predicted. As testing proceeded over the transition, very
few system problems were reported, and all of these problems were resolved
with little or no impact to NCB and its customers.
The relatively smooth transition into the Year 2000 indicates that
remediation efforts were largely successful. NCB has nonetheless planned for
the possibility that Year 2000 failures may yet be discovered. Monitoring and
reporting will continue throughout 2000 in compliance with FFIEC guidelines.
Direct costs incurred by NCB have totaled approximately $55,000. NCB does
not expect to incur any Year 2000 expenses in the future.
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,
1999 and December 31, 1998 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. The negative change in the table for
Net Interest Income and Market Value Portfolio Equity for 1999
versus 1998 (up 100 and 200 shock scenarios) relates to the
combination of several factors which include: the higher
proportion of short-term debt financings, maturities, repricings,
and the reduction in cash and cash equivalents at December 31, 1999.
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).
1999
CHANGE IN CHANGE IN
CHANGE IN NET INTEREST MARKET VALUE OF
INTEREST RATES INCOME PORTFOLIO EQUITY
+200 (6.3)% (11.3)%
+100 (3.0) (6.1)
0 0.0 0.0
-100 2.8 4.3
-200 5.1 9.2
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
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. Spread relationships between various interest rate indices,
which are generated by the analysis of historical relationships
and RMC consensus.
3. 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 repricing within one year) would
tend to have a positive impact on net interest income while a
negative gap would tend to have a detrimental impact. During a
period of declining interest rates, a negative gap would tend to
have a positive impact on net interest income while a positive
gap would tend to have a detrimental impact. NCB's one-year
cumulative gap positions at December 31, 1999 and 1998 were
negative $95.9 million or (9.07%) of assets and positive $26.0
million or 2.78% of assets, respectively.
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, 1999
and 1998.
See Table 8 and 9
It is clear from Table 8 that on December 31, 1999 NCB had a
negative gap (as a percentage of total assets) of 9.07% and
10.91% at the one year and 180 day time horizons, respectively.
Table 9 indicated 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. At December 31,
1999 and 1998, 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, 1999 or Less Five Years Five Years Total
Commercial $39,774 $205,028 $226,111 $470,913
Real estate-residential 6,484 79,280 322,440 408,204
Real estate-commercial 3,324 3,125 2,228 8,677
Leases 47 49,215 10,842 60,104
Total loans and leases $49,629 $336,648 $561,621 $947,898
Fixed interest rate loana $180,132 $322,890
Variable interest rate
loans 156,516 238,731
$336,648 $561,621
Table 8
Interest Rate Sensitivity
(dollar in thousands)
Over 12
At December 31, 1999 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 $ 41,901 $ 0 $ 0 $ 0 $ 41,901 $ 0 $ 41,901
Investment securities 2,284 3,962 3,023 2,491 11,760 39,432 51,192
Loans and leases 76,486 353,712 40,607 80,875 551,680 418,361 970,041
Total interest earning
assets $120,671 $357,674 $ 43,630 $ 83,366 $605,341 $457,793 $1,063,134
Interest bearing
liabilities
Deposits $ 53,484 $ 4,747 $ 10,490 $ 31,877 $100,598 $ 25,473 $ 126,071
Short-terms borrowings 265,309 18,280 0 0 283,589 0 283,589
Long-term debt* 44,263 32,000 0 0 76,263 210,000 286,263
Subordinated debt* 53,631 0 0 92,135 145,766 36,854 182,620
Total interest bearing
liabilities 416,687 55,027 10,490 124,012 606,216 272,327 878,543
Other
Other non-interest
bearing, net 0 0 0 0 0 184,591 184,591
Effect of interest
rate swaps and
financial futures 0 40,000 115,000 (60,000) 95,000 (95,000) 0
Total $ 416,687 $ 95,027 $ 125,490 $ 64,012 $701,216 $361,918 $1,063,134
Repricing difference $(296,016) $262,647 $ (81,860) $ 19,354 $(95,875) $ 95,875
Cumulative gap $(296,016) $(33,369) $(115,229) $(95,875)
Cumulative gap as %
total assets -28.02% -3.16% -10.91% -9.07%
* Net of premiums/discounts.
Table 9
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 month 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.
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 14.1% in 1999 compared with 14.8% in
1998. When including NCB's subordinated debt, NCB's average total capital
to average assets was 31.6% and 34.7% in 1999 and 1998, respectively. The
Act limits NCB's outstanding debt to ten times its capital and surplus
(including the subordinated debt). As of December 31, 1999, NCB Savings
Bank, FSB, maintained capital levels 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 1999, NCB distributed $12.9 million related to 1998 patronage
refund to its active member-borrowers. Of this total, approximately $4.9
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 40 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, 1999 and 1998,
and the related consolidated statements of income, comprehensive income,
changes in members' equity, and cash flows for each of the three years in
the period ended December 31, 1999. 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 auditing standards
generally accepted in the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
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, 1999 and
1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 conformity with
accepted accounting principles generally accepted in the United States.
Vienna, Virginia
January 26, 2000
NATIONAL COOPERATIVE BANK
CONSOLIDATED BALANCE SHEETS
December 31,
Assets 1999 1998
Cash and cash equivalents $ 29,910,037 $ 66,563,160
Restricted cash 4,887,213 13,202,725
Investment securities
Available-for-sale (amortized cost
of $47,146,086 and $38,732,390) 46,283,045 39,127,948
Held-to-maturity (fair value of
$2,719,878 and $2,861,605) 2,710,191 2,892,312
Loans held for sale 132,057,978 184,000,331
Loans and lease financing 815,840,439 611,174,140
Less: Allowance for loan losses (18,693,670) (17,426,450)
Net loans held for sale and
loans and lease financing 929,204,747 777,748,021
Other assets 43,514,663 33,881,044
Total assets $1,056,509,896 $933,415,210
Liabilities and Members' Equity
Liabilities
Deposits $ 126,071,259 $123,419,544
Patronage dividends payable in cash 5,642,040 5,275,326
Other liabilities 25,041,359 29,872,654
Borrowings
Short-term 283,589,354 220,652,186
Long-term 286,262,870 231,193,174
569,852,224 451,845,360
Subordinated debt 182,620,212 182,706,417
Total borrowings 752,472,436 634,551,777
Total liabilities 909,227,094 793,119,301
Members' equity
Common stock
Class B 99,879,531 92,209,648
Class C 22,380,663 22,199,604
Class D 300 300
Retained earnings
Allocated 9,203,865 7,245,656
Unallocated 16,682,644 17,097,102
Accumulated other comprehensive
(loss) income (864,201) 1,543,599
Total members' equity 147,282,802 140,295,909
Total liabilities and members'
equity $1,056,509,896 $933,415,210
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999 1998 1997
Interest income
Loans and lease financing $74,673,172 $65,443,587 $62,549,700
Investment securities 5,243,761 5,743,674 6,237,441
Total interest income 79,916,933 71,187,261 68,787,141
Interest expense
Deposits 5,642,331 4,939,806 3,970,498
Short-term borrowings 15,690,813 14,614,417 11,229,046
Long-term debt, other borrowings
and subordinated debt 28,426,982 26,006,479 26,744,347
Total interest expense 49,760,126 45,560,702 41,943,891
Net interest income 30,156,807 25,626,559 26,843,250
Provision for loan losses 908,868 842,881 3,504,000
Net interest income after
provision for loan losses 29,247,939 24,783,678 23,339,250
Non-interest income
Gain on sale of loans 8,413,595 5,808,568 7,229,368
Loan and deposit servicing
fees 2,831,495 2,569,098 2,237,082
Other 4,422,192 5,689,462 5,097,382
Total non-interest income 15,667,282 14,067,128 14,563,832
Non-interest expense
Compensation and
employee benefits 14,402,289 12,736,507 12,658,409
Contractual services 5,077,112 4,862,537 3,808,267
Occupancy and equipment 5,059,604 4,395,558 4,016,118
Contribution to NCB
Development Corporation 1,000,000 - 1,000,000
Other 3,025,600 2,775,414 2,582,435
Total non-interest
expense 28,564,605 24,770,016 24,065,229
Net income before taxes 16,350,616 14,080,790 13,837,853
Provision for income taxes 1,636,509 1,453,165 1,375,498
Net income $14,714,107 $12,627,625 $12,462,355
Distribution of net income
Patronage dividends $14,845,905 $12,520,982 $13,982,639
Retained earings (131,798) 106,643 (1,520,284)
$14,714,107 $12,627,625 $12,462,355
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1999 1998 1997
Net income $14,714,107 $12,627,625 $12,462,355
Other comprehensive income,
net of tax:
Net unrealized holding
(losses) gains before tax (2,409,600) 1,201,899 405,577
Tax benefit (expense) 1,800 1,539 (642)
Comprehensive income $12,306,307 $13,831,063 $12,867,290
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, 1999, 1998 and 1997
Retained Retained Accumulated Other Total
Common Earnings Earnings Comprehensive Members'
Stock Allocated Unallocated (Loss) Income Equity
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
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 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
Net income - - 14,714,107 - 14,714,107
Adjustment to 1997 patronage
dividends paid in 1998 (121,586) - - - (121,586)
1998 patronage dividends
distributed in stock
and cash 7,972,528 (7,245,656) (31,775) - 695,097
Other dividends paid - - (250,885) - (250,885)
1999 patronage dividends
To be distributed cash - - (5,642,040) - (5,642,040)
Retained in form of equity - 9,203,865 (9,203,865) - -
Unrealized loss on
investment securities
available-for-sale - - - (2,407,800) (2,407,800)
Balance, December 31, 1999 $122,260,494 $ 9,203,865 $16,682,644 $ (864,201) $147,282,802)
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 1999 1998 1997
Cash flows from operating
activities
Net income $ 14,714,107 $ 12,627,625 $ 12,462,355
Adjustments to reconcile net
income to net cash provided
by operating activities
Provision for loan losses 908,868 842,881 3,504,000
Depreciation and amortization 6,744,113 5,357,156 5,212,091
Gain on sale of loans (8,413,595) (5,808,568) (7,229,368)
Loans originated for sale (337,493,655) (586,305,753) (365,279,273)
Proceeds from sale of loans held
for sale 397,849,598 585,050,379 362,446,396
(Increase) decrease in other
assets (13,139,842) (853,805) 3,441,735
(Decrease) increase in other
liabilities (4,831,295) 12,800,384 5,740,238
Net cash provided by operating
activities 56,338,299 23,710,299 20,298,174
Cash flows from investing
activities
Decrease (increase) in restricted
cash 8,315,512 (6,318,153) -
(Purchase) sale of investment
securities
Available-for-sale (20,001,505) (350,000) (7,046,767)
Held-to-maturity - (950,000) 1,464,131
Proceeds from maturities of
investments
Available-for-sale 1,505,990 15,677,261 5,009,306
Held-to-maturity 182,121 - 154,113
Proceeds from sales of investments
Available-for-sale 6,182,453 3,460,000 -
Net increases in loans and lease
financing (213,704,720) (35,401,178) (44,351,586)
Proceeds from sale of portfolio
loans 10,483,124 8,156,399 17,276,924
Purchases of premises and
equipment (1,286,360) (953,488) (712,729)
Net cash used in investing
activities (208,323,385) (16,679,159) (28,206,608)
Cash flows from financing activities
Net increase (decrease) in
deposits 2,651,715 39,593,565 (4,794,023)
Net increase (decrease) in short-
term borrowings 62,937,168 (22,468,421) 18,620,607
Proceeds from issuance of long-
term debt 75,000,000 74,303,558 30,916,680
Repayment on long-term debt (20,113,749) (48,000,000) (28,000,000)
Redemption of common stock - - (15,000)
Dividends paid (5,143,171) (5,585,927) (4,281,119)
Net cash provided by financing
activities 115,331,963 37,842,775 12,447,145
(Decrease) increase in cash and
cash equivalents (36,653,123) 44,873,915 4,538,711
Cash and cash equivalents,
beginning of year 66,563,160 21,689,245 17,150,534
Cash and cash equivalents,
end of year $ 29,910,037 $ 66,563,160 $ 21,689,245
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:
1999 1998 1997
Unrealized (loss) gain on investment
available-for-sale $(2,407,800) $ 1,203,438 $ 404,935
Common stock cancelled against
allowance for loan losses $ 0 $ 403,294 $ 9,114
Interest paid $49,512,131 $45,195,243 $40,722,565
Income taxes paid $ 1,528,668 $ 1,263,362 $ 1,223,695
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 contribu
tions 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
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
accounting principles generally accepted in the United States
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
2006. 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, "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". 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.
Under SFAS No. 125, servicing assets are assessed for
impairment based on 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 1999 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:
1999 1998
Cash in bank $ 9,298,908 $ 9,416,039
Federal funds 10,598,862 33,570,870
Overnight investments 10,012,267 23,576,251
$29,910,037 $66,563,160
3. Investment Securities
The composition of investment securities available-for-sale
at December 31 is as follows:
1999
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury and
agency obligations $18,641,632 $ - $ 194,287 $18,447,345
Corporate bonds 4,728,080 3,890 10,932 4,721,038
Mutual funds 1,231,191 - 9,472 1,221,719
Money market 1,177,781 - 138,463 1,039,318
Interest-only
receivables 21,367,402 404,327 918,104 20,853,625
$47,146,086 $408,217 $1,271,258 $46,283,045
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
Interest-only receivables substantially pertain to blanket
loans to cooperative housing corporations.
The maturities of investment securities available-for-sale
at December 31, are as follows:
1999
Weighted
Amortized Average
Cost Yield Fair Value
Within 1 year $ 5,933,576 6.26% $ 5,784,522
After 1 year through
5 years 21,581,877 6.23% 21,771,504
After 5 years through
10 years 19,630,633 6.96% 18,727,019
$47,146,086 6.54% $46,283,045
1998
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:
1999
Gross
Amortized Unrealized Fair
Cost Gains Value
Mortgage-backed securities $1,942,313 $9,687 $1,952,000
Private debt security 767,878 - 767,878
$2,710,191 $9,687 $2,719,878
1998
Gross
Amortized Unrealized Fair
Cost Losses Value
Mortgage-backed securities $1,942,312 $(30,707) $1,911,605
Private debt security 950,000 - 950,000
$2,892,312 $(30,707) $2,861,605
In both 1999 and 1998, mortgage-backed securities held-to-
maturity have a weighted average yield of 9.4% and mature after
ten years.
In 1999 and 1998, securities available-for-sale totaling
$6,182,453 and $3,460,000, respectively, were sold resulting
in a loss of $9,273 and a gain of $10,150, respectively.
There were no sales of securities classified as held-to-maturity
during 1999 and 1998. NCB held callable investment securities
with amortized costs of $331,680 and $1,992,553 at December 31,
1999 and 1998, respectively. The fair values of the callable securities
are $326,808 and $2,016,170 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, 1999 and 1998 are
$2,071,849,000 and $1,763,050,000, respectively.
5. Loans and Lease Financing
Loans and leases outstanding, including loans held for
sale, by category at December 31 are as follows:
1999 1998
Commercial loans
Portfolio $467,689,219 $346,570,990
Loans held for sale 3,223,991 7,197,347
Real estate loans
Residential 279,370,068 209,762,519
Loans held for sale 128,833,987 176,802,984
Commercial 8,676,896 7,349,882
Lease financing 60,104,256 47,490,749
$947,898,417 $795,174,471
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
1999 1998 1999 1998
By Region
Northeast 18.5% 20.5% 66.2% 72.6%
South Atlantic 8.2 4.5 5.3 7.5
Central 22.3 25.6 19.8 10.8
West 51.0 49.4 8.7 9.1
100.0% 100.0% 100.0% 100.0%
Percentage of Total
Loan Portfolio
1999 1998
By Borrower Type
Real estate
Residential 40.3% 48.6%
Commercial 3.7 .9
Commercial
Food processing and distribution 19.3 17.1
Financial services 4.8 3.9
Medical service and supplies 2.0 2.3
Hardware 7.1 5.9
Alaskan native corporations 4.2 4.3
Other 12.3 11.0
Lease financing 6.3 6.0
100.0% 100.0%
NCB originates multi-family blanket mortgages to
predominantly owner-occupied housing cooperatives. A significant
portion of NCB's mortgage loans is secured by real estate in New
York City due to that city's extensive cooperative market. At
December 31, 1999 and 1998, $186.0 million and $226.0 million,
respectively, of real estate loans are secured by real estate in
New York City. The collateral for 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
1999 1998 1999 1998
Commercial
Fixed rate loans $257,433 $144,445 $262,590 $154,706
Adjustable rate loans 210,256 202,126 212,551 206,671
Loans held for sale 3,224 7,197 3,240 7,004
Real Estate
Loans held for sale 128,834 176,803 129,650 191,425
Portfolio-fixed rate 83,169 91,313 84,638 93,716
Portfolio-adjustable 204,878 125,799 205,409 127,509
Lease financing 60,104 47,491 64,017 51,265
$947,898 $795,174 $962,095 $832,296
6. Receivables Sold with Recourse
At December 31, 1999 and 1998, restricted cash of $4,887,213
and $5,690,095, 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, 1999 and 1998, the
outstanding balances of the 1993 and 1992 recourse loan sales
combined totaled $56,967,101 and $104,954,000, 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 traunche are
repaid from a security held by NCB totaling $1,942,312 at
December 31, 1999 and 1998, respectively. At December 31, 1999
and 1998, the outstanding balances of the 1993 recourse loan sale
totaled $7,878,973 and $9,681,480, 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, 1999 and 1998, totaled $580,311 and $2,384,691,
respectively, and averaged $1,084,000 and $3,097,000 during the
same respective periods. Specific allowances of $239,911 and
$557,267 were established at December 31, 1999 and 1998,
respectively. During 1999 and 1998, the interest collected on the
nonaccrual loans was applied to reduce the outstanding principal.
At December 31, 1999 and 1998, there were no commitments to
lend additional funds to borrowers whose loans are impaired.
At December 31, 1999 and 1998, NCB had real estate owned of
$2,687,347 and $4,342,739 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:
1999 1998 1997
Balance at beginning of year $17,426,450 $17,638,136 $15,504,510
Provision for loan losses 908,868 842,881 3,504,000
Charge-offs (264,256) (1,230,892) (1,555,226)
Recoveries of loans previously
charged-off 622,608 176,325 184,852
Balance at end of year $18,693,670 $17,426,450 $17,638,136
The allowance for loan losses was 2.0%, 2.2% and 2.3% of
loans and lease financing and loans held for sale at December 31,
1999, 1998, and 1997, 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, 1999, loans to affiliated
cooperatives, directors, officers, and their family members have
the following outstanding balances:
January 1, December 31,
1999 Additions Deductions 1999
Loans to affiliated
cooperatives $55,524,500 $53,183,598 $28,627,759 $80,080,339
Percent of loans
outstanding 7.0% 8.4%
During 1999, 1998, and 1997 NCB recorded interest income of
$7,347,774, $5,352,355, and $6,412,886, respectively, on loans
to related parties.
10. Premises and Equipment
Premises and equipment are included in other assets and
consist of the following as of December 31:
1999 1998
Furniture and equipment $ 2,988,558 $ 2,461,610
Leasehold improvements 1,358,487 1,321,816
Other 1,563,315 1,548,155
5,910,360 5,331,581
Less: Accumulated depreciation
and amortization (4,005,992) (3,262,369)
$ 1,904,368 $ 2,069,212
11. Leases
NCB leases its current headquarters in Washington, D.C.
through March 31, 2002. The NCB headquarters will relocate within
Washington, D.C. effective April 2001. The new lease, which is for
10 years, will expire in April 2011. 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, 1999 are as
follows:
2000 $ 1,934,452
2001 2,990,905
2002 2,338,836
2003 2,447,170
2004 2,568,423
Thereafter 21,954,945
$34,234,731
Rental expense on premises and office equipment in 1999,
1998, and 1997 is $1,708,647, $1,687,183, and $1,689,415,
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,
1999 and 1998, the unamortized lease incentive is $571,835 and
$750,891, respectively.
12. Deposits
Deposits as of December 31 are summarized as follows:
1999 1998
Weighted Weighted
Average Average
Balance Rate Balance Rate
Passbook accounts $ 4,103,441 2.67% $ 4,695,457 2.65%
Money market demand
and NOW accounts 46,316,432 3.09% 22,949,597 1.21%
Fixed-rate certificates
Less than $100,000 50,147,789 5.52% 63,775,057 5.69%
$100,000 or greater 25,503,596 5.51% 31,999,433 5.56%
$126,071,259 4.53% $123,419,544 4.72%
The remaining contractual maturities of certificate accounts at
December 31 are as follows:
1999
Less than $100,000
$100,000 or greater Total
Three months or less $ 5,887,274 $ 1,923,751 $ 7,811,025
Three to six months 6,544,114 3,946,799 10,490,913
Six to twelve months 21,480,156 8,912,709 30,392,865
Twelve months or longer 16,236,245 10,720,337 26,956,582
$50,147,789 $25,503,596 $75,651,385
1998
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 $123,558,000 and
$121,313,000, at December 31, 1999 and 1998, respectively.
13. Short-Term Borrowings
Revolving credit facilities
At December 31, 1999, NCB has $452.5 million of revolving lines of
credit with other financial institutions. $260.0 million in committed
line of credit facilities expire between April and July 2000. $140.0
million expires in May 2002, while the remaining $52.5 million is
uncommitted at December 31, 1999.
At December 31, 1998, 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 $6,624,901, $9,689,345, and $8,732,851, in
1999, 1998, and 1997, respectively. The following is a summary of
the borrowings under the facilities for the years ended December
31:
1999 1998
Borrowings outstanding
at December 31 $ 79,500,000 $156,000,000
Unused capacity
at December 31 183,300,000 181,800,000
Average line of credit
borrowings outstanding
during the year 117,970,000 165,813,699
Maximum borrowings
during the year 257,000,000 256,500,000
Weighted average borrowing
rate
During the year 5.5% 5.8%
At December 31 6.2% 6.7%
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, 1999 and 1998,
respectively, commitment fees for the line of credit ranged between
.125% and .200% and between .125% and .150%, respectively of the
commitment balance. Total commitment fees paid for revolving
credit facilities were $860,000, $524,000, and $479,000 in 1999,
1998 and 1997, respectively. 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).
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, 1999 and 1998, the short-term
borrowings outstanding totaled $17.2 million and $34.7 million,
respectively. NCB also has a commercial paper program in place to
further reduce NCB's cost of funds. At December 31, 1999 and
1998, commercial paper totaled $171.8 millions and $29.9 million,
respectively.
NCB, through its subsidiary NCBSB, has a blanket pledge
agreement with FHLB requiring advances to be secured by eligible
mortgages with a principal balance of 150% of such advances.
These eligible mortgages had outstanding principal balances
totaling $117,771,000 and $88,471,000 at December 31, 1999 and
1998. Outstanding advances at December 31, 1999 were
$15,000,000. There were no outstanding advances at December 31,
1998. Interest expense on the advances for the years ended
December 31, 1999 and 1998 were $1,062,577 and $1,130,
respectively.
During 1999, NCB did not enter into any reverse repurchase
agreement. In 1998, NCB entered into a series of reverse
repurchase agreements wherein the average balance of reverse
repurchase agreements outstanding was $5,385,833 and the maximum
borrowings were $16,509,000. The weighted average rate on the
reverse repurchase agreements was 5.62% during the same period.
There were no reverse repurchase agreements outstanding at
December 31, 1999 and 1998.
The carrying amounts of short-term borrowings at December 31
are as follows (dollars in thousands):
Carrying Amount
1999 1998
Line of credit $ 79,500 $156,000
Commercial paper 171,845 29,939
Other 17,244 34,713
FHLB advances 15,000 -
$283,589 $220,652
14. Long-term Debt
NCB has entered into various agreements for extension of
credit with third parties. At December 31, 1999 and 1998, under
the medium term note program, NCB had approval to issue up to
$400.0 million and $200.0 million, respectively. As of December
31, 1999 and 1998, NCB had $100.0 million and $55.0 million,
respectively, outstanding under this program. In addition, as of
December 31, 1999 and 1998, NCB had outstanding $187.0 and $177.0
million, respectively, 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).
The following is a schedule of outstanding long-term debt,
net of deferred hedges, at December 31, 1999:
Amount Rate Maturity
$ 44,385,706 7.71% 2000
82,288,107 6.52% 2001
69,820,213 6.37% 2002
24,935,790 6.50% 2003
64,833,054 7.07% 2004 and thereafter
$286,262,870
NCB has entered into a series of interest rate swap
agreements which have a combined notional amount of $65.0
million. The effect of the agreements is to convert $65.0 million
of the long-term debt from a weighted average fixed rate of 6.97%
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, 1999 the three and six
month LIBOR were 6.00% and 6.13%, respectively. These agreements
expire as follows:
Maturity LIBOR
Amount Date Index
$ 15,000,000 2001 Three month
20,000,000 2002 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, 1999
and 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
currently cannot pay any dividend on any class of stock at a rate
greater than the statutory interest rate payable on subordinated
debt. NCB is currently seeking an amendment to the Act that
would eliminate this limitation on dividends. There is no
assurance that the Act will be amended.
The notes require that proceeds from the sale of Classes B
and C stock be applied annually toward the repayment of the
notes. In 1999 and 1998, 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 $7.9 million and $5.0
million, respectively, plus accrued interest at December 31, 1999
and 1998.
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 traunche 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, 1999
(dollars in thousands):
Next Carrying Estimated
Index Rate Repricing Date Amount Fair Value
91-day Treasury rate 4.88% January 1, 2000 $ 53,553 $ 53,383
3-year Treasury rate 5.70% October 1, 2002 36,854 38,942
5-year Treasury rate 6.01% October 1, 2000 55,281 54,624
10-year Treasury rate 8.82% October 1, 2000 36,854 36,461
182,542 183,410
Premium on hedging 78 -
$182,620 $183,410
NCB has entered into a series of interest rate swaps agreements
totaling $90.0 million which have the effect of converting a portion
of the subordinated debt from a fixed rate of 6.20% 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, 1999, the one, three and
six month LIBOR rates were 5.82%, 6.0% and 6.13%, respectively.
The interest rate swap agreements, are described below:
Debt LIBOR
Swapped Amount Index
Three year $30,000,000 Three month
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
$90,000,000
The three year interest rate swap agreements expire
in 2002. The remaining agreements expire in 2000.
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.
1999 1998
Class B Class C Class D Class B Class C Class D
Par value per share $ 100 $ 100 $ 100 $ 100 $ 100 $ 100
Shares authorized 1,100,000 300,000 100,000 1,000,000 300,000 100,000
Shares issued and
outstanding 998,795 223,807 3 922,096 221,996 3
The changes in each class of common stock are described below:
Class B Class C Class D Total
Balance, 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
Adjustment to 1997 patronage
dividends paid in 1998 (121,586) - - (121,586)
1998 patronage dividend
distributed in common stock 7,791,469 181,059 - 7,972,528
Balance, December 31, 1999 $99,879,531 $22,380,663 $300 $122,260,494
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, 1999. The following table summarizes NCBSB's
capital at December 31, 1999 and 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, 1999:
Tangible Capital
(to tangible assets) $12,198,000 7.9% $2,310,257 1.5% N/A N/A
Total Risk-Based Capital
(to risk-weighted assets) $11,979,000 16.6% $5,759,956 8.0% $7,199,944 10.0%
Tier I Risk-Based Capital
(to risk-weighted assets) $12,198,000 16.9% N/A N/A $4,319,966 6.0%
Core Capital (to adjusted
tangible assets) $12,198,000 7.9% $4,620,515 3.0% $7,700,857 5.0%
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%
The Office of Thrift Supervision regulations impose certain
restrictions on NCBSB's payment of dividends. At December 31,
1999, 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 1999, 1998, and 1997 is
$307,386, $425,103 and $428,676, 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 1999,
1998, and 1997 are $392,100, $365,942, and $359,401,
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. The
Plan's terms were revised by the Board of Directors effective
January 1, 1999. NCB expensed $240,000, $388,000 and $210,000
for the Plan in 1999, 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 2000, NCB anticipates that it will declare a
patronage dividend for 1999 of approximately $14,846,000. The
anticipated cash portion of the 1999 patronage dividend is
included in patronage dividends payable at December 31, 1999.
The anticipated stock portion of the patronage dividend of 1999
earnings to be distributed has been added to allocated retained
earnings at December 31, 1999. 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,
1999 1998 1997
Current tax expense
Federal $1,433,913 $1,189,112 $1,270,100
State and local 153,572 186,911 143,504
Total current 1,587,485 1,376,023 1,413,604
Deferred tax expense
(benefit)
Federal 49,024 (42,262) (38,106)
State and local - 119,404 -
Total deferred 49,024 77,142 (38,106)
Total provision $1,636,509 $1,453,165 $1,375,498
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,
1999 1998 1997
Statutory U.S. tax rate $ 6,427,760 $5,286,768 $ 5,884,348
Patronage dividends (5,047,608) (4,257,134) (4,754,097)
State and local taxes 153,572 186,911 143,504
Other 102,785 236,620 101,743
Income tax provision $ 1,636,509 $1,453,165 $ 1,375,498
Deferred tax assets net of liabilities, included in other
assets, are comprised of the following at December 31, 1999 and
1998:
1999 1998
Deferred commitment fees $ 117,297 $120,691
Allowance for loan losses 351,793 295,321
Other 24,323 30,875
Gross deferred tax assets 493,413 446,887
Mortgage servicing rights (133,406) (58,674)
Federal Home Loan Bank stock dividends (123,941) (85,698)
Depreciation (67,280) (54,780)
Gross deferred tax liabilities (324,627) (199,152)
Net deferred tax asset $ 168,786 $247,735
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 1999, 1998, and 1997 are 6.21%, 6.33% and
6.39%, respectively. Consequently, the amounts available for
payment on the Class C stock for 1999, 1998, and 1997 are
$1,389,839, $1,405,235, and $1,399,694 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 letters of credit at December 31, are as follows
(dollars in thousands):
Contract or Estimated
Notional Amounts Fair Value
1999 1998 1999 1998
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $203,191 $178,621 $1,016 $ 961
Standby letters of credit $110,052 $126,814 $1,853 $1,567
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 not exposed to credit
loss in the event of nonperformance by its counterparties
because at December 31, 1999 the estimated cost of replacing, at
current market rates, all outstanding swap agreements is at a
loss of $267.0 thousand. 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 loans held
for sale.
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
1999 1998 1999 1998
Financial instruments whose
notional or contract amounts
exceed the amount of
credit risk:
Financial futures
contracts $143,400 $180,700 $2,725 $ (512)
Interest rate swap
agreements $155,000 $125,000 $ (267) $4,257
At December 31, 1999 and 1998, NCB had deferred gains of
$6,920,705 and deferred losses of $3,361,937, 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, 1999 and 1998. 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, 1999 and 1998 are as follows (dollars in
thousands):
1999 1998
Carrying Amount Fair Value Carrying Amount Fair Value
Financial Assets:
Cash and cash equivalents $ 29,910 $ 29,910 $ 66,563 $ 66,563
Restricted cash 4,887 4,887 13,203 13,203
Investment securities
Available-for-sale 46,283 46,283 39,128 39,128
Held-to-maturity 2,710 2,720 2,892 2,862
Interest-only receivables 18,882 18,882 16,041 16,041
Loans and lease financing 947,898 962,095 795,174 832,296
Financial Liabilities:
Deposits 126,071 123,558 123,420 121,313
Short-term and other
borrowings 283,589 283,589 220,652 220,652
Long-term debt 286,263 284,603 231,193 238,274
Subordinated debt 182,542 183,410 182,542 188,228
Off-Balance Sheet Financial
Instruments:
Interest rate swap agreements - (267) - 4,257
Financial futures and
forward commitments - 2,725 - (512)
Commitments to extend credit - 1,016 - 961
Standby letters of credit - 1,853 - 1,567
23. SEGMENT REPORTING
NCB's reportable segments are strategic business units that
provide diverse products and services within the financial
services industry. NCB has four reportable segments: commercial
lending, real estate, NCB Savings Bank and other. The commercial
lending segment provides financial services to cooperative and
member-owned businesses. The real estate lending segment
originates, sells and services real estate loans nationally,
with a concentration in New York City. NCB Savings Bank segment
provides traditional banking services such as lending and
deposit gathering to retail, corporate and commercial customers.
"Other" consists of NCB's unallocated parent company income and
expense, and net interest income from investments and corporate
debt after allocations to segments.
NCB evaluates segment 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, 1999, 1998 and 1997 (dollars in thousand):
1999 Commercial Real Estate NCB
Lending Lending NCBSB Other Consolidated
Net interest income
Interest income $ 39,756 $ 23,111 $ 11,591 $ 5,459
Allocated interest
expense 29,081 16,154 - (45,235)
Interest expense - - 6,705 43,055
Net interest income 10,675 6,957 4,886 7,639 $ 30,157
Provision (credit)
for loan losses (3,254) 356 159 3,648 909
Non-interest
income-external 3,182 11,616 748 121 15,667
Non-interest expense
Direct expense 5,551 4,727 2,776 15,510 28,564
Overhead and support 807 342 300 (1,449) -
Total non-interest
expense 6,358 5,069 3,076 14,061 28,564
Income (loss) before
taxes $ 10,753 $ 13,148 $ 2,399 $ (9,949) $ 16,351
Total average assets $450,937 $329,423 $152,377 $106,669 $1,039,406
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
Provision (credit)
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) -
Total non-interest
expense 3,777 3,328 2,889 14,071 24,065
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 $842,146
24. New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. SFAS
No. 137 was issued in 1999 and effectively delayed the
implementation of SFAS No. 133 to fiscal years beginning after
June 15, 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
James L. Burns, Jr. Chairman of the Board
Of Directors and Director 1996 2002 61
Charles E. Snyder President and Chief
Executive Officer 1983 - 46
Harry J. Bowie Director 1999 - 64
Joseph Cabral Director 1995 2001 51
Kirby J. Erickson Vice Chairman of the Board 1997 2000 59
of Directors and Director
Eben Hopson, Jr. Director 1998 2002 53
Jackie Jenkins-Scott Director 1997 2000 50
Marilyn J. McQuaide Director 1996 2002 50
Michael J. Mercer Director 1998 2001 46
Alex N. Miller Director 1998 2001 57
Alfred A. Plamann Director 1995 2001 57
Stuart M. Saft Director 1999 2002 52
Sheila A. Smith Director 1995 - 54
Peter C. Young Director 1997 2000 54
Thomas K. Zaucha Director 1997 2000 55
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 3/99 45
Steven A. Brookner Managing Director
President and Director,
NCB I, Inc.
Director, NCB Insurance
Brokers, Inc. 1997 - 37
Charles H. Hackman Managing Director, Chief
Credit Officer
President,
NCB Financial Corporation
Vice President and Director,
NCB Savings Bank, FSB
President and Director,
NCB Insurance Brokers, Inc. 1984 - 55
Mark W. Hiltz Managing Director, Chief
Risk Officer 1982 - 52
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 - 41
Thomas C. Schoettle President, NCB Savings
Bank,FSB 1997 - 44
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.
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.
Harry J. Bowie has been the President and Chief Executive
Office of Delta Foundation, Inc., a community development
corporation located in Greenville, Mississippi, since 1986.
He has also served as a Director of the Southern Regional
Council located in Atlanta and the Housing Assistance Council
located in Washington, D.C.
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 was a Senior Vice President and Senior
Operations Officer of Vermont National Bank from 1989 to 1999.
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 Cornerstone
Cooperatives, formerly known as 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.
Alfred A. Plamann has been the President and Chief
Executive Officer of Unified Western Grocers, formerly known
as Certified Grocers of California, Ltd. 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).
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.
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 more than 25 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, who resigned in March 1999, was 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.
Steven A. Brookner is a Managing Director responsible
for overseeing the real estate originations, capital markets,
servicing and investor reporting functions of NCB. From 1997
through September 1998 he was a Managing Director responsible
for strategic initiatives and new product development.
Previously, he was a shareholder and officer of Hamilton
Securities Group for one year and Co-Founder and Principal of
BNC & Associates, a financial and management cosulting firm,
for five years.
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,
President of NCB Financial Corporation since its inception in
1988 and President of NCB Insurance Brokers, Inc. starting in
1999.
Mark W. Hiltz is a Managing Director and Chief Risk Officer
of NCB. He was a Corporate Vice President and Manager of
Special Assets from 1994 to 1998 and a Senior Vice President
of the Special Assets Department from 1986 to 1994.
Previously he was Vice President of Loan Administration from
1983 to 1986 and General Auditor from 1982 to 1983.
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
Lynn M. Hoopingarner
David H. Roberts
Lynn M. Hoopingarner is the President of Profitable
Solutions TM Institute, Inc. She has been the President of
White House Owners Association since 1992 to present. She
also previously worked as a banker at Chase Manhattan Bank and
Wells Fargo Bank.
David H. Roberts is the Treasurer since 1995 to present and
Vice President since 1998 to present of 230 Tenants
Corporation. He was formerly a Vice President of
Citibank/Citigroup.
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. Harry J. Bowie 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 $250,000,
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.(Chair),
Joseph Cabral, Kirby J. Erickson, Jackie Jenkins-Scott,
Marilyn J. McQuaide, Michael J. Mercer, Alfred A. Plamann
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 Joseph
Cabral, Eben Hopson, Jr., Jackie Jenkins-Scott, Alex N.
Miller, Sheila A. Smith(Chair), Peter C. Young 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 Harry J. Bowie, James L. Burns, Jr., Kirby J.
Erickson, Marilyn J. McQuaide, Michael J. Mercer(Chair),
Alfred A. Plamann and Stuart M. Saft.
The Audit Committee is responsible for assisting the Board
of Directors in fulfilling its statutory and fiduciary
responsibilities for NCB and its subsidiaries and related entity
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
related entity are operating within prescribed policies and
procedures and in conformance with the applicable conflict of
interest policies. The members of the Committee are Harry J.
Bowie, James L. Burns, Jr., Kirby J. Erickson, Marilyn J.
McQuiade(Chair), Michael J. Mercer, Alfred A. Plamann and
Stuart M. Saft.
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 Joseph Cabral, Eben Hopson, Jr., Jackie Jenkins-
Scott(Chair), Alex N. Miller, Sheila A. Smith, Peter C. Young
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), Stuart M. Saft 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 1999 $336,000 $121,600 $20,760
President & CEO 1998 320,000 155,000 20,800
1997 310,013 103,250 20,440
Charles H. Hackman 1999 204,300 58,935 20,760
Managing Director, 1998 196,450 66,115 20,800
Chief Credit Officer 1997 189,387 63,591 20,440
Richard L. Reed 1999 175,000 52,250 20,679
Managing Director, 1998 157,500 52,500 20,340
Chief Financial
Officer 1997 150,005 52,500 19,037
Mark Hiltz 1999 156,000 45,240 20,169
Managing Director, 1998 150,800 50,750 19,488
Chief Risk Officer 1997 145,005 48,125 18,592
Caroline Blakely 1999 135,792 74,850 15,756
Managing Director, 1998 199,500 66,500 20,487
Chief Marketing
Officer 1997 203,678 59,500 20,440
Steven Brookner 1999 160,400 33,000 12,034
Managing Director
* The "All Other Compensation" reported for 1999 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 $1,560
Mr. Hackman 9,600 9,600 1,560
Mr. Reed 9,600 9,600 1,479
Mr. Hiltz 9,378 9,378 1,413
Ms. Blakely 8,147 6,699 910
Mr. Brookner 9,272 1,545 1,217
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 1999 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, 1999.
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 3.05% 28,566.22 12.76%
Central Bank
75 Park Plaza
Boston, MA 02116
Greenbelt Homes, Inc. 14,424.28 1.44% 29,505.23 13.18%
Hamilton Place
Greenbelt, MD 20770
Group Health, Inc (1) 12,718.23 1.27% 14,249.60 6.37%
2829 Univ. Ave., S.E.
Minneapolis, MN 55414
(1) Included in the above are 3,960.26 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.
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
1999 12/31/99 12/31/99
James L. Burns, Jr. Co-op Central Bank $ 0 $ 0
Joseph Cabral Chatsworth Products 349,089 209,454 8.82%
Chatsworth Products 2,710,270 1,922,498 8.82%
Kirby J. Erickson Central Minnesota
Group Health 3,008,280 3,008,280 8.00%
Central Minnesota
Group Health 2,852,678 2,474,532 8.10%
Alex N. Miller The Columns at
East Hill 202,515 200,010 9.24%
1261 La Vista 2,158,140 2,141,399 8.37%
Belvedere Point,
Inc. 311,848 307,204 9.81%
Tanglewood Garden
Coop. 854,488 844,552 9.69%
Alfred A. Plamann Park/Shop-
Andronico's 8,700,000 6,290,404 various
K. V. Mart 5,183,841 4,058,964 8.50%
Mollie Stone Market 7,500,000 7,050,000 8.62%
Certified Revolver 5,000,000 0 various
Certified Lease 39,443 0 lease
Green Frog Market 749,702 609,598 various
Jensen's Complete
Shop 1,400,000 1,345,238 9.25%
M&M Highland 309,366 316,500 9.26%
Major Market 306,881 106,138 9.00%
Northwest Supermkt 3,917,600 3,357,943 various
Superior Warehouse 4,250,000 0
Yucaipa Trading 315,133 258,561 9.50%
Grocers Cap Revolver 2,000,000 1,200,000 8.50%
Grocers Cap Program 17,638,600 14,421,904 various
Peter O'Neal 1,075,341 1,045,154 various
IFOR 163,229 142,364 6.88%
United Resources
Program 11,823,934 9,552,867 various
Peter C. Young Area Coop Education
Services 1,300,000 1,300,000 9.00%
Thomas K. Zaucha Hilltop Properties 3,462,563 3,067,993 various
Greenwich Assoc. 12,000,000 12,000,000 8.60%
Charles E. Snyder National Cooperative
Business Assoc. 68,512 27,405 lease
National Cooperative
Business Assoc. 330,000 205,000 8.63%
Nominees for Directorship Largest Interest
Balance Balance as Rate as
in of of
1999 12/31/99 12/31/99
Lynn M. Hoopingarner The White House
Owners Association $ 177,082 $ 161,959 9.38%
David H. Roberts 230 Tenants
Corporation 900,000 900,000 7.95%
230 Tenants
Corporation 288,425 288,100 7.73%
NCB has a $30.0 million committed line of credit 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. G & M
Management Company, of which Mr. Miller is the President,
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 enterd into agreements with Grocers Capital Company
(GCC) and United Resources, Inc (URI), finance and subsidiaries
of Unified Western Grocers (UWG) of which Mr. Plamann is its
President and Chief Executive officer, to purchase member loans
originated by GCC and URI. NCB also provides a line of credit to
GCC. In December 1999, NCB agreed to modify its financing
arrangements with GCC and URI, the documentation of which was in
process at year end. Finally, GCC and UWG provide guarantees on
several loans to members of UWG, some of which have been sold and
are not reflected on NCB's books.
NCB has a $1.5 million line of credit with Area Cooperative
Educational Services of which Mr. Young is the Executive
Director. The line of credit is for working capital needs.
NCB has two loans outstanding with Hilltop Properties.
Hilltop Properties is a member of the National Grocers
Association of which Mr. Zaucha is its President. The loans were
used for a real estate refinancing, to purchase furniture,
fixtures, equipment and inventory and to remodel a store. Also
available is a $.3 million line of credit for working capital
needs. Additionally, NCB originated four loans with Greenwich
Associates, a real estate company which leases property to
D'Agostinos Markets, a chain grocery operation and member of the
National Grocers Association. The loans were made to refinance
the real estate whose primary tenants are the D'Agostinos
markets. NCB fully intends to sell these commercial real estate
loans in the secondary market.
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 Lynn M. Hoopingarner is the President of White
House Owners Association. NCB has an outstanding real estate
loan to the White House Owners which was used to finance capital
improvements.
Board nominee David H. Roberts is Vice President of 230
Tenants Corporation. NCB has two outstanding real estate loans
to 230 Tenant Corporation. They were used to refinance an
existing loan and for capital improvements.
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, 1997, 1998, and 1999.
Page #
40 Report of Independent Public Accountants
41 Consolidated Balance Sheets
42 Consolidated Statements of Income
43 Consolidated Statements of Comprehensive Income
44 Consolidated Statements of Changes in Members' Equity
45-46 Consolidated Statements of Cash Flows
47-77 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
Agreement with Fleet Bank as Agent
(aa) 10.16 Amendment to Fleet Loan Agreement
(z) 10.17 Second Amendment Agreement to Note Purchase
Agreement with Lutheran Brotherhood et. al (June 1999)
(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)
(y) 10.21 Amendment No. 2 to Third Amended and Restated
Loan Agreement with Fleet Bank as Agent
(y) 10.22 First Amendment to Term Loan Agreement with Greenwich
Funding Corporation and Credit Suisse First Boston
(aa) 10.23 Note Purchase Agreement with Prudential Insurance Company of
America (Dec. 1999)
(z) 10.24 First Amendment Agreement to Note Purchase Agreement
with First AUSA Life Insurance et. al (June 1999)
(j) 10.25 Term Loan Agreement with PNC Bank (Aug 1996)
*(aa) 10.26 Incentive Plan for NCB Executive Officers
(y) 10.27 Executive Long-Term Incentive Plan
(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)
( ) 10.30 (No Exhibit)
(i) 22.1 List of Subsidiaries and Affiliates of the NCB
(aa) 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
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.
(aa) 25.7 Power of Attorney by Harry J. Bowie
(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
(aa) 25.12 Power of Attorney by Stuart M. Saft
(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) Incorporated by referance to the exhibit of the same
number filed as part of the registrant's annual report on
Form 10K for the year ended December 31,1998 (File No. 2-
99779).
(y) 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, 1999 (File No.
2-99779).
(z) 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, 1999 (File
No. 2-99779).
(aa) Filed herewith
(b) The Registrant did not file any report on Form 8-K
during the last quarter of 1999.
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, 2000 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/James L Burns, Jr. Chairman of the Board and 3/30/00
James L. Burns, Jr Director
/s/Richard L. Reed Managing Director, 3/30/00
Richard L. Reed (Principal Financial Officer)
/s/Marietta J. Orcino Vice President, Tax & 3/30/00
Marietta J. Orcino Regulatory Compliance
*/s/Harry J. Bowie Director 3/30/00
Harry J. Bowie
*/s/Joseph Cabral Director 3/30/00
Joseph Cabral
*/s/Kirby J. Erickson Director 3/30/00
Kirby J. Erickson
*/s/Eben Hopson, Jr. Director 3/30/00
Eben Hopson, Jr.
*/s/Jackie Jenkins-Scott Director 3/30/00
Jackie Jenkins-Scott
Signature Title Date
*/s/Marilyn J. McQuiade Director 3/30/00
Marilyn J. McQuiade
*/s/Michael J. Mercer Director 3/30/00
Michael J. Mercer
*/s/Alex N. Miller Director 3/30/00
Alex N. Miller
*/s/Alfred A. Plamann Director 3/30/00
Alfred A. Plamann
*/s/Stuart M. Saft Director 3/30/00
Stuart M. Saft
*/s/Sheila A. Smith Director 3/30/00
Sheila A. Smith
*/s/Peter C. Young Director 3/30/00
Peter C. Young
*/s/Thomas K. Zaucha Director 3/30/00
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 2000 annual meeting. The registrant has
not yet distributed the 1999 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
10.16 Amendment to Fleet Loan Agreement
10.23 Note Purchase Agreement with Prudential
Insurance Company of America (Dec. 1999)
10.26 Incentive Plan for NCB Executive Officers
23.1 Consent of Arthur Andersen LLP
25.7 Power of Attorney by Harry J. Bowie
25.12 Power of Attorney by Stuart M. Saft
27 Financial Data Schedule
Supplemental Information
Registrant's 2000 Election Materials