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, 1996 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 2.6% 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, 1996
Class C
(Common stock, $100.00 par value) 217,516
Class B
(Common stock, $100.00 par value) 786,004
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 8 Financial Statements and Supplementary Data............... 24
Item 9 Changes in and Disagreements with Accountants,
on Accounting and Financial Disclosure.................. 63
PART III
Item 10 Directors and Executive Officers of the Registrant........ 63
Item 11 Executive Compensation.................................... 72
Item 12 Security Ownership of Certain
Beneficial Owners and Management........................ 73
Item 13 Certain Relationships and Related Transactions............ 74
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................. 79
PART I
ITEM 1. BUSINESS
General
The National Consumer Cooperative Bank, which does business as the National
Cooperative Bank ("NCB"), is a financial institution organized under the laws of
the United States. NCB provides financial and technical assistance to eligible
cooperative enterprises or enterprises controlled by eligible cooperatives. A
cooperative enterprise is an organization which is owned by its members and
which is engaged in producing or furnishing goods, services, or facilities for
the benefit of its members or voting stockholders who are the ultimate
consumers or primary producers of such goods, services, or facilities. NCB
is structured as a cooperative institution whose voting stock can only be
owned by its patrons or those eligible to become its patrons.
In the legislation chartering NCB (the National Consumer Cooperative Bank
Act or the "Act"), Congress stated its finding that cooperatives have proven to
be an effective means of minimizing the impact of inflation and economic
hardship on members/owners by narrowing producer-to-consumer margins and
price spreads, broadening ownership and control of economic organizations to a
larger base of consumers, raising the quality of goods and services available
in the marketplace and strengthening the nation's economy as a whole.
To further the development of cooperative businesses, the Congress
specifically directed NCB (1) to encourage the development of new and
existing cooperatives eligible for its assistance by providing specialized
credit and technical assistance; (2) to maintain broad-based control of NCB
by its voting shareholders; (3) to encourage a broad-based ownership, control
and active participation by members in eligible cooperatives; (4) to assist
in improving the quality and availability of goods and services to consumers;
and (5) to encourage ownership of its equity securities by cooperatives and
others.
NCB has attempted to fulfill its statutory obligations in two fashions.
First, NCB makes loans and offers other financing arrangements which afford
cooperative businesses substantially the same financing opportunities currently
available for traditional enterprises. Second, NCB provides financial and other
assistance to the NCB Development Corporation ("NCB Development"), a non-profit
corporation without capital stock organized in 1982 which makes loans and
provides assistance to developmental cooperatives.
The Act was passed on August 20, 1978, and NCB commenced lending operations
on March 21, 1980. In 1981, Congress amended the Act (the "Act Amendments") to
convert the Class A Preferred Stock of NCB previously held by the United States
to Class A Notes as of December 31, 1981 (the "Final Government Equity
Redemption Date"). Since the Final Government Equity Redemption Date, NCB's
capital stock, except for three shares of non-voting Class D stock, has been
owned exclusively by cooperatives. 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
Minneapolis, New York City, and Anchorage. NCB Financial Corporation, NCB
Retail Finance Corporation and NCB I, Inc. maintain offices in Wilmington,
Delaware while NCB Savings Bank, FSB maintains its offices in Ohio.
When used in this report, the words "believes", "anticipates", "expects",
"seeks" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those projected,
including: competition within each of NCB's businesses, the effects of
internationl, 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 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. In addition, organizations applying
for loans must comply with other technical requirements imposed by NCB.
Lending Authorities. The Board of Directors of NCB establishes its
policies governing its lending operations in compliance with the Act. The
policies adopted by the Board are carried out by the management of NCB pursuant
to written loan policies adopted by the Board. The management in turn adopts
and implements guidelines and procedures consistent with stated Board
directives. Lending policies and guidelines are reviewed regularly by the
Board of Directors and management to make needed changes and amendments.
The management of NCB may approve individual loan amounts 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
of NCB may delegate authorities up to this limit to such committees and
individual officers as he may deem appropriate.
The loan committee approves loans and commitments that exceed individual
or team lending authority.
LENDING LIMITS
Single Borrower
The total amount of loans, letters of credit, leases and other financing
that may be made available to any one borrower may not exceed 15% of NCB's
capital. The approval of any loan to a single borrower which has a combined
total of financing from NCB in excess of 75% of the 15% limit is subject to the
prior approval of the Loan and Business Development Committee of the Board.
Cooperatives of Primary Producers
The total dollar value of loans to cooperatives that produce, market and
furnish goods, services and facilities on behalf of their members as primary
producers may not exceed 10% of the gross assets of NCB. The total dollar
volume of loans NCB will allow to be outstanding to any producer cooperative
may not exceed 20% of the amount available for loans to all producer
cooperatives.
INTEREST RATES
Generally
NCB charges interest rates approximately equal to the market rates charged
by other lending institutions for comparable types of loans. NCB seeks to price
its loans to yield a reasonable return on its portfolio in order to build and
maintain the financial viability of NCB 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 Real
Estate Lending Group for specific types of loans with specific maturities. NCB
takes the following factors into consideration in pricing its real estate loans:
loan-to-value ratios, lien position, cooperative 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 a constant maturity of
one, three, five or ten 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. Typically,
commercial loan repayment schedules are structured by NCB with flat monthly
principal reduction plus interest on the outstanding balance.
Fees
NCB typically assesses fees to cover the costs to NCB of its consideration
of and handling of loan transactions, and to compensate NCB for setting aside
funds for future draws under a commitment. The legal fees paid to outside legal
counsel retained by NCB for loan transactions are charged to the borrower.
Underwriting
When evaluating credit requests, NCB seeks to determine whether a
prospective borrower has and/or will have sound management, sufficient cash flow
to service debt, assets in excess of liabilities and a continuing demand for its
products, services or use of its facilities, so that the request will be repaid
in accordance with its terms.
NCB evaluates repayment ability based upon an analysis of a borrower's
historical cash flow and conservative projections of future cash flows from
operations. This analysis focuses on determining the predictability of future
cash flows as a primary source of repayment.
Security
Loans made by NCB are generally secured by specific collateral. If
collateral security is required, the value of the collateral must be reasonably
sufficient to protect NCB from loss, in the event that the primary sources of
repayment of financing from the normal operation of the cooperative, or
refinancing, prove to be inadequate for debt repayment. Collateral security
alone is not a sufficient basis for NCB to extend credit. Unsecured loans
normally are made only to borrowers with strong financial conditions, operating
results and demonstrated repayment ability.
Loans Benefiting Low-Income Persons
Under the Act, the Board of Directors must use its best efforts to insure
that at the end of each NCB fiscal year at least 35% of its 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.
Loans for Residential Purposes
Commencing on October 1, 1985, the Act prohibited 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. Since October 1, 1985, the
preponderance of NCB real estate orgination volume 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, 1996, approximately 16.5% 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.
Cooperative Funding Corporation ("CFC") is a wholly-owned subsidiary of
NCB. CFC provides fee compensated corporate financial services to customers of
NCB and to other corporations which may be members of cooperatives, or which
sponsor employee stock ownership plans. CFC is registered as a broker-dealer
with the Securities and Exchange Commission and is a member of the National
Association of Securities Dealers.
NCB Investment Advisers, Inc. ("NCBIA") has been organized to provide
investment advisory services to cooperatives. It is registered as an investment
adviser with the Securities and Exchange Commission.
NCB Financial Corporation ("NCBFC") is a Delaware chartered, wholly-owned,
S&L holding company whose sole subsidiary is NCB Savings Bank, FSB.
NCB Savings Bank, FSB ("NCBSB") is a federally chartered, federally insured
savings bank located in Hillsboro, Ohio.
NCB Mortgage Corporation ("NCBMC") is a wholly-owned subsidiary of NCB that
originates and services loans to cooperatives.
NCB Insurance Brokers, Inc. ( "NCBIB") is engaged in the business of
brokering housing-related insurance to cooperatives.
NCB I, Inc. ("NCB I") is a wholly-owned, special purpose corporation that
holds credit enhancement certificates related to the securitization and sale of
cooperative real estate loans. NCB and NCB I are parties to an agreement under
which each agrees not to commingle the assets of NCB I with those of NCB.
NCB Retail Finance Corporation ( "NCBRFC") is a wholly-owned special
purpose corporation that participates in the securitization and sale of loans to
customers involved in the grocery business. NCBRFC is required by its
certificate of incorporation to have at least two directors independent of NCB
and to avoid commingling its assets with those of NCB.
COMPETITION
The Congress created and capitalized NCB because it found that existing
financial institutions were not making adequate financial services available to
cooperative, not-for-profit business enterprises. However, NCB experiences
considerable competition in lending to the most credit worthy cooperative
enterprises.
REGULATION
NCB is organized under the laws of the United States. NCB is examined
annually by the Farm Credit Administration and the General Accounting Office is
authorized to audit NCB. Reports of such examinations and audits are to be
forwarded to the Congress, which has the sole authority to amend or revoke NCB's
charter. NCB Savings Bank, FSB is regulated by the Office of Thrift
Supervision.
TAXES
The Act provides that NCB shall be treated as a cooperative within the
meaning of Section 1381 (a)(2) of the Internal Revenue Code. As such and
pursuant to the provisions of the Act, NCB, in determining its taxable income
for federal income tax purposes, is allowed a deduction for an amount equal
to any patronage refunds in the form of cash, Class B or Class C stock, or
allocated surplus that are distributed or set aside by NCB during the
applicable tax period. To date, NCB has followed the policy of distributing
or setting aside such patronage refunds during the applicable tax period
which has effectively reduced NCB's federal income tax liability to
insignificant amounts.
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.
In 1995, it was determined that all income generated by NCB and its
subsidiaries, with the exception of NCB Savings Bank, qualifies as patronage
income under the Internal Revenue Code, with the consequence that NCB is able to
issue tax deductible patronage refunds with respect to all such income.
NCB's subsidiaries are subject to state income taxes.
AGREEMENT CONCERNING CLASS A NOTES
The Act, as amended, provided that the interest rate payable to the United
States on NCB's Class A notes was limited until October 1, 1990 to 25% of NCB's
net income. 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 10,
1997, the face amounts and current maturities of the outstanding replacement
notes were as follows:
Current
Replacement Maturity
Note Date Amount Maturity
1 4/1/97 $53,553,328 3 months
2 10/1/97 $36,854,000 36 months
3 10/1/00 $55,281,000 60 months
4 10/1/00 $36,854,000 120 months
When each note matures NCB has the right to borrow again from the Treasury
the maturing amount under the same terms and conditions. At each maturity date,
the interest rate to be paid upon the note for the succeeding period will be
calculated by the U.S. Treasury based upon the prevailing interest rates for
Treasury obligations of comparable maturities. NCB intends generally to avail
itself of this right. Thus, until the final redemption of the Class A notes,
NCB would have outstanding to the U.S. Treasury four tranches of Class A
notes in the maturities stated above. In November 1994, however, NCB adopted
a Capitalization and Patronage Refund Policy that contemplates the probable
retirement of $25 million of Class A notes in 2010 and $25 million in 2015.
FURTHER INFORMATION
For further information concerning the development of NCB's business in
1996, please see the response to Item 7.
ITEM 2. PROPERTIES
NCB leases space for its Washington, D.C. headquarters and for three
regional offices located in Minneapolis, New York City, and Anchorage. NCB
Financial Corporation, NCB Retail Finance Corporation and NCB I,Inc. maintain
offices in Wilmington, Delaware while NCB Savings Bank, FSB maintains its
offices in Ohio. NCB's headquarters is 34,464 square feet in size and
regional offices average 1500 square feet. The rental expense for the fiscal
year ended December 31, 1996 was $1,231,000 for NCB's headquarters and
regional offices. NCB considers the regional offices suitable for its needs
and the facilities are fully utilized in its operations.
Minimum future rental payments, assuming present office space and space
leased for the headquarters are retained without subtracting payments made to
NCB under subleases of such space, for the following fiscal years ended
December 31 are as follows:
Other
Year Headquarters Offices
1997 $1,300,000 $227,250
1998 $1,320,000 $231,960
1999 $1,340,000 $ 21,609
2000 $1,360,000
2001 $1,380,000
After 2001 $ 389,000
ITEM 3. LEGAL PROCEEDINGS
NCB is not involved in any pending legal proceeding, other than ordinary
routine litigation incidental to its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
NCB did not submit any matters to a vote of its security holders during
the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
NCB currently has three classes of stock outstanding whose rights are
summarized as follows:
Class B Stock - The Act permits Class B stock to be held only by borrowers
from NCB and requires each borrower to hold Class B stock at the time the loan
is made whose par value is equal to 1% of its loan amount. The Act prohibits
NCB from paying dividends on Class B stock. There are two series of Class B
stock. Class B-1 stock is Class B stock purchased for cash at par value on
or after June 29, 1984, while Class B-2 stock is all other Class B stock.
Class B stock is transferrable 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 suchstock beyond that required to
support their loans have held such stock for the longest time. NCB also
repurchases 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. 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 6.1% during 1996. In 1994, NCB
adopted a policy under which annual cash dividends on Class C stock of up to 2
percent of NCB's net income may be declared. The policy does not provide any
specific method to determine the amount, if any, of such dividend. Whether any
such dividends will be declared and if so, in what amount accordingly rests
within the discretion of the NCB's Board of Directors. The Board declared an
initial dividend of 83 cents per share of Class C stock, payable on June 30,
1996 to holders of record as of March 31, 1996. In November 1996, the Board
approved a dividend diminimus provision which states the Class C stock
dividends shall not be distributed to the stockholder until such time as the
cumulative amount of 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 transferrable to another eligible holder
only with the approval of NCB. No requests for approval of transfers have
been made to NCB in recent years. 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 transferrable only with the approval of NCB. No
requests for approval of such transfers have been made to NCB.
There is no established public trading market for any class of NCB's common
equity, and it is unlikely that any such market will develop in view of the
restrictions on transfer of NCB's stock discussed above. Holders of Class B
stock may use such stock to meet the Class B stock ownership requirements
established in the Bank Act for borrowers from NCB and permitted to NCB,within
the limits set forth above, to transfer Class B stock to another borrower from
NCB.
As of December 31, 1996 there were 1,076 holders of Class B stock, 364
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.
In years prior to 1995, NCB's patronage refund policy called for patronage
refunds to be paid partly in cash and partly in allocated surplus, with the same
percentage of each paid to each patron. Under NCB's new patronage refund policy
that became effective in 1995 with respect to payment of the refund for
patronage during the calendar year 1994, NCB will no longer issue allocated
surplus as part of the patronage refund, but will instead make 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 new patronage refund policy NCB intends to pay a higher
percentage of the patronage refund in cash to those patrons who have greater
holdings of Class B and Class C stock in proportion to their loan amount. NCB
generally intends to pay a minimum 35% of the patronage refund in cash to those
patrons with stock holdings of 1.0% or more of their loan amount and up to 55%
to those patrons with stock holding of 12.5% or more of their loan amount.
There can, however, be no assurance that a cash patronage refund of any amount
will be declared for any year. Pursuant to the policy, all of NCB's allocated
surplus at December 31, 1993 was converted in 1994 to Class B or Class C
stock. The 1994 allocated surplus was converted in 1995.
NCB has declared a patronage refund for the year ended December 31, 1996,
of approximately $10.5 million of which $4.7 million will be distributed in cash
and $5.8 million in Class B or Class C stock.
Sales of Unregistered Shares of Class C Stock
During 1996, NCB sold ten shares of its Class C stock without registration
under the Securities Act of 1933 (the "1933 Act") in reliance on the exemption
from registration provided by section 4(2) of the 1933 Act. The stock was sold
for $100 a share in cash without any underwriting discounts or commissions to
cooperative organizations eligible to obtain loans from NCB. The stock was not
offered to the general public; the purchasers had access to essentially the same
information that would be contained in a registration statement and had the
capability to evaluate the merits of such an investment.
ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
At December 31, 1996 1995 1994 1993 1992
Loans and leases
outstanding $750,094 $597,190 $501,090 $457,713 $457,551
Allowance for loan
losses 15,504 14,554 13,031 12,309 10,419
Total assets 839,336 684,532 567,321 535,767 527,861
Total capital* 307,714 300,995 295,749 292,581 287,521
Subordinated debt 182,542 182,542 182,542 182,542 182,857
Long-term borrowings,
including subordinated
debt 384,679 337,230 287,899 312,897 330,380
Members' equity 125,172 118,453 113,207 110,039 104,664
Total borrowings
including deposits 515,257 365,288 256,315 230,868 228,512
For the Years Ended
December 31, 1996 1995 1994 1993 1992
Total interest income $59,593 $52,498 $41,123 $38,997 $44,063
Total interest expense 35,299 30,753 20,609 20,663 23,918
Net interest income 24,294 21,745 20,514 18,334 20,145
Net income 11,199 9,083 8,877 8,616 6,060
Ratios
Capital to assets 36.7% 44.0% 52.3% 54.6% 54.5%
Return on average
assets 1.5% 1.5% 1.7% 1.6% 1.2%
Return on average
members' equity 9.2% 7.8% 7.9% 8.0% 5.8%
Net yield on interest
earning assets 3.5% 3.7% 4.1% 3.7% 3.9%
Average members'equity
as a percent of
Average total assets 16.6% 18.9% 21.5% 20.4% 19.8%
Average total loans
and lease financing 19.2% 21.9% 25.0% 24.3% 22.6%
Net average loans and
lease financing to
average total assets 84.3% 86.2% 83.4% 81.9% 85.7%
Net average earning
assets to average
total assets 92.4% 94.9% 93.3% 93.2% 96.5%
Allowance for loan
losses to loans
outstanding 2.1% 2.5% 2.6% 2.7% 2.3%
Provision for loan
losses to average
loans outstanding 0.3% 0.4% 0.2% 0.3% 0.5%
* - Capital includes members' equity and subordinated debt
** - Net of deferred hedge gains
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial summary
1996 vs 1995
Net income of $11.2 million in 1996 increased 23.1% from $9.1
million in 1995. The growth in net income was due to increased volume of
commercial and mortgage lending activities, servicing fees and other non-
interest income. The impact of the increase in net interest income was
partially offset by increases in the provision for loan losses and non-
interest expenses.
Credit quality in NCB's lending portfolio remained strong during
1996. The provision for loan losses as a percentage of average loans and
leases decreased to .3% in 1996 from .4% in 1995 after increasing from .2%
in 1994. In this same period, the allowance for loan losses as a percentage
of loans and leases has decreased to 2.1% in 1996 from 2.5% and 2.6% in 1995
and 1994, respectively.
The return on average assets remained unchanged from 1995 at 1.5%. The
return on average equity increased to 9.2% compared with 7.8% in 1995.
Total assets increased 22.6% or $154.8 million to $839.3 million as of
December 31, 1996 from $684.5 million at year end 1995. Loan originations of
commercial and residential real estate showed a 27.6% increase over last
year primarily due to growth in real estate loans held for sale.
Net Interest Income
Net interest income of $24.3 million for the year ended December 31,
1996 represents an increase of $2.5 million or l1.7% over year end 1995. As
shown on Table 2, the net yield on interest earning assets decreased 21
basis points to 3.50% from 3.71% in 1995 while net spread slightly decreased
from 2.60% in 1995 to 2.59% in 1996.
Total interest income increased 14% to $59.6 million from $52.5
million in 1995. The increase is attributable to higher average volume of
loans outstanding.In comparison to the prior year, average commercial and
real estate loans increased due to the strengthening loan originations in the
cooperative market and a favorable rate environment. As shown on Table 1,
higher volume, mostly in loans held for sale, accounted for an increase of
$9.4 million in interest earned during 1996 compared with 1995.
The average yields on the real estate and commercial loan portfolios
were 9.04% and 8.54%,respectively, in 1996. These yields dropped by 13 and 55
basis points compared with the prior year.
Total interest expense increased to $35.3 million in 1996 from $30.8
million in 1995. As shown on Table 1, the increase was primarily due to an
increase in the volume of notes payable, specifically short-term notes, required
to fund our growth.
See Table 1 & Table 2
Credit quality
Credit quality remained strong in 1996 with total criticized loans below
1995 levels. Management believes that the current economic expansion is mature
and is likely to experience corrections. Therefore, it is anticipated there may
be a slight increase in such loans due to a softening economy in 1997.
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 multilevel
approval processes and an ongoing assessment of the credit condition of the
portfolio. In addition, a risk rating system is designed to classify each loan
according to the risks unique to each credit facility. In turn, NCB's risk
rating system and historical analysis allow management to track migration of
assets and to determine a risk-weighted allowance for loan losses.
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 a senior management team in an attempt to ensure the quality of
lending decisions. Financial analysis of the industries and regions serviced
are regularly performed by the various lending teams that keep abreast of
economic events and market conditions throughout the United States.
Loans classified by NCB as unacceptable 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.
The allowance for loan losses seeks to protect NCB's capital against the
risk of losses inherent in the credit extension process. The allowance is
increased by the provision for possible credit losses and decreased by the
amount of charge-offs, net of recoveries. The adequacy of the allowance for
loan losses is determined based on risk ratings, current and projected
economic conditions, concentrations, diversification, and portfolio size,
among other relevant factors.
The provision for loan losses increased slightly to $1.95 million in 1996
from $1.90 million in 1995. The provision as a percentage of average loans
and leases outstanding decreased to .3% in 1996 from .4% in 1995.
The allowance for loan losses increased 6.5% to $15.5 million in 1996. Due
to increased loan volume at year end, the allowance as a percentage of loans and
leases outstanding decreased to 2.1% at December 31, 1996 from 2.5% at December
31, 1995. The allowance as a percentage of nonperforming loans ( restructured
and non-accruing loans ) decreased to 200% in 1996 compared with 252% in the
prior year.
Total nonperforming assets ( non-accruing and restructured loans and real
estate owned) increased to $8.1 million at December 31, 1996 from $7.2 million
at December 31, 1995. Nonperforming assets as a percentage of loans and leases
outstanding plus REO decreased slightly to 1.1% in 1996 from 1.2% in 1995.
Nonperforming assets as a percentage of total capital increased to 6.5% in 1996
from 6.1% in 1995.
Table 1
CHANGES IN NET INTEREST INCOME
(dollars in thousands)
1996 Compared to 1995 1995 Compared to 1994
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 $ 406 $ (419) $ 13 $ 15 $1,195 $ 1,210
Commercial loans and leases 3,659 (1,592) 2,067 4,081 2,518 6,599
Real estate loans 5,378 (339) 5,039 3,143 424 3,567
Total interest income 9,443 (2,350) 7,093 7,239 4,137 11,376
Interest Expense
Deposits 616 35 651 589 789 1,378
Notes payable 6,212 (1,269) 4,943 5,462 2,124 7,586
Subordinated debt 2 (1,050) (1,048) (17) 1,196 1,179
Total interest expense 6,830 (2,284) 4,546 6,034 4,109 10,143
Net interest income $2,613 $ (66) $2,547 $1,205 $ 28 $ 1,233
* 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,
1996 1995 1994
Average Average Average
Assets Average Income/ Rate/ Average Income/ Rate/ Average Income/ Rate/
Balance* Expense Yield Balance* Expense Yield Balance* Expense Yield
Interest earning assets
Real estate loans $316,015 $28,565 9.04% $256,564 $ 23,524 9.17% $220,870 $19,967 9.04%
Commercial loans and
leases 317,427 27,106 8.54% 275,352 25,039 9.09% 228,466 18,431 8.07%
Total loans and leases 633,442 55,671 8.79% 531,916 48,563 9.13% 449,336 38,398 8.55%
Investment securities and
cash equivalents 59,835 3,922 6.55% 53,962 3,935 7.29% 51,609 2,725 5.28%
Total interest earning
assets 693,277 59,593 8.60% 85,878 52,498 8.96% 500,945 41,123 8.21%
Allowance for loan losses (14,976) (13,309) (12,968)
Non-interest earning assets
Cash 4,577 5,023 6,806
Other assets 51,112 39,446 28,205
Total non-interest earning
assets 55,689 44,469 35,011
Total assets $733,990 $617,038 $522,988
Liabilities and members'
equity
Interest bearing liabilities
Subordinated debt $182,943 9,849 5.38% $182,915 10,897 5.96% $182,961 9,718 5.31%
Notes payable 321,080 21,341 6.65% 229,963 16,398 7.13% 156,801 8,811 5.62%
Deposits 83,056 4,109 4.95% 70,596 3,458 4.90% 56,572 2,080 3.68%
Total interest bearing
liablities 587,079 35,299 6.01% 483,474 30,753 6.36% 396,334 20,609 5.20%
Other liabilities 25,038 17,178 14,362
Members' equity 121,873 116,386 112,292
Total liabilities and
members' equity $733,990 $617,038 $522,988
Net interest earning
assets $106,198 $102,404 $ 104,611
Net interest revenues
and spread $24,294 2.59% $21,745 2.60% $20,514 3.01%
Net yield on interest
earning assets 3.50% 3.71% 4.10%
* Based on monthly balances. Average loan balanoes include nonaccrual loans.
See Table 3
Non-accruing loans, as a percentage of loans and leases, remained at
.3% at year-end 1996 and 1995. Restructured loans increased to $5.1 million
in 1996 compared with $4.0 million in 1995 due to one real estate loan in the
amount of $1.1 million which was restructured in November, 1996. As of year
end, all restructured loans were current.
The majority of NCB's loans are to cooperatives in industries such as
owner-occupied and multifamily 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, property value deterioration has not adversely
affected NCB's portfolio because 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 4 & Table 5
Non-interest income
Non-interest income increased slightly by .4% to $12.7 million in
1996. 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. Gains on sales of loans were $4.6
million in 1996 which represented 36.2% of non-interest income. Real estate
loan sales decreased by $79.5 million to $173.2 million in 1996 from $252.7
million in 1995. NCB maintains a conservative interest rate risk policy;
accordingly, warehoused loans were fully hedged in 1996.
Servicing income remained a stable source of non-interest income for
NCB in 1996. NCB earned servicing fee income of $2.1 million in 1996
compared with $1.7 million in 1995. As of December 31, 1996, NCB serviced
$1.2 billion in single and multifamily real estate and commercial loans for
investors compared with $1.1 billion at year end 1995.
Non-interest expenses
Non-interest expenses increased 1.8% from $22.6 million to $23
million. Increases in compensation and employee benefits, occupancy and
equipment,contributions to NCBDC and other expenses of $2 million were offset by
a decrease in contractual services of $1.6 million. Non-interest expenses as a
percentage of average assets were 3.1% for 1996 compared with 3.7% in 1995.
Salaries and benefits, the single largest component of non-interest expenses,
increased 4.1% as a result of additional employee hiring and incentive bonuses
paid to NCB's personnel. Employees are eligible to receive bonuses based on
performance objectives which are tied to market compensation for comparable
positions. Salaries and employee benefits accounted for 47.1% of non-interest
expenses in 1996 and 46.1% of non-interest expenses in 1995 compared with 51.1%
in 1994. As of December 31, 1996, NCB and its consolidated subsidiaries
employed 162 employees compared with 144 employees one year earlier.
Under the provisions of the National Consumer Cooperative Bank Act, NCB
makes tax deductible, voluntary contributions to the NCB Development
Corporation. These contributions are normally calculated based on NCB's net
income. In 1996, NCB agreed to make a contribution to NCBDC to fund certain
business activities. The contribution to NCB Development Corporation was
$.72 million in 1996 and $.5 million each in 1995 and 1994. Non-interest
expenses as a percentage of average assets, adjusted for the contribution to
NCBDC, decreased to 3.0% in 1996 compared with 3.6% in 1995.
Income taxes
Under the terms of the Act, NCB is exempt from most state and local
taxes. In addition, under provisions of the Act and Subchapter T of the
Internal Revenue Code, NCB substantially reduces its Federal tax liability
through the issuance of annual patronage dividends. The federal income tax
provision is determined on non-member income generated by NCB Savings Bank,
FSB, and reserves set aside for the retirement of Class A notes and dividends
on Class C stock. NCB's subsidiaries are also subject to varying levels of
state taxation.
Note 19 to the consolidated financial statements contains additional
discussions of NCB's tax status.
1995 vs 1994
Net income of $9.1 million in 1995 increased from $8.9 million in
1994. The growth in net income was due to increased volume of commercial
and mortgage lending activities and gains from loan sales. The impact of
increases in net interest income and non-interest income was offset by
increases in the provision for loan losses and non-interest expenses in 1995.
Net interest income increased $1.2 million or 6.0% in 1995 primarily as a
result of increases in the average volume on the lending portfolio. The net
spread on interest earning assets decreased to 3.7% in 1995 from 4.1% in 1994.
Credit quality in NCB's lending portfolio remained strong in 1995. The
provision for loan losses as a percentage of loans and leases increased from
.2% in 1994 to .4% in 1995. In this same period, the allowance for loan
losses as a percentage of average loans and leases outstanding decreased to
2.5% in 1995 from 2.6% in 1994.
Non-interest income increased 49.7% to $12.6 million in 1995. 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.
Gains on loan sales, net of hedging expenses, were $6.0 million in 1995 which
represented 47.6% of non-interest income. The $2.8 million increase in the
gains from sale of loans in 1995 over 1994 is due primarily to higher volume
of loans sold in 1995. Real estate loan sales increased by $131.8 million to
$252.7 million in 1995 from $120.9 million in 1994. NCB maintains a conservative
interest rate risk policy; accordingly, warehoused loans were fully hedged in
1995.
Non-interest expenses increased 21.5% from $18.6 million to $22.6 million
due primarily to an increase in contractual services. Contractual service
expense for the year ended December 31, 1995 was $2.5 million higher than
1994 due to higher fees paid to NCBDC for management of loan portfolios and
higher expenditures for strategic planning, process redesign and the
development of a commercial loan securitization program. Non-interest
expense as a percentage of average assets were 3.7% for 1995 compared with
3.6% in 1994. Salaries and benefits, the single largest component of non-
interest expenses, increased 9.5% as a result of additional employee hiring
and incentive bonuses paid to NCB's personnel.
1996 vs 1995 Fourth quarter results
Net income for the fourth quarter of 1996 was $1.1 million compared with
$3.0 million in the fourth quarter of 1995. The decrease was due primarily
to lower non-interest income. Non-interest income for the quarter decreased
from $6.0 million in 1995 to $2.3 million in 1996 due primarily to the timing
of the gain realized in the blanket loan sales.
Net interest income increased from $6.0 million in 1995 to $6.4 million in
1996. The increase was due primarily to increasing short term interest rates and
loan volume from the prior year.
See Table 6
Table 3
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
For the years ended December 31, 1996 1995 1994 1993 1992
Balance at beginning of year $14,554 $13,031 $12,309 $10,419 $ 8,706
Charge-offs
Commercial 1,106 131 320 159 416
Real estate - construction 0 0 0 0 0
Real estate - residential 31 568 0 93 0
Total charge-offs 1,137 699 320 252 416
Recoveries
Commercial 137 125 164 356 30
Real estate - construction 0 0 0 0 0
Real estate - residential 0 192 0 82 0
Total recoveries 137 317 164 438 30
Net charge-offs 1,000 382 156 (186) 386
Provision for loan losses 1,950 1,905 878 1,704 2,099
Balance at end of year $15,504 $14,554 $13,031 $12,309 $10,419
Table 4
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
At December 3l, 1996 1995 1994 1993 1992
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* $342,211 45.6% $327,215 54.8% $246,797 49.3% $223,682 48.8% $199,442 43.5%
Real estate -
construction 154 0.0 428 0.1 999 0.2 5,779 1.3 5,080 1.1
Real estate -
residential * 383,881 51.2 247,096 41.4 233,527 46.5 210,846 46.1 236,379 51.5
Real estate -
commercial 8,742 1.2 9,361 1.6 10,301 2.1 10,577 2.3 10,933 2.4
Lease financing 15,106 2.0 13,090 2.1 9,466 1.9 6,829 1.5 6,722 1.5
Total loans and lease
financing $750,094 100.0% $597,190 100.0% $501,090 100.0% $457,713 100.0% $458,556 100.0%
Allocation of allowance
for loan losses
Commercial $ 7,826 50.5% $7,158 49.2% $ 0 0.0 $ 0 0.0 $ 0 0.0
Real estate -
construction 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
Real estate -
residential 6,963 44.9 5,820 40.0 0 0.0 0 0.0 0 0.0
Lease financing 151 1.0 250 1.7 0 0.0 0 0.0 0 0.0
Unallocated 564 3.6 1,326 9.1 13,031 100.0% 12,309 100.0% 10,419 100.0%
Total allowance
for loan losses $15,504 100.0% $ 14,554 100.0% $ 13,031 100.0% $ 12,309 100.0% $ 10,419 100.0%
* Includes loans held for sale
Table 5
NONPERFORMING ASSETS
(dollars in thousands)
At December 31, 1996 1995 1994 1993 1992
Real estate owned $ 377 $1,397 $ 300 $ 172 $2,360
Non-accruing $2,601 $1,741 $ 723 $ 886 $4,207
Restructured $5,147 $4,041 $2,143 $2,283 $3,428
Table 6
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
(dollars in thousands)
1996 1995
For the Three Months
Ended Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
Interest income $16,437 $14,750 $14,118 $14,288 $14,976 $13,021 $12,733 $11,768
Interest expense 10,007 8,645 8,193 8,454 8,936 7,716 7,411 6,690
Net interest income 6,430 6,105 5,925 5,834 6,040 5,305 5,322 5,078
Provision for loan
losses 1,000 300 330 320 996 320 370 219
Income after provision
for loan losses 5,430 5,805 5,595 5,514 5,044 4,985 4,952 4,859
Non-interest income 2,298 2,076 6,745 1,540 6,013 1,865 2,131 2,604
Net revenue 7,728 7,881 12,340 7,054 11,057 6,850 7,083 7,463
Non-interest
expenses 6,479 6,189 5,275 5,064 7,856 4,899 4,952 4,885
Income before
income taxes 1,249 1,692 7,065 1,990 3,201 1,951 2,131 2,578
Provision for
income taxes 189 157 222 229 154 247 252 125
Net income $ 1,060 $ 1,535 $ 6,843 $ 1,761 $ 3,047 $ 1,704 $ 1,879 $ 2,453
Sources of Funds
Capital Markets Access
NCB maintains line of credit facilities provided by a consortium of banks.
At year end, total borrowing capacity under these facilities was $251.0 million,
and the outstanding balance at December 31, 1996 was $224.5 million compared
with an outstanding balance of $132.5 million at December 31, 1995. In
January, 1997, additional short-term borrowing capacity of $40 million was
secured from partaicipant of the bank consortium. Usage, as measured by
average outstanding balances during the year, increased from $77.7 million
in 1995 to $120.6 million in 1996 due to growth in commercial loan volume
and additional activity to fund warehoused real estate loans.
In 1996, steps were taken to move into the medium term note market. In
January, 1997, NCB
received approval to issue up to $100 million under the medium term note
program. In February, 1997, NCB issued $25 million under this program.
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 1996, NCB sold $173.2 million
compared to $267.8 million of cooperative real estate, commercial and share
loans sold in the prior year.
In 1997, NCB expects to sell $234 million of cooperative real estate,
commercial and share loans. Actual sales through February, 1997 were $91.9
million.
Deposits
At NCB's wholly-owned subsidiary, NCB Savings Bank, FSB, deposits increased
to $88.6 million in 1996 from $78.1 million a year earlier. The growth was
generated by an aggressive campaign in the local community and with NCB's
members. The weighted average rates on deposits at December 31, 1996 and
1995 were 4.8% and 5.2%, respectively. Although NCB relies heavily on funds
raised through the capital markets, deposits are a major portion of interest
bearing liabilities -- 12.7% in 1996 compared with 14.2% in 1995. Management
anticipates that deposits will represent an increasing portion of its capital
structure.
Uses of funds
Loans and leases
Loans and leases outstanding increased 25.6% from $597.2 million at year-
end 1995 to $750.1 million in 1996.
NCB's commercial loan portfolio expanded with new business opportunities.
The commercial loan and lease portfolio increased 5.0% from $340.3 million a
year earlier to $357.3 million in 1996. The commercial loan portfolio
reflects a decrease in the food processing and distribution areas as a result
of NCB's retail loan securitization program. Decreases in the areas of
financial services and other, which includes native Alaskan and hardware
activities, were due to scheduled loan repayments and maturities.
NCB's real estate portfolio increased to $392.8 million at the end of 1996
from $256.9 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 1997, NCB expects continued strength in its origination and secondary
marketing activities. Net loan volume is expected to decrease approximately $18
million based on new loan originations (net of scheduled amortization) of $216
million and sales of $234 million.
Cash, Cash Equivalents, and Investment Securities
Cash, cash equivalents, and investments decreased 5.0% or $3.1 million
to $58.8 million in 1996. Cash, cash equivalents, and investment securities,
represent 7.3% of interest earning assets in 1996 compared with 9.4% in 1995.
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, 1996, NCB held $17.2 million in cash and cash
equivalents compared with $21.3 million in cash and cash equivalents at year end
1995. These funds are normally used to fund business operations.
NCB's $33.3 million investment portfolio is a second source of asset
liquidity. The portfolio consists of high-grade corporate and government
obligations. The weighted average period to maturity increased to 5.0 years at
year end 1996 from 3.9 years at year-end 1995.
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 $251 million of revolving lines of credit, $120 million of
which is committed until May 28, 1999 and $80 million committed until May 28,
1997. Average outstanding balances were $120.6 million in 1996 compared with
$77.7 million in 1995.
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 fund co-
originations of blanket mortgages with NCB and to originate single family share
loans.
See Table 7
Interest Sensitivity
Interest Rate Risk (IRR) is the sensitivity of earnings and capital to
changes in market rates of interest. It arises through differences in the
repricing characteristics of both assets and liabilities.
To measure its risk, NCB utilizes a computer simulation model to forecast
its earnings and the market value of its portfolio equity under different rate
scenarios. The model incorporates the dynamics of balance sheet and interest
rate changes as well as the utilization of financial derivativies to hedge risk.
NCB's Risk Management Committee reviews the simulation output and makes
decisions accordingly.
Table 8 represents NCB's static interest-rate gap position at December 31,
1996. The gap, adjusted for off-balance sheet activity, represents a one day
snapshot of the amount of assets and liabilities contractually scheduled to
reprice or mature within a designated time horizon. Interest rate sensitive
assets exceeding interest rate sensitive liabilities, within a designated time
frame, is referred to as a positive gap. Conversely, interest rate sensitive
liabilities exceeding interest rate sensitive assets, in a designated time
frame, is referred to as a negative gap. A static gap analysis, considered
alone, is not a complete indication of IRR.
NCB is exposed to a tightening of the Prime/LIBOR (London Interbank Offered
Rate) spread relationship because much of its floating-rate assets adjusts to
Prime, while much of its floating rate obligations adjusts to one, three and
six month LIBOR.
It is clear from Table 8 that NCB had a negative gap (as a percentage of
total assets) of 4.20% and 1.10% at the one year and 180 day time horizons,
respectively. At December 31, 1996, NCB's static gap position was in
compliance with existing Board policies.
See Table 8
Table 7
MATURITY SCHEDULE OF LOANS
(dollar in thousands)
One Year
One Year Through Over
At December 31, 1996 or Less Five Years Five Years Total
Commercial $13,120 $105,955 $223,136 $342,211
Real estate-construction 154 0 0 154
Real estate-residential 34,792 50,979 298,110 383,881
Real estate- commercial 0 6,443 2,299 8,742
Leases 90 9,100 5,916 15,106
Total loans and leases $48,156 $172,477 $529,461 $750,094
Fixed interest rate loans $ 74,300 $329,943
Variable interest rate loans 98,177 199,518
$172,477 $529,461
Table 8
Interest Rate Sensitivity
(dollars in thousands)
Over 12
At December 31, 1996 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 $ 25,499 $ 0 $ 0 $ 0 $ 25,499 $ 0 $ 25,499
Investment securities 26,435 124 2,241 982 29,782 3,502 33,284
Loans and leases 219,708 16,950 32,051 69,323 338,032 412,062 750,094
Total interest earning
assets $271,642 $ 17,074 $ 34,292 $ 70,305 $393,313 $415,564 $808,877
Interest bearing liabilities
Deposits $ 5,273 $ 13,484 $ 14,654 $ 39,408 $ 72,819 $ 15,801 $ 88,620
Short-term borrowings 224,500 0 0 0 224,500 0 224,500
Long-term debt 0 0 19,000 28,000 47,000 155,137 202,137
Subordinated debt* 53,553 0 0 0 53,553 128,989 182,542
Total interest bearing
liabilities 283,326 13,484 33,654 67,408 397,872 299,927 697,799
Other
Other non-interest
bearing, net 0 0 0 0 0 111,078 111,078
Effect of interest rate
swaps & financial
futures 7,000 95,451 (101,000) 28,000 29,451 (29,451) 0 0
Total $290,326 $ 108,935 $ (67,346) $ 95,408 $427,323 $381,554 $808,877
Repricing difference $(18,684) $ (91,861) $ 101,638 $(25,103) $(34,010) $ 34,010
Cumulative gap $(18,684) $(110,545) $ (8,907) $(34,010)
Cumulative gap as %
total assets -2.31% -13.67% -1.10% -4.20%
* Net of premiums/discounts.
Capital
NCB's strong capital position supports growth, ensures continuing access
to financial markets, and allows for greater flexibility during difficult
economic periods.
Historically, NCB has maintained a strong capital structure. NCB's equity
to average assets was 16.6% in 1996 compared with 18.9% and 21.5% in 1995 and
1994, respectively. When including NCB's subordinated debt, NCB's average total
capital to average assets was 41.5% in 1996 compared with 48.5% and 56.4%
during 1995 and 1994, respectively. The Bank Act limits NCB's outstanding
debt to ten times its capital and surplus (including the subordinated debt).
As of December 31, 1996, NCB Savings Bank, FSB, had a risk based capital
ratio of 17.4%, well in excess of regulatory requirements.
Patronage policy
Each year, NCB declares patronage refunds approximately equal to its
taxable net income thereby reducing its Federal income tax to insignificant
amounts. In June 1996, NCB distributed $11.3 million to its active member-
borrowers. Of this total, approximately $4.4 million was distributed in cash.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The registrant's financial statements and notes thereto are set forth
beginning at page 25 below. The registrant is not subject to any of the
requirements for supplementary financial information contained in Item 302 of
Regulation S-K.
Independent Auditors' Report
To the Board of Directors and
Members of National Cooperative Bank
We have audited the accompanying consolidated balance sheets of National
Cooperative Bank and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in members' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards.Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of National Cooperative
Bank and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Washington, D.C.
January 30, 1997
(February 28, 1997 as to Note 24)
NATIONAL COOPERATIVE BANK
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
Assets
Cash and cash equivalents $ 17,150,534 $ 21,289,376
Restricted cash 8,348,703 8,348,703
Investment securities
Available for sale (amortized cost of
$30,401,874 and $28,841,521 in 1996
and 1995) 30,337,100 29,095,559
Held-to-maturity (fair value of
$2,294,294 and $1,748,578 in 1996
and 1995) 2,946,425 3,118,956
Loans and lease financing 565,824,579 558,582,284
Loans held for sale 184,269,872 38,608,195
Less: Allowance for loan losses (15,504,510) (14,554,240)
734,589,941 582,636,239
Excess servicing 30,758,057 25,670,305
Premises and equipment, net 2,257,362 1,896,779
Other assets 12,947,458 12,475,747
Total assets $839,335,580 $684,531,664
Liabilities and Members' Equity
Liabilities
Deposits $ 88,620,002 $ 78,100,173
Patronage dividends payable in cash 4,721,600 5,088,851
Other liabilities 11,332,033 12,687,840
Borrowings
Short-term 224,500,000 132,499,998
Long-term 202,137,077 154,688,045
426,637,077 287,188,043
Subordinated debt 182,853,313 183,013,689
Total borrowings 609,490,390 470,201,732
Total liabilities 714,164,025 566,078,596
Members' equity
Common stock
Class B 78,600,416 72,349,754
Class C 21,751,584 21,731,166
Class D 300 300
Retained earnings
Allocated 5,770,844 6,219,707
Unallocated 19,113,185 17,898,103
Unrealized (loss) gain on investment
securities available for sale (64,774) 254,038
Total members' equity 125,171,555 118,453,068
Total liabilities and
members' equity $839,335,580 $684,531,664
See notes to consolidated financial statements.
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1996 1995 1994
Interest income
Loans and lease financing $55,671,365 $48,563,512 $38,398,026
Investment securities 3,921,634 3,934,756 2,725,183
Total interest income 59,592,999 52,498,268 41,123,209
Interest expense
Deposits 4,109,098 3,457,902 2,079,895
Short-term borrowings 7,851,964 6,196,456 2,367,375
Long-term debt, other
borrowings and
subordinated debt 23,338,194 21,098,803 16,161,773
Total interest expense 35,299,256 30,753,161 20,609,043
Net interest income 24,293,743 21,745,107 20,514,166
Provision for loan losses 1,950,000 1,904,500 878,401
Net interest income after
provision for loan losses 22,343,743 19,840,607 19,635,765
Non-interest income
Gain on sale of loans 4,578,209 6,009,720 2,916,326
Loan and deposit
servicing fees 2,125,131 1,701,682 1,501,847
Other 5,955,610 4,901,623 4,007,233
Total non-interest income 12,658,950 12,613,025 8,425,406
Non-interest expenses
Compensation and employee
benefits 10,828,385 10,406,220 9,504,571
Contractual services 4,182,131 5,808,285 3,352,459
Occupancy and equipment 4,140,589 3,060,293 2,839,090
Contribution to NCB
Development corporation 720,000 500,000 500,000
Other 3,135,476 2,817,915 2,403,659
Total non-interest expenses 23,006,581 22,592,713 18,599,779
Income before income taxes 11,996,112 9,860,919 9,461,392
Provision for income taxes 796,914 777,683 584,530
Net income $11,199,198 $ 9,083,236 $ 8,876,862
Distribution of net income
Patronage dividends $10,492,444 $11,308,558 $ 8,814,942
Retained earnings 706,540 (2,225,322) 61,920
$11,199,198 $ 9,083,236 $ 8,876,862
See notes to consolidated financial statements.
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
Retained Retained Total
Common Earnings Earnings Unrealized Members'
Stock Allocated Unallocated Gain (Loss) Equity
Balance, January 1,
1994 $ 80,245,148 $12,844,968 $16,949,037 $ - $110,039,153
Net income - - 8,876,862 - 8,876,862
Proceeds from issuance
of common stock 10,200 - - - 10,200
Cancellation and
redemption of stock (330,841) - - - (330,841)
Conversion of allocated
surplus to common stock 12,827,599 (12,844,968) 17,369 - -
1993 patronage
dividends (84,110) - 84,110 - -
1994 patronage dividend
Distributed in cash - - (3,966,724) - (3,966,724)
Retained in form of equity - 4,848,218 (4,848,218) - -
Unrealized loss on
investment securities
available for sale - - - (1,421,581) (1,421,581)
Balance,
December 31, 1994 92,667,996 4,848,218 17,112,436 (1,421,581) 113,207,069
Net income - - 9,083,236 - 9,083,236
Cancellation and
redemption of stock (3,544,579) - 3,234,213 - (310,366)
1994 patronage dividend
Distributed in
common stock and cash 4,957,803 (4,848,218) (198,684) - (89,099)
Other dividend paid - - (24,540) - (24,540)
1995 patronage dividends
To be distributed in
cash - - (5,088,851) - (5,088,851)
Retained in form of
equity - 6,219,707 (6,219,707) - -
Unrealized gain on
investment securities
available for sale - - - 1,675,619 1,675,619
Balance,
December 31, 1995 94,081,220 6,219,707 17,898,103 254,038 118,453,068
Net income - - 11,199,198 - 11,199,198
Proceeds from issuance
of common stock 1,000 - - 1,000
Cancellation and
redemption of stock (658,484) _ 590,484 - (68,000)
1995 patronage dividend
Distributed in
common stock and cash 6,928,564 (6,219,707) 101,189 - 810,046
Other dividend paid - - (183,345) - (183,345)
1996 patronage dividends
To be distributed
in cash - - (4,721,600) - (4,721,600)
Retained in form of
equity - 5,770,844 (5,770,844) - -
Unrealized loss on
investment securities
available for sale - - - (318,812) (318,812)
Balance,
December 31, 1996 $100,352,300 $ 5,770,844 $19,113,185 $ (64,774) $125,171,555
See notes to consolidated financial statements.
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996 1995 1994
Cash flows from operating activities
Net income $ 11,199,198 $ 9,083,235 $8,876,862
Adjustments to reconcile net income
to net cash
Provisions for loan losses 1,950,000 1,904,500 878,401
Depreciation and amortization 5,148,255 4,950,808 4,335,318
Gain on sale of assets (4,578,209) (6,009,720) (2,901,782)
Loans originated for sale (243,114,015) (251,781,768) (127,122,958)
Loans sold 135,955,259 250,676,820 120,882,002
Increase in other assets (5,443,982) (1,689,307) (1,875,088)
(Decrease) increase in other
liabilities (2,186,480) 1,782,807 2,182,560
Transfer from restricted
cash account - - 12,816
Other - 798,211 337,495
Net cash (used in) provided by
operating activities (101,069,974) 9,715,586 5,605,626
Cash flows from investing activities
Purchases of investments
Available for sale (9,435,643) (722,785) (18,763,180)
Held to maturity - (9,155,293) (5,434,000)
Proceeds from maturities of investments
Available for sale 8,006,556 4,503,907 3,726,424
Held to maturity 198,000 3,306,785 5,263,097
Proceeds from sales of investments
Available for sale - 4,385,281 14,112,463
Net increases in loans and lease
financing (84,941,273) (158,775,397) (154,118,616)
Proceeds from sale of portfolio loans 38,679,408 51,405,022 117,719,857
Purchases of premises and equipment (1,235,856) (613,576) (598,877)
Net cash used in investing activities (48,728,808) (105,666,056) (38,092,832)
Cash flows from financing activities
Net increase (decrease) in deposits 10,519,829 19,181,624 (8,012,885)
Net increase in short-term borrowings 92,000,000 41,468,884 59,489,537
Proceeds from issuance of long-
term debt 47,500,000 74,500,000 30,000,000
Repayment on long-term debt - (25,168,822) (54,998,022)
Repayment on other borrowings - (922,176) (1,032,228)
Redemption of common stock (68,000) (310,366) (330,841)
Patronage dividends paid (4,341,889) (4,056,132) (3,147,860)
Other - - 127,544
Net cash provided by financing
activities 145,659,940 104,693,012 22,095,245
(Decrease) increase in cash and
cash equivalents (4,138,842) 8,742,542 (10,391,961)
Cash and cash equivalents,
beginning of year 21,289,376 12,546,834 22,938,795
Cash and cash equivalents,
end of year $ 17,150,534 $ 21,289,376 $ 12,546,834
See notes to consolidated financial statements.
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of noncash investing and financing activities:
1996 1995 1994
Unrealized loss on investment
available for sale $ 318,812 $ 1,675,619 $ 1,421,581
Common stock cancelled against
allowance for loan losses 21,390 288,585 -
Contributions of excess
concentration to NCBRFC - 2,697,010 -
Interest paid 34,582,531 30,177,706 19,245,501
Income taxes paid 670,122 709,879 762,898
See notes to consolidated 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 Mortgage Corporation, a wholly-owned
subsidiary, originates, sells and services real estate and commercial loans for
cooperatives. NCB Financial Corporation, a wholly-owned subsidiary, is the
holding company of NCB Savings Bank, FSB (NCBSB), a federally-chartered thrift
institution. Cooperative Funding Corporation, a wholly-owned subsidiary of NCB,
is a registered broker-dealer and provides corporate financial services. NCB
Investment Advisers, Inc., a wholly-owned subsidiary of NCB, provides investment
advisory services to cooperatives. NCB I, Inc., 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 (RFC), a wholly-owned subsidiary incorporated on December
24, 1994, purchases and sells commercial loans which are then securitized
into commercial paper.
The Act also provided for the formation of NCB Development Corporation
(NCBDC), an affiliate, which is a non-profit organization without capital stock
organized under the laws of the District of Columbia. NCBDC provides loans and
technical support to cooperative enterprises. NCBDC's bylaws provide for six
directors from the NCB board to serve on the NCBDC board, along with three
outside directors elected by NCB directors. Consistent with the Act, NCB makes
deductible, voluntary contributions to NCBDC.
Borrowers from NCB are required to own Class B Stock in NCB. Stock owned
by a borrower may be cancelled by NCB, at NCB's sole discretion, in case of
certain events, including default.
In 1995, it was determined that 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.
Principles of Consolidation
The consolidated financial statements include the accounts of NCB and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated. The financial statements of NCB do not include the net assets or
results of operations of NCBDC.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" was issued in May 1993 by
the Financial Accounting Standards Board. At December 31, 1993, NCB adopted the
requirements of SFAS 115 to classify and account for debt and equity securities
as follows:
Available for sale- Securities that will be held for indefinite periods
of time, including those that may be sold in response to changes in market
interest rates and related changes in the security's prepayment risk, needs for
liquidity and changes in the availability of and the yield of alternative
investments are classified as available-for-sale. These assets are carried at
fair value. Unrealized gains and losses are determined on an aggregate basis,
excluded from earnings and reported as a separate component of members' equity.
Gains and losses on the sale of investment securities are determined using the
adjusted cost of the specific security sold and are included in earnings.
Held-to-maturity- Securities that management has the positive intent and
ability to hold until maturity are classified as held-to-maturity. They are
reported at amortized cost.
Prior to the adoption of SFAS No. 115, NCB carried securities with the
intention to be held to maturity at amortized cost, securities intended for sale
were carried at the lower of cost or fair value and securities held for trading
were carried at fair value. Changes in the carrying value of securities held for
sale and trading securities were included in income as security gains or losses.
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. Gains or losses are
recognized at the time of disposition of the assets or liabilities being hedged,
or are amortized over the life of the hedged asset or liability as an adjustment
to interest income or interest expense.
Interest rate swap agreements are used to shorten the functional repricing
period of the 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 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 1998. 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 anticipated loan and lease financing losses in
the existing portfolio. A provision for loan losses is added to the allowance
and charged to expense. Loan and lease charge-offs, net of recoveries, are
deducted from the allowance. When a portion of a loan is deemed uncollectible,
a full or partial charge-off against the allowance for loan losses is made.
The factors utilized by management in determining the adequacy of the
allowance include, but are not limited to, the following: the present and
prospective financial condition of the borrowers and the values of any
underlying collateral; evaluation of the loan and lease financing portfolio
in conjunction with historical loss experience; portfolio composition; and
current and projected economic conditions. The allowance for loan losses is
maintained at a level believed by management to be adequate to absorb
potential losses inherent in the loan portfolio. Changes in economic
conditions and economic prospects of borrowers can occur quickly;
consequently losses that NCB ultimately realizes could differ from the
estimates made by management.
The major risk classifications that management uses to assess impairment
are nonaccrual, restructured and loans otherwise rated doubtful because
collection is in question. When a loan is impaired, NCB measures impairment
based on the present value of the expected future cash flows discounted at the
loan's effective interest rate or the fair value of the collateral, less
estimated selling costs, if the loan is collateral-dependent and foreclosure
is probable. NCB recognizes an impairment by creating a valuation allowance.
A loan is impaired when, based on current information, it is probable that a
creditor will be unable to collect all amounts due under the contractual
terms of the loan.
Loan-Origination Fees, Commitment Fees, and Related Costs
Loan fees received are accounted for in accordance with Statement of
Financial Accounting Standards 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.
Loan-Servicing Rights
NCB adopted Statement of Financial Accounting Standards (SFAS) No. 122,
"Accounting for Mortgage Servicing Rights," as of January 1, 1996. SFAS 122
amended SFAS 65 "Accounting for Certain Mortgage Banking Activities" to
eliminate the accounting distinction between rights to service mortgage loans
for others that are acquired through loan origination activities and those
acquired through purchase transactions. The statement requires servicing to be
capitalized for loans originated based on an allocation of the loan cost
between the servicing rights and the loan. The adoption of SFAS 122 did not
have a material impact on NCB's financial condition and results of
operations. Prior to the adoption of this statement, capitalizing the
servicing rights associated with originated loans was not permitted.
The cost of loan-servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. When participating interests
in loans sold have an average contractual interest rate, adjusted for normal
servicing fees, that differs from the agreed yield to the purchaser, gains or
losses are recognized equal to the present value of such differential over the
estimated remaining life of such loans. The resulting "excess servicing" is
amortized over the estimated life using a method approximating the level-yield
method.
Substantially all excess servicing pertains 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 excess
servicing, NCB discounts the cash flows through the lockout period. Cash flows
beyond the lockout period are discounted only to the extent that NCB is entitled
to receive the prepayment or yield maintenance penalty.
The cost of loan-servicing rights, the excess servicing, and the
amortization thereon are periodically evaluated in relation to estimated future
net servicing revenues. NCB evaluates the carrying value of the servicing
portfolio by estimating the future net servicing income of the portfolio based
on management's best estimate of remaining loan lives. Experience could differ
from the estimates used by management. As a result actual amounts NCB ultimately
realizes could differ from the esimates made by management.
Receivables Sold with Recourse
NCB is obligated under various recourse provisions related to the sales of
residential mortgages. Management has accrued a liability for estimated probable
losses to these recourse provisions. Management believes the recourse provisions
do not subject NCB to any material risk of loss other than that provided for in
other accrued expenses.
Premises and Equipment
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.
Other Assets
Foreclosed property pending disposition is carried at fair value less
estimated costs to sell. Goodwill relating to the acquisition of NCBSB by NCB
Financial Corporation is being amortized over the estimated remaining lives of
the long-term interest-bearing assets acquired.
Income Taxes
The National Consumer Cooperative Bank Act Amendments of 1981 (P.L. 97-35)
provide that, effective January 1, 1982, NCB shall be treated as a cooperative
and subject to the provisions of Subchapter T of the Internal Revenue Code.
Under Subchapter T, NCB issues its member-borrowers patronage refunds, which
are tax deductible to NCB thereby reducing its taxable income. In 1995, it
was 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 adopted Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" as of January 1, 1992. The asset and liability
approach of SFAS 109 requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amounts and the tax bases of assets and liabilities that have been
recognized in NCB's financial statements or tax returns.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1996
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:
1996 1995
Cash in bank $ 5,186,085 $ 6,121,646
Federal funds 4,377,837 7,170,000
Overnight investments 7,586,612 7,997,730
$17,150,534 $21,289,376
3. Investment Securities
The composition of investment securities available for sale at December 31,
is as follows:
1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
US Treasury and agency
obligations $17,119,960 $ 93,710 $ 86,408 $17,127,262
Corporate bonds 10,975,813 68,635 23,667 11,020,781
Mutual funds 1,296,968 - 4,985 1,291,983
Money market 1,009,133 - 112,059 897,074
$30,401,874 $162,345 $ 227,119 $30,337,100
1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
US Treasury and agency
obligations $15,465,491 $195,375 $ 46,896 $15,613,970
Corporate bonds 11,330,949 220,742 9,526 11,542,165
Mutual funds 1,084,707 - 3,013 1,081,694
Money market 960,374 - 102,644 857,730
$28,841,521 $416,117 $ 162,079 $29,095,559
1994
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
US Treasury and agency
obligations $15,349,852 $ 35 $ 819,592 $14,530,795
Corporate bonds 10,367,358 5,268 407,656 9,964,970
Mutual funds 1,566,704 - 56,785 1,509,919
Money market 901,254 - 143,351 757,903
$28,185,168 $5,803 $1,427,384 $26,763,587
The maturities of investment securities available for sale at December 31,
1996 are as follows:
Weighted
Amortized Average
Cost Yield Fair Value
Within 1 year $ 4,986,041 6.59% $ 4,870,655
After 1 year through 5 years 17,473,464 6.54 17,557,076
After 5 years through 10 years 4,466,682 5.99 4,457,783
After 10 years 3,475,687 6.42 3,451,586
$30,401,874 6.42% $30,337,100
The composition of investment securities held-to-maturity at December 31,
is as follow:
1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Certificates of deposit $ 200,000 $ - $ - $ 200,000
Mortgage-backed
securities 2,746,425 - 652,131 2,094,294
$2,946,425 $ - $652,131 $2,294,294
1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Mortgage-backed
securities $2,720,956 $ - $1,370,378 $1,350,578
Certificates of
deposit 398,000 - - 398,000
$3,118,956 $ - $1,370,378 $1,748,578
1994
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
US Treasury and agency
obligations $2,466,000 $26,694 $ - $2,492,694
Mortgage-backed
securities 2,626,909 - 1,342,307 1,284,602
Certificates of
deposits 1,091,000 - - 1.091,000
$6,183,909 $26,694 $1,342,307 $4,868,296
The maturities of securities held-to-maturity at December 31, 1996 are as
follows:
Weighted
Amortized Average Fair
Cost Yield Value
Within 1 year $ 200,000 5.5% $ 200,000
After ten years 2,746,425 9.4 2,094,294
$2,946,425 9.1% $2,294,294
In 1996, NCB had no sales of securities available for sale. In 1995 and
1994, securities available for sale totalling $4,459,219, and $14,100,000 were
sold resulting in a loss of $73,938 and a gain of $12,463, respectively. There
were no sales of securities classified as held-to-maturity during 1996, 1995,or
1994. NCB held callable investment securities with amortized costs of $6,824,483
and $4,998,919 at December 31, 1996 and 1995, respectively. The fair values of
the callable securities are $6,950,818 and $5,116,900 in the same respective
periods.
4. Loan Servicing and Excess 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, 1996 and 1995 are $1,194,113,000 and $1,110,991,000 respectively.
NCB has excess servicing substantially pertaining to blanket loans to
cooperative housing corporations totalling $30,758,057 and $25,670,305 at
December 31, 1996 and 1995, respectively, with fair values of $30,357,072 and
$27,749,372 in the same respective periods.
5. Loans and Lease Financing
Loans and leases outstanding, including loans held for sale, by category
at December 31 are as follows:
1996 1995
Commercial loans
Portfolio $337,717,275 $327,214,991
Loans held for sale 4,493,469 -
Real estate loans
Construction 154,400 428,201
Residential 204,104,191 208,48,534
Loans held for sale 179,776,403 38,608,195
Commercial 8,742,343 9,361,090
Lease financing 15,106,370 13,090,468
$750,094,451 $597,190,479
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
1996 1995 1996 1995
By Region
Northeast 19.77% 25.3% 70.0% 62.8%
South Atlantic 6.7 17.2 7.9 8.5
Central 29.3 26.7 14.1 22.5
West 44.3 30.8 8.0 6.2
100.0% 100.0% 100.0% 100.0%
Percentage of Total
Loan Portfolio
1996 1995
By Borrower Type
Real estate
Construction .1% .1%
Residential 51.2 41.4
Commercial 1.2 1.6
Commercial
Food processing and distribution 8.9 13.1
Financial services 5.5 10.2
Medical service and supplies 4.7 4.2
Other 26.4 27.1
Lease Financing 2.0 2.2
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 located
within New York City due to that city's extensive cooperative market. At
December 31, 1996, $233,818,000 of real estate loans are located in New York.
The collateral for almost all of the real estate loans consist of first
mortgage liens on the land and improvements of cooperatively owned,
multi-family residential properties and property leases. The real estate
portfolio also includes loans secured by second mortgage liens and, in
several rare circumstances, unsecured loans to residential cooperative
corporations. The loans are repaid from operations of the real estate
cooperative. NCB's exposure to credit loss in the event of nonperformance by
other parties to the loans is the carrying amounts of the loans.
NCB's commercial portfolio has a concentration in the food processing and
distribution industry. The loan types include lines of credit, revolving
credits, and term loans. These loans are typically collateralized with general
business assets (e.g., inventory, receivables, fixed assets, and leasehold
interests). The loans are expected to be repaid from cash flows generated by
the borrower's operating activities. NCB's exposure to credit loss in the
event of nonperformance by the other parties to the loan is the carrying
amounts of the loans.
The carrying amounts and respective estimated fair values of loans and
leases outstanding at December 31 are as follows (amounts in thousands):
Carrying Amount Estimated Fair Value
1996 1995 1996 1995
Commercial
Fixed rate loans $162,220 $156,434 $165,438 $161,309
Adjustable rate loans 179,990 170,781 180,732 175,960
Real Estate
Loans held for sale 179,776 38,608 181,243 40,317
Portfolio-fixed rate 59,188 60,243 60,405 62,049
Portfolio-adjustable 153,813 158,035 152,913 156,336
Lease financing 15,106 13,090 15,570 13,076
$750,094 $597,190 $756,301 $609,047
6. Receivables Sold with Recourse
At December 31, 1996 and 1995, restricted cash of $8,348,703 is held by a
trustee for the benefit of certificate holders in the event of a loss on certain
loans sold with balances totalling $37,300,000 and $92,623,000 in 1993 and 1992,
respectively. At December 31, 1996 and 1995, the outstanding balances of the
1993 and 1992 recourse loan sales totalled $108,755,626 and $122,264,581.
These loans are primarily concentrated in New York. NCB's exposure to credit
loss in the event of nonperformance by the other parties to the loan is the
carrying amounts of the loans up to $8,348,703. To date NCB has not incurred
any losses on these loan sales.
In an unrelated 1993 transaction, NCB sold loans totalling $25,924,380 of
which any losses on the subordinate tranche are repaid from a security held by
NCB totalling $2,746,425 and $2,720,956 at December 31, 1996 and 1995,
respectively. At December 31, 1996 and 1995, the outstanding balances of the
1993 recourse loan sale were $19,013,777 and $21,382,078. These loans are
primarily concentrated in New York. NCB's exposure to credit loss in the event
of nonperformance by the other parties to the loan is the carrying amounts of
the loans up to $2,746,425. NCB is prohibited from disposing of this security
until all senior holders of the security have been repaid. To date NCB has not
incurred any losses on these loan sales.
7. Impaired Assets
Loans that became impaired after January 1, 1994 totalled $3,878,357 and
$2,450,255 at December 31, 1996 and 1995, respectively, and averaged $3,443,243
and $1,339,000 during the same respective periods. The nonaccrual loans totalled
$2,829,221 and $1,740,794, at December 31, 1996 and 1995 respectively. The
restructured loans totalled $1,049,136 and $709,461, at December 31, 1996 and
1995, respectively. Specific allowances of $1,535,000 and $248,000 have been set
aside for these loans in 1996 and 1995, respectively, as management's best
estimate of their fair value is less than the recorded investment in the loans.
During 1996 and 1995, the interest collected on the nonaccrual loans was applied
to reduce the outstanding principal. Interest earned on the restructured loans
totalled $109,000 and $54,000 during 1996 and 1995, respectively.
At December 31, 1996, there are no commitments to lend additional funds to
borrowers whose loans are non-performing.
At December 31, 1996 and 1995, NCB had real estate owned of $376,708 and
$1,396,666, respectively, which are classified as other assets.
8. Allowance for Loan Losses
The following is a summary of the activity in the allowance for loan
losses:
1996 1995 1994
Balance at beginning of year $14,554,240 $13,031,499 $12,309,359
Provision for loan losses 1,950,000 1,904,500 878,401
Charge-offs (1,137,229) (699,014) (319,592)
Recoveries of loans previously
charged off 137,499 317,255 163,331
Balance at end of year $15,504,510 $14,554,240 $13,031,499
The allowance for loan losses is 2.1%, and 2.5%, and 2.6% of loans and
lease financings at December 31, 1996, 1995, and 1994, 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, 1996, loans to affiliated cooperatives,
directors, officers, and their family members have the following outstanding
balances:
January 1, December 31,
1996 Additions Deductions 1996
Loans to affiliated
cooperatives $39,361,411 $31,295,737 $10,104,387 $60,552,761
Loans to directors,
officers, and
family members 1,310,325 199,572 586,677 923,220
$40,671,736 $31,495,309 $10,691,064 $61,475,981
Percent of loans
outstanding 6.8% 8.3%
During 1996, 1995, and 1994, NCB recorded interest income of $3,216,776,
$2,957,590, and $2,675,104, respectively, on loans to related parties.
Included in the analysis of loans outstanding to affiliated cooperatives
as of December 31, 1996, is a $50 million loan to the Co-operative Central
Bank. This loan is serviced by NCB Mortgage Corporation and is 80%
participated to outside banks without recourse to NCB. NCB has adequately
reserved for the $10 million exposure associated with the 20% share it
retained. At December 31, 1996 $5 million of the loan is outstanding. The
loan is secured by US Government guaranteed obligations equal to 110% of
the outstanding balance. The Co-operative Central Bank is an organization
with which an NCB director serves as the chief executive officer.
Certain NCB affiliates, and certain directors and officers of NCB and
NCBSB, have deposits with NCBSB. Such deposits, aggregated $1,092,299 and
$3,774,723 as of December 31, 1996 and 1995, respectively.
During 1996 and 1995, NCB extended a $10 million letter of credit to
NCBRFC. The letter of credit provides a credit enhancement in the event of loss
on loans sold by NCBRFC and securitized by a third party. NCB has risk of loss
equal to the amount of funds drawn on the letter of credit. At December 31, 1996
and 1995, no amounts were drawn on the letter of credit.
10. Premises and Equipment
Premises and equipment as of December 31 consist of the following:
1996 1995
Furniture and equipment $3,366,620 $2,617,598
Leasehold improvements 1,128,359 1,550,812
Other 2,196,400 1,493,722
6,691,379 5,662,132
Less: Accumulated depreciation
and amortization (4,434,017) (3,765,353)
$2,257,362 $1,896,779
11. Leases
NCB leases its headquarters in Washington, D.C. through April 1, 2002. NCB
also leases premises for its regional offices with expiration dates between
January 31, 1995 to January 6, 1999. 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, 1996 are as follows:
1997 $1,587,975
1998 1,531,223
1999 1,366,016
2000 1,268,352
2001 1,268,352
2002 317,088
$7,339,006
Rental expense on premises and office equipment in 1996, 1995, and 1994
is $1,686,788, $1,744,329, and $1,677,412, 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, 1996 and 1995, the unamortized lease
incentive is $1,092,627 and $1,296,632, respectively.
12. Deposits
Deposits as of December 31 are summarized as follows:
1996 1995
Weighted Weighted
Average Average
Balance Rate Balance Rate
Balances by type
Passbook accounts $ 5,647,482 2.71% $ 7,217,986 3.00%
Money market demand
and NOW accounts 18,260,850 2.24 11,211,690 2.50
Fixed-rate certificates
Less than $100,000 42,122,451 5.93 42,008,489 6.04
$100,000 or greater 22,589,219 5.28 17,662,008 5.60
$88,620,002 4.80% $78,100,173 5.15%
The remaining contractual maturity of certificate accounts at December 31, 1996
is as follows:
Less than $100,000
$100,000 or greater Total
three months or less $ 7,743,384 $ 9,013,199 $16,756,583
three to six months 8,034,369 4,409,139 12,443,508
six to twelve months 15,579,570 6,405,191 21,984,761
twelve months or
longer 10,765,129 2,761,690 13,526,819
$42,122,451 $22,589,219 $64,711,671
The estimated fair value of deposits is $88,211,000, and $77,224,000 at
December 31, 1996 and 1995, respectively.
13. Short-Term Borrowings
Revolving credit facilities
NCB has $251 million of revolving lines of credit, $120 million of which
are committed until May 28, 1999 and $80 million committed until May 28, 1997.
The remaining balance of $51 million is uncommitted at December 31, 1996.
Interest expense from borrowings under the revolving line of credit
facilities is $6,671,725, $5,004,701, and $1,875,744 in 1996, 1995, and 1994,
respectively. The following is a summary of the borrowings under the facilities
for the years ended December 31:
1996 1995
Borrowings outstanding
at December 31 $218,000,000 $128,000,000
Unfunded capacity
at December 31 33,000,000 128,000,000
Average line of credit
borrowings outstanding
during the year 120,576,776 77,704,284
Maximum borrowings
during the year 218,000,000 186,000,000
Weighted average borrowing
rate
During the year 5.9% 6.4%
At December 31 6.6% 6.3%
Borrowing rates under the revolving credit facility are indexed off the
prime rate, federal funds rate, certificate of deposit rates or the London
Interbank Offered Rate (LIBOR) and vary with the amount of borrowings
outstanding. As of December 31, 1996, commitment fees for the line of credit
are .20% on $120 million and .125% on $80 million. Total commitment fees
paid for revolving credit facilities were $340,000 in both 1996 and 1995,
and $458,335 in 1994. All borrowings under the facility which are
outstanding at expiration of the facility are due at that time.
NCB is required under these revolving lines of credit agreements to
maintain $25 million of cash, cash equivalents, and investments and have, among
other items, an effective net worth of not less than $307 million (defined as
total members' equity plus subordinated debt). NCB shall not at any time permit
consolidated senior debt to exceed 650% of consolidated adjusted net worth.
Other Short-term Debt
In an effort to reduce NCB's cost of funds, NCB developed a program under
which it makes short-term borrowings from certain of its customers. At December
31, 1996 and 1995, the short-term borrowings outstanding totalled $6.5 million
and $4.5 million, respectively. During 1996 and 1995, NCB also entered into a
series of reverse repurchase agreements. The average balances of reverse
repurchase agreements outstanding during 1996 and 1995 were $9,288,258 and
$19,471,431 and the maximum borrowings during 1996 and 1995 were $13,523,500
and $13,129,550, respectively. The weighted average rates on the reverse
repurchase agreements during 1996 and 1995 were 5.65% and 6.25%. There were
no reverse repurchase agreements outstanding at December 31, 1996 and 1995.
Estimated fair value
The carrying amounts and respective estimated fair values of short-term
borrowings at December 31, 1996 and 1995 are as follows (amounts in thousands):
Carrying Amount Estimated Fair Value
1996 1995 1996 1995
Line of credit $218,000 $128,000 $218,000 $128,018
Other 6,500 4,500 6,500 4,504
$224,500 $132,500 $224,500 $132,522
14. Long-term Debt
The following is a schedule of outstanding long-term debt at December 31,
1996:
Amount Rate Maturity
$ 47,129,905 8.25% 1997
48,005,903 7.45 1998
20,077,861 5.92 1999
31,923,408 8.51 2000
55,000,000 6.90 2001 and thereafter
$202,137,077
NCB has entered into various agreements for extension of credit with
third parties. NCB had an agreement for a $50 million extension of credit,
which $20 million was unused, with a major insurance company which expired
on December 31, 1996. NCB is executing a new contract with the same third
party. The contract provides NCB with the option to borrow up to $30 million
for as long as seven years. The commitment would extend two years from the
date of the signed contract. The majority of the long-term debt has semi-
annual invest with principal payments due on a 30/360 basis.
NCB is required under these lending agreements to, among other things,
maintain $25 million of cash, cash equivalents and investments and have an
effective net worth of not less than $307 million (defined as total members'
equity plus subordinated debt. NCB shall not at any time permit consolidated
senior debt to exceed 650% of consolidated adjusted net worth.
The carrying amounts of long-term debt at December 31, 1996 and 1995 are
$202,137,007 and $154,688,045, respectively and the fair values of the long-
term debt are $204,824,000 and $158,682,000 in the same respective periods.
NCB has entered into a series of interest rate swap agreements which have
a combined notional amount of $101 million. The effect of the agreements is to
convert $101 million of the long-term debt from a weighted average fixed rate of
7.49% 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 thoughout the year. At
December 31, 1996 the three and six month LIBOR were 5.56% and 5.60% ,
respectively. These agreements expire as follows:
Maturity LIBOR
Amount Date Index
$ 38,000,000 1997 Six month
13,000,000 1998 Six month
20,000,000 1999 Three month
30,000,000 2001 Six month
$101,000,000
15. Subordinated Debt
On December 31, 1981, NCB issued unsecured subordinated debt to
the U.S. Treasury in the amount of $184,270,000 as provided in the Act, as
amended, in full redemption of the Class A Preferred Stock previously owned by
the Government. The notes and all related payments are subordinated to any
secured and unsecured notes and debentures thereafter issued by NCB, but the
notes have first preference with respect to NCB's assets over all classes of
stock issued by NCB. NCB cannot pay any dividend on any class of stock at a
rate greater than the statutory interest rate payable on subordinated debt.
The notes require that proceeds from the sale of Classes B and C Stock be
applied annually toward the repayment of the notes. In 1996 and 1995, no
payments were made. In February 1993 and November 1994, NCB adopted plans to
maintain a schedule to ensure accumulation of the funds needed to repay these
notes which mature on October 31, 2020. This involves the creation of a
reserve fund and the issuance of preferred stock or subordinated debt. Total
contributions to the fund, including interest thereon, would approximate $100
million. The remaining $80 million would be obtained through the issuance of
preferred stock or subordinated debt. NCB had designated investments
totalling $3 million plus accrued interest at December 31, 1996 and 1995.
The Act states that the amount of NCB borrowings which may be outstanding
at any time shall not exceed 10 times the paid-in capital and surplus which, as
defined by the Act, includes the subordinated debt.
The annual interest payments for each tranche are determined in accordance
with the following schedule which also includes the carrying amounts, net of
hedge gains, and respective estimated fair values of the subordinated debt at
December 31, 1996 (in thousands):
Next Carrying Estimated
Index Rate Repricing Date Amount Fair Value
91-day Treasury rate 5.04% January 1, 1997 $ 53,553 $ 53,437
3-year Treasury rate 6.28 October 1, 1999 36,854 37,847
5-year Treasury rate 6.01 October 1, 2000 55,281 56,593
10-year Treasury rate 8.82 October 1, 2000 36,854 40,866
$182,542 $188,743
In addition to the $101 million of interest rate swaps on the long-term
debt, NCB has entered into a series of interest rate swap agreements which
have the effect of converting the subordinated debt from a fixed rate of 7.8%
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,
1996, the one, three and six month LIBOR rates were 5.50%, 5.56% and 5.60%,
respectively. The agreements, which debt expire in the year 2000, are
described below:
Debt LIBOR
Swapped Amount Index
five year $30,000,000 six months
ten year 10,000,000 six months
ten year 10,000,000 three months
ten year 10,000,000 one month
$60,000,000
16. Common Stock and Members' Equity
NCB's common stock consists of Class B Stock owned by its borrowers, Class
C Stock owned by cooperatives eligible to borrow from NCB, and Class D non-
voting Stock owned by others.
1996 1995
Class B Class C Class D Class B Class C Class D
Par value per
share $ 100 $ 100 $ 100 $ 100 $ 100 $ 100
Shares authorized 800,000 300,000 100,000 800,000 300,000 100,000
Shares issued and
outstanding 786,004 217,516 3 723,498 217,312 3
The changes in each class of common stock are described below:
Class B Class C Class D Total
Balance, January 1, 1993 $59,671,095 $20,573,753 $300 $ 80,245,148
Proceeds from issuance
of common stock 10,000 200 - 10,200
Cancellation and
redemption of common
stock (330,841) - - (330,841)
Conversion of allocated
surplus to common stock 8,556,927 4,270,672 - 12,827,599
1994 patronage dividends (84,110) - - (84,110)
Balance, December 31, 1994 67,823,071 24,844,625 300 92,667,996
Cancellation and redemption
of common stock (1,135,617) (2,408,962) - (3,544,579)
1994 patronage dividend
distributed in common
stock 4,746,618 211,185 - 4,957,803
Reclassification of
stock surplus 915,682 (915,682) - -
Balance, December 31,
1995 72,349,754 21,731,166 300 94,081,220
Proceeds from issuance
of common stock - 1,000 - 1,000
Cancellation and
redemption of common
stock (468,024) (190,460) - (658,484)
1995 patronage dividend
distributed in common
stock 6,718,686 209,878 - 6,928,564
Balance,December 31,
1996 $78,600,416 $21,751,584 $ 300 $100,352,300
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 the savings bank 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), the savings bank, 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,
1996. The following table summarizes the NCBSB's capital at December 31, 1996:
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996:
Total capital
(to risk weighted assets) $9,600,000 17.52% $4,384,000 8.0% $5,480,000 10.0%
Tier I capital
(to risk weighted assets) 8,863,000 16.17 1,644,000 3.0 3,288,000 6.0
Tier I capital
(to adjusted assets) 8,863,000 9.04 2,942,000 3.0 4,903,000 5.0
As of December 31, 1995:
Total capital
(to risk weighted assets) 9,037,000 19.91 3,630,000 8.0 4,538,000 10.0
Tier I capital
(to risk weighted assets 8,943,000 19.71 1,361,000 3.0 2,723,000 6.0
Tier I capital
(to adjusted assets) 8,943,000 10.18 2,634,000 3.0 4,391,000 5.0
NCBSB's management believes that, under the current regulations, NCBSB
will continue to meet its minimum capital requirements in the foreseeable
future. However, events beyond the control of NCBSB, such as increased interest
rates or a downturn in the economy in areas where NCBSB has most of its loans,
could adversely affect future earnings and, consequently, the ability of NCBSB
to meet its future minimum capital requirements.
The Office of Thrift Supervision regulations impose certain restrictions
on NCBSB's payment of dividends. At December 31, 1996, 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 1996,
1995, and 1994 is $362,621, $329,471, and $322,065, respectively.
NCB maintains an employee thrift plan organized under IRS Code Section
401(k) and contributes up to 6% of each participant's salary. Contributions and
expense for 1996, 1995, and 1994 are $278,720 ,$275,457, and $251,600,
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. In September 1994, NCB converted $12,844,968 of allocated
surplus to common stock. In 1997, NCB anticipates that it will declare a
patronage dividend for 1996 of $10,492,000. The anticipated cash portion of the
patronage dividend in 1997 of 1996 earnings is shown as dividends payable. The
anticipated stock portion of the patronage dividend in 1997 of 1996 earnings has
been added to allocated retained earnings at December 31, 1996. Patrons of NCB
receiving such patronage dividends consent to include them in their income.
The provision for income taxes consists of the following:
Year Ended December 31,
1996 1995 1994
Current tax expense
Federal $674,728 $665,429 $ 602,358
State and local 148,054 19,184 -
Total current 822,782 684,613 602,358
Deferred tax (expense) benefit
Federal (25,868) (14,858) 6,242
State and local - 107,928 (24,070)
Total deferred (25,868) 93,070 (17,828)
Total provision $796,914 $777,683 $ 584,530
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
to pretax income as a result of the following differences:
Year Ended December 31,
1996 1995 1994
Statutory U.S. tax rate $4,242,158 $4,510,339 $3,216,873
Patronage dividends (3,567,430) (3,844,910) (2,401,410)
State and local taxes 148,054 127,112 (169,428)
Other (25,868) (14,858) (61,505)
Income tax provision $ 796,914 $ 777,683 $ 584,530
Deferred tax assets net of liabilities, included in other assets, are
comprised of the following at December 31, 1996 and 1995:
1996 1995
Deferred commitment fees $129,067 $103,742
Allowance for loan losses 280,185 279,017
Other 96,455 77,400
Gross deferred tax assets 505,707 460,159
Loan bad debt expense (56,342) (52,867)
Federal Home Loan Bank stock dividends (48,697) (32,239)
Other (14,412) (8,707)
Gross deferred tax liabilities (119,451) (93,814)
Net deferred tax asset $386,256 $366,345
20. Income Available for Dividends on Stock
Under an existing long-term debt agreement, 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 2% 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 subordinated Class A notes. Those rates for 1996, 1995,
and 1994 are 6.1%, 6.7% and 6.3%, respectively. Consequently, the amounts
available for payment on the Class C Stock for 1996, 1995, and 1994 are
$1,326,847, $1,455,988 and $1,552,789, respectively. In addition, under the
Act and its bylaws, NCB may not pay dividends on its Class B stock.
21. Financial Instruments with Off-Balance Sheet Risk
NCB's policy is to prohibit the use of derivative financial instruments
for any purpose other than managing interest rate risk. NCB is a party to
financial instruments with off-balance sheet risk. NCB uses such instruments
in the normal course of business to reduce its own exposure to fluctuations
in interest rates. These financial instruments may include commitments to
extend credit, standby letters of credit, interest rate swaps, forward
commitments to sell loans and financial futures contracts. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the balance sheets. The contract or
notional amounts of those instruments reflect the extent of involvement,
but not exposure, that NCB has in particular classes of financial
instruments.
NCB's exposure to credit loss in the event of nonperformance by the other
parties to the commitments to extend credit and standby letters of credit
written is represented by the contract or notional amounts of those instruments.
NCB uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. For interest rate swap
transactions, forward commitments, and financial futures contracts, the contract
or notional amounts do not represent exposure to credit loss. Unless noted
otherwise, NCB does not require collateral or other security to support
financial instruments with credit risk.
In the normal course of business, NCB makes loan commitments which are not
reflected in the accompanying financial statements. The commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being completely
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. NCB evaluates each customer's creditworthiness on a case-
by-case basis. The amount of collateral obtained, if deemed necessary by NCB
upon extension of credit, is based on management's credit evaluation of the
counterparty. Collateral varies but may include accounts receivable, inventory,
property, plant, equipment, residential and income-producing commercial
properties.
Standby letters of credit are conditional commitments by NCB to guarantee
the payment performance of a customer to a third party. The credit risk involved
in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers.
The contract or notional amounts and the respective estimated fair value
of NCB's off-balance sheet financial instruments at December 31, are as follows
(amounts in thousands):
Contract or Estimated
Notional Amounts Fair Value
1996 1995 1996 1995
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $184,625 $149,190 $ 435 $516
Standby letters of credit 100,845 69,847 1,157 753
Derivative Financial Instruments Held or Issued for Purposes other than Trading
NCB uses derivative financial instruments in the normal course of business
for the purpose of reducing its own exposure to fluctuations in interest rates.
Existing NCB policies prohibit the use of derivative financial instruments for
any purpose other than managing interest rate risk. These instruments included
interest rate swaps, financial future contracts, forward commitments, and
option-like contracts such as caps, floors, and collars.
Interest rate swaps are executed to manage the interest rate risk associated
with specific assets or liabilities. An interest rate swap agreement commits
each party to make periodic interest payments to the other based on an agreed-
upon fixed rate or floating rate index. There are no exchanges of principal
amounts. Entering into an interest rate swap agreement involves the risk of
default by counterparties and interest rate risk resulting from unmatched
positions. The amounts potentially subject to credit risk are significantly
smaller than the notional amounts of the agreements. NCB is exposed to credit
loss in the event of nonperformance by its counterparties in the aggregate
amount of $3,721,908, representing the estimated cost of replacing, at current
market rates, all outstanding swap agreements. NCB does not anticipate
nonperformance by any of its counterparties. Income or expense from interest
rate swaps is treated as an adjustment to interest expense/income on the hedged
asset or liability.
Financial futures are contracts for delayed delivery of specific securities
at a specified future date and at a specified price or yield. NCB purchases/
sells these contracts to hedge the interest rate risk associated with
originating mortgage loans that will be held for sale. NCB has minimal credit
risk exposure on these financial instruments since changes in market value of
financial futures are settled in cash on the following business day, and payment
is guaranteed by the clearinghouse. Gains and losses from these contracts are
deferred until the time of disposition of the asset or liability.
NCBSB and NCB enter into forward commitments to sell a portion of their
production of loans to Federal National Mortgage Association 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.
NCB purchases or sells caps, floors, and collars at the request of its
customers in the normal course of business. Caps, floors, and collars are
option-like contracts that provide the holder with benefits of favorable
movements in the price of an underlying asset or index with limited or no
exposure to losses from unfavorable price movements, generally in return for
a premium paid at inception by the holder to the issuer. NCB offsets its
risks associated with providing these products to its customers by executing
offsetting positions with other counterparties.
In 1993, NCB entered into a transaction to sell an interest rate cap in the
normal course of business. At December 31, 1996 and 1995, the notional amount
of NCB's interest rate cap totalled $833,000 and $1,633,333, respectively.
The fair value of the outstanding cap was $1,263 at December 31, 1996. NCB
purchased an offsetting position in February 1994, with a start date of
February 1, 1996. Entering into an interest rate cap transaction involves
the risk of default by counter-parties. The amount potentially subject to
credit risk is significantly smaller than the notional amount of the cap.
The contract or notional amounts and the respective estimated fair value of
NCB's off-balance sheet financial instruments at December 31, are as follows:
(amounts in thousands):
Contract or Fair
Notional Amounts Estimated Value
1996 1995 1996 1995
Financial instruments whose
notional or contract amounts
exceed the amount of
credit risk:
Financial futures
contracts 167,200 53,400 170,421 51,388
Interest rate swap
agreements
In a net receivable
position 161,000 141,000 164,722 149,438
In a net payable
position (161,000) (141,000) (161,000) (141,005)
At December 31, 1996 and 1995, NCB had deferred gains and (losses)
outstanding on financial futures contracts totalling $15,313 and ($1,347,082),
and $1,075,816 and ($510,459), respectively, which are classified as loans
available for sale.
22. Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("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 of 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 are based on market prices for similar loans sold in the secondary
market adjusted for differences in loan characteristics.
Excess servicing - The fair value of excess servicing 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 the same stated
maturity of the underlying loans for which the excess servicing relates.
Deposit liabilities - The fair value of demand deposits, savings accounts,
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates of deposits of similar remaining
maturities.
Short-term and other borrowings - The carrying amounts of the revolving
line of credit balances, advances from the Federal Home Loan Bank and other
borrowings approximate fair value.
Long-term debt - The fair value of long-term debt is estimated by
discounting the future cash flows using the current borrowing rates at which
similar types of borrowing arrangements with the same remaining maturities could
be obtained by NCB.
Subordinated debt - The fair value of subordinate debt is estimated by
discounting the future cash flows using the current borrowing rates at which
similar types of borrowing arrangements with the same remaining maturities could
be obtained by NCB.
Interest rate swap agreements - The fair value of interest rate swaps
(used for interest-rate risk management purposes) is the estimated amount that
NCB would receive or pay to terminate the swap agreements at the reporting date,
taking into account current interest rates and the current creditworthiness of
the swap counterparties.
Financial Futures and Forward contracts - The fair value of interest rate
futures is based on the closing price of the Chicago Board of Trade at December
31, 1996 and 1995. The fair value of Forward contracts are based on current
market prices for similar contracts.
Commitments to extend credit, standby letters of credit, and financial
guarantees written - The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and committed rates. The
fair value of guarantees and letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the reporting date.
The estimated fair value of the Bank's financial instruments as of
December 31, 1996 and 1995 are as follows (dollars in thousands):
(in thousands) 1996 1995
Financial Asset Carrying Amount Fair Value Carrying Amount Fair Value
Cash and cash equivalents $ 17,150 $ 17,150 $ 29,096 $ 21,289
Investments
Available for sale 30,337 30,337 28,842 29,096
Held-to-maturity 2,946 2,294 3,119 1,749
Excess servicing 30,758 30,357 25,670 27,749
Loans and lease financing 750,094 756,301 597,190 609,047
Financial Liabilities:
Deposits 88,620 88,211 78,100 77,224
Short-term and other borrowings 224,500 224,500 132,500 132,522
Long-term debt 202,137 204,824 154,688 158,682
Subordinated debt 182,853 188,743 183,014 188,585
Off-Balance Sheet Financial
Instruments:
Interest rate swap agreements
In a net receivable position 161,000 164,722 141,000 149,438
In a net payable position (161,000) (161,000) (141,000) (141,005)
Financial futures and
forward commitments 167,200 170,421 53,400 51,388
Commitments to extend credit 184,625 435 149,190 516
Standby letters of credit 100,845 1,157 69,847 753
23. New Accounting Standards
In June, 1996, the FASB issued SFAS No.125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. " The
statement provides standards for distinguishing transfers of financial assets
that are sales from those that are secured borrowings, and provides guidance
on the recognition and measurment of asset servicing contracts and on debt
extinguishments. As issued, SFAS No.125 is effective for transactions
occurring after December 31, 1996. However, as a result of an amendment to
SFAS No.125 issued by the FASB in December, 1996, certain provisions of SFAS
NO.125 are deferred for an additional year. Adoption of the new accounting
standard is not expected to have a material impact on NCB.
24. Subsequent Events
On January 31, 1997, NCB entered into a separate agreement with an
existing banking relationship, to borrow up to $40 million through a revolving
line of credit facility. The funds are committed until May 28, 1997. To date,
no funds have been disbursed from the line.
In January, 1997 NCB obtained approval to issue up to $100 million in
debt as part of a medium term note program. The terms of the notes under this
program can range from nine months to 30 years and the rates are to the
treasury note rates with similar terms.
On February 28, 1997, NCB issued $25 million in five year debt as part
of the medium term note program approved in December, 1996. NCB sold
approximately $75 million in whole loans, servicingretained, to and
unrelated third party generating a net gain of approximately $1.2 million
which will be included in non-interest income in the 1997 first quarter
financial statements. In two other related transcations, NCB sold loans
totalling approximately $4 million and $13 million in January and February,
1997, respectively.
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
Thomas D. Henrion Chairman of the Board of
Directors and Director 1991 1997 53
Charles E. Snyder President and Chief
Executive Officer 1983 - 43
Leo H. Barlow Director 1993 1999 44
Harry J. Bowie Director 1991 1998 61
James L. Burns, Jr. Director 1996 1999 58
Joseph Cabral Director 1995 1998 48
Terry Lewis Director 1991 1997 49
Marilyn J. McQuaide Director 1996 1999 47
Alfred A. Plamann Vice Chairman of the Board
of Directors and Director 1995 1998 54
Mary Ann Rothman Director 1993 1999 54
Anthony J. Scallon Director 1995 1998 51
Sheila A. Smith Director 1995 1998 51
Wally Smith Director 1990 1997 49
Dr. Robert L. Thompson Director 1989 1997 62
Year First End of
Position Appointed Term Age
Caroline Blakely Managing Director, Chief
Marketing Officer
President, NCB Mortgage
Corporation
President and Director,
NCB 1, Inc.
President and Director,
NCB Insurance Brokers,
Inc. 1992 - 42
Charles H. Hackman Managing Director, Chief
Credit Officer
President,
NCB Financial Corporation
Vice President and Director,
NCB Savings Bank, FSB
Vice President and Director,
NCB Insurance Brokers,
Inc. 1984 - 52
Mark W. Hiltz Managing Director, Chief
Credit Risk Officer 1982 - 49
Kenneth A. Payton President, NCB Savings
Bank, FSB 1994 - 63
Richard L. Reed Managing Director, Chief
Financial Officer
Treasurer, NCB Mortgage
Corporation
Vice President and Director,
NCB Savings Bank, FSB
Vice President, Treasurer and
Director, NCB Investment
Advisers, Inc.
Treasurer, NCB Retail
Finance Corporation 1985 - 38
Nominees For Directorships
David A. Cox
Kirby J. Erickson
David I. Ferber
Jackie Jenkins-Scott
Susan Kargman
Edward Yaker
Peter C. Young
Thomas K. Zaucha
Thomas D. Henrion has been President and Chief Operating Officer of KFC
National Purchasing Cooperative, Inc. d/b/a FoodService Purchsing Cooperative,
Louisville, Kentucky since 1980. He also serves as President and Chief
Executive Officer of KFC Mutual Insurance Company, Ltd., Hamilton, Bermuda.
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 since 1983 to December 1991.
Leo H. Barlow has been President & Chief Executive Officer of Sealaska
Corporation since August 1, 1992. Previously, he was President & Chief
Executive Officer of Sealaska Timber Corporation.
Harry J. Bowie has been the President and Chief Executive Officer of
Delta Foundation, Inc. a community development corporation located in
Greenville, Mississippi since 1986. He has also served as a Director of the
Southern Regional Council located in Atlanta and the Housing Assistance
Council located in Washington, D.C.
James L. Burns, Jr. has been the President and Chief Executive Officer of
The Co-operative Central Bank since 1972. He also has been the President and
Chief Executive Officer of Co-operative Investment Fund since 1984. In
addition, he has served as a consultant to the Australian government and the
Australian and New Zealand banking industry.
Joseph Cabral has been the President and Chairman of the Board of
Chatsworth Products, Inc. since its inception in June 1991. He also serves
as President of the California chapter of the ESOP Association and a member
of the Executive Board of the ESOP Association State/Regional Council. Prior
to June 1991, he was associated with Arthur Andersen & Co.
Terry Lewis has been practicing law in Michigan since 1982. She was also
the President of the National Association of Housing Cooperatives (NAHC) from
1987 to October 1995. Since November 1995, she has chaired the legislation
and government relation's committee of NAHC.
Marilyn J. McQuaide has been Senior Vice President and Senior Operations
Officer of Vermont National Bank since 1989. She was a Vice President and
also served on the board of Northeast Cooperatives.
Alfred A. Plamann has been the President and Chief Executive Officer of
Certified Grocers of California, Ltd. since 1994. He was the Senior Vice
President and Chief Financial Officer of Certified Grocers from 1989 to 1993.
He has served in an executive capacity with Atlantic Richfield Co. (ARCO) and
has served on the Board of Directors of several of the cooperative's
subsidiaries. Additionally, he has served on the Board of Directors of the
National American Wholesale Grocers Association (NAWGA) and the California
Grocer's Association (CGA), and has been a member of the Industry Relations
Committee of the Food Marketing Institute (FMI).
Mary Ann Rothman has been Executive Director of the Council of New York
Cooperatives since 1980. She also serves on the executive committee of the
National Association of Housing Cooperatives and is Vice Chairman of the
NCBDC's Board of Directors.
Anthony J. Scallon has been Chairman of the Board of Directors, Federal
Home Loan Bank of Des Moines since 1994. He is also a Vocational Coordinator,
Independent School District # 197, West St. Paul, Minnesota from 1994 to
present time. He was elected as Minneapolis City Council Member in 1979 and
served until 1993.
Sheila A. Smith has been President and Chief Operating Officer of
Advanced Rubber Concept Inc., (ARC) since 1979. In addition to her position
at ARC, she is also President of GRC Industries and Vice President of TQS
Group Inc.
Wally Smith has been President and Chief Executive Officer and member of
the Board of Directors of Recreational Equipment, Inc., Seattle, Washington
since 1983. He also serves as Chairman of the Board of Independent Colleges
of Washington.
Dr. Robert L. Thompson has been President and Chief Executive Officer of
Winrock International since July, 1993. Previously, he was Dean of
Agriculture, Purdue University from 1987 to 1993.
Caroline E. Blakely is a Managing Director, Chief Marketing Officer with
NCB. She was formerly a Corporate Vice President, Real Estate Division in
1994, a Senior Vice President from 1993 to 1994 and a Vice President from
1992 to 1993. Previously, she was a shareholder and attorney in Fields and
Director, PC with a practice in corporate and real estate law from 1991 to
1992. She was also a shareholder and attorney with Golden Freda & Schraub,
PC with a practice in corporate and real estate law from 1985 to 1991.
Charles H. Hackman is a Managing Director, Chief Credit Officer with
NCB. He was formerly Corporate Vice President and Chief Financial Officer
from 1992 to 1994. He was Corporate Vice President, Credit Policy, of NCB
from 1984 to 1992, and President of NCB Financial Corporation since its
inception in 1988. Previously, he was Vice President, Credit Administration
of Equitable Bank, N.A., Baltimore.
Mark W. Hiltz is a Managing Director, Chief Risk Officer with NCB. He
was a Corporate Vice President and Manager of Special Assets from 1994 to 1996
and a Senior Vice President of the Special Assets Department from 1986 to
1994. Previously he was Vice President of Loan Administration from 1983 to
1986 and General Auditor from 1982 to 1983.
Kenneth A. Payton was named President and Chief Executive Officer of NCB
Savings Bank, FSB in 1994. Previously, he was the President and CEO of
Citizens Savings Bank Co. from 1992 to 1994. He has served in various
executive capacities at Fifth Third Bank from 1986 to 1992 before being
promoted to President and CEO of Fifth Third Trust Co. and Savings Bank, FSB,
Florida from 1991 to 1992.
Richard L. Reed is a Managing Director, Chief Financial Officer with NCB.
He was 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.
Nominees for Directorships
David L. Cox has been President of 718 Apartments, Inc. since April,
1996. Prior to that he was its Treasurer and a Board Member for three years.
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.
David I. Ferber is presently a Council Member of The Council, Village
Community School. He previously served for several years as its Treasurer and
member of the governing board. He is also the President and a member of the
Board of Directors of 40 Fifth Avenue Corporation for the last 15 and 16
years, respectively.
Jackie Jenkins-Scott is currently a Board Member of NCB Development
Corporation. She also has been 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 Massachusetts League of Community Health Centers and a
member of the National Association of Community Health Centers, Inc.
Susan Kargman is a Vice President at Citibank, N.A. where she has been
focusing in the housing/real estate lending area for the past 25 years. She
also served as President, Treasurer and Board Member of 74 Fifth Avenue Owners
Corp. from 1982 to 1994 and as Treasurer at 13th Street Owners, Inc. from 1978
to 1980.
Edward Yaker has been President and Chairman of the Board of Amalgamated
Housing Corporation for the past 12 years and a Member of its board for 19
years. Currently, he is also a Board Member of the National Association of
Housing Cooperatives. He was also a Co-Chairman for 5 years and a
representative for 19 years of the Coordinating Council of Cooperatives and
served as Secretary, Secretary-Treasurer and Board Member of Coordinated
Housing Services, Inc.
Peter C. Young has been the Executive Director of Area Cooperative
Educational Services for almost 26 years. Currently, he is a member of the
Board of Trustees and the Finance Committee of CT Hospital Association/Workers
Compensation Trust. He is also the Fiscal Agent (Treasurer) and was a member
of the Governing Board of the American Association of Educational Service
Agencies.
Thomas K. Zaucha has been the President and Chief Executive Officer 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 Board
Member of NCB Retail Finance Corporation and Cooperative Development
Foundation.
COMPOSITION OF BOARD OF DIRECTORS
The Act provides that the Board of Directors of NCB shall consist of 15
persons serving three-year terms. An officer of NCB may not also serve as a
director. The President of the United States is authorized to appoint three
directors with the advice and consent of the Senate. Of the Presidential
appointees, one must be selected from among proprietors of small business
concerns which are manufacturers or retailers; one must be selected from among
the officers of the agencies and departments of the United States; and one
must be selected from among persons having extensive experience representing
low-income cooperatives eligible to borrow from NCB. Sheila A. Smith is the
Presidential appointee from among proprietors of small business concerns.
There is a vacancy for the Presidential appointee from among the officers of
U.S. agencies and departments. Anthony J. Scallon is the Presidential
appointee from among persons representing low-income cooperatives.
The remaining 12 directors are elected by the holders of Class B and
Class C stock. Under the bylaws of NCB, each stockholder-elected director must
have at least three years experience as a director or senior officer of the
class of cooperatives which he or she represents. The five classes of
cooperatives are: (a) housing, (b) consumer goods, (c) low-income
cooperatives, (d) consumer services, and (e) all other eligible cooperatives.
At all times each class must have at least one, but not more than three,
directors representing it on the Board.
Only holders of NCB's Class B and Class C stock have voting rights, and
they vote as one class under the terms of the weighted voting system adopted
by NCB to comply with the Act. The NCB by-laws and voting policy provide that
(a) each stockholder of record who is also a borrower from NCB (a "borrower-
stockholder") is entitled to five votes, (2) each borrower-stockholder is
entitled to additional votes, up to a total of 120, based on a formula
measuring the proportion that such borrower-stockholder's patronage with NCB
bears to the total patronage during a period of time fixed by the election
rules, and (3) each stockholder who is not a borrower from NCB shall receive
one vote, and non-borrower stockholders as a class shall receive at least 10%
of the votes allocated.
The by-laws and voting policy further provide that, notwithstanding any
allocations of votes which would otherwise result from the foregoing rules (1)
no stockholder shall be entitled to more than 5% of the total voting control
held by all stockholders, (2) the total votes allocated to any class of
cooperatives shall not exceed 45% of the total, and (3) no stockholder which
is a "developing cooperative" shall be entitled to more than five votes. A
developing cooperative is defined as a cooperative that is in a developmental
or fledgling state of operation and that does not have members who are
ultimate consumers or primary consumers.
NCB has reserved the right to alter its voting policy at any time to
comply with the requirement of the Act that its voting system should not
result in: (1) voting control of NCB becoming concentrated with larger, more
affluent or smaller, less affluent organizations, (2) a disproportionate
concentration of votes in any housing cooperatives or low-income cooperatives
or consumer goods and services cooperatives, or (3) the concentration of more
than 5% of the voting control in any one Class B or Class C stockholder.
NCB may refuse to honor any stockholder's voting rights, except to the
extent of one vote, if the stockholder is more than 90 days late on any
payment to NCB at the time such rights would otherwise be exercised.
Committees of the Board
The Board of Directors directs the management of NCB and establishes the
policies of NCB governing its funding, lending, and other business operations.
In this regard, the Board has established a number of committees, including
Executive, Loan and Business Development, Finance, Audit, Low Income Policy,
and Strategic Planning and Nominating Committees.
The Executive Committee is responsible for exercising all powers of the
Board of Directors when waiting for the next regular meeting will adversely
affect the best interest of NCB. It also reviews and recommends CEO's annual
compensation and benefit plans, authorizes contracts in excess of $100,000,
recommends to the board rules and procedures governing the board, reviews and
recommends policies or actions not within the authority of any other
committee, serves as the appeal authority for loan turn-down, recommends to
the board appointment of representatives to other boards where NCB is entitled
to such representation and approves exceptions to policies not within the
authority of another committee. The members of the committee are Leo H.
Barlow, Harry J. Bowie, Thomas D. Henrion(Chair), Terry Lewis, Alfred A.
Plamann, Wally Smith and Robert L.Thompson.
The Loan and Business Development Committee is responsible for providing
policy to management and for monitoring the lending, fee for service and
business development efforts of NCB and its subsidiaries, consistent with the
board's approved strategic plan. The members of the committee are Harry J.
Bowie, James L. Burns, Jr., Terry Lewis, Mary Ann Rothman, Anthony J. Scallon
and Wally Smith(Chair).
The Finance Committee is responsible for monitoring NCB's financial
planning, budgeting process, asset liability management and funding strategies
for the Bank. The members of the committee are Leo H. Barlow, Joseph
Cabral, Alfred A. Plamann, Marilyn J. McQuaide, Thomas D. Henrion, Sheila A.
Smith and Robert L. Thompson(Chair).
The Audit Committee is responsible for assisting the Board of Directors
in fulfilling its statutory and fiduciary responsibilities for NCB and its
subsidiaries and affiliate by overseeing all examinations and audits,
monitoring all accounting and financial reporting practices, determining that
there are adequate administrative and internal accounting controls and
assuring that NCB and its subsidiaries and affiliate are operating within
prescribed policies and procedures and in conformance with the applicable
conflict of interest policies. The members of the Committee are Leo H.
Barlow(Chair), Joseph Cabral, Alfred A. Plamann, Marilyn J. McQuiade, Anthony
J. Scallon and Robert L. Thompson.
The Low Income Policy Committee is responsible for evaluating NCB's best
efforts to achieve 35% of loans outstanding to low income cooperatives in
accordance with established policies and for recommending to management ways
NCB can increase low income lending. The members of the committee are Harry
J. Bowie(Chair), Terry Lewis, Mary Ann Rothman and Sheila Smith.
The Strategic Planning Committee monitors and reviews all NCB related
entities' planning activities delegated to them by the board. The members of
the committee are the full Board of Directors.
The Nominating Committee annually oversees the election for NCB
directors. The committee also periodically drafts election rules on behalf
of the Board of Directors. The committee consists of those members of the
Board whose terms are not expiring during the current year.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF THE OFFICERS
The following table sets forth the compensation during the three fiscal years
of NCB's Chief Executive Officer and its four other most highly compensated
executive officers.
All Other
AnnualCompensation Compensation
(a) (b) (c) (d) (e)
Name and
Principal Position Year Salary Bonus
Charles E. Snyder, 1996 $295,000 $96,670 $19,380
President & CEO 1995 275,534 86,450 19,320
1994 260,000 64,530 23,264
Charles H. Hackman, 1996 182,664 63,591 19,380
Managing Director, Chief 1995 175,147 52,920 19,320
Credit Officer 1994 168,000 51,180 21,345
Caroline Blakely, 1996 170,627 53,375 19,267
Managing Director, Chief 1995 138,130 44,750 17,669
Marketing Officer 1994 108,531 58,800 13,796
Mark Hiltz, 1996 137,505 45,719 15,520
Managing Director, Chief 1995 124,147 20,400 8,481
Risk Officer 1994 103,995 25,381 8,872
Richard L. Reed, 1996 117,500 36,575 15,010
Managing Director, Chief 1995 102,918 20,000 13,148
Financial Officer 1994 93,753 16,650 11,977
* The "All Other Compensation" reported for 1996 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 $9,000 $9,000 $1,380
Mr. Hackman 9,000 9,000 1,380
Ms. Blakely 9,000 9,000 1,267
Mr. Hiltz 8,199 6,188 1,143
Mr. Reed 7,050 7,050 911
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 1996 to
$471.88 a day, and (2) travel expenses. Typically, they receive compensation
for no more than nine days a year. Directors elected by shareholders are
entitled to (1) annual compensation of $7,000, (2) $1,000 for the chairman of
each committee, (3) $1,000 for each board meeting attended, (4) $250 for each
committee meeting attended up to two meetings only, and (5) travel expenses.
The Chairman of the Board is entitled to $8,000 in compensation in addition to
the above amounts. Directors of subsidiary corporations are entitled to (1)
$500 for each board meeting attended when not held in conjunction with NCB
board meetings and (2) travel expenses.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Stock Ownership of Certain Stockholders and Management
Several of NCB's stockholders own in excess of 5 percent of the outstanding
shares of NCB's Class B or Class C stock. The shareholders purchased a portion
of this stock in connection with sizable loans made by NCB to them and received
a portion of the stock as patronage dividends from NCB. NCB's voting policy,
however, does not allocate voting rights solely based on the number of shares of
Class B or Class C stock held and prohibits any one stockholder from being
allocated more than five percent of the votes allocated in connection with any
stockholder action.
The following table shows those cooperatives which owned more than 5
percent of NCB's Class B or Class C stock as of December 31, 1996.
Class B Stock Class C Stock
Name and Addresses of No. of Percent No. of Percent
Shareholders Shares of Class Shares of Class
Co-operative Central
Bank 30,500.00 3.88% 28,104.63 12.92%
265 Franklin Street
Boston, MA. 92110
Greenbelt Homes Inc 14,424.28 1.84% 29,423.71 13.53%
Hamilton Place
Greenbelt, MD. 20770
Group Health, Inc (1) 11,380.00 1.45% 14,249.60 6.55%
2829 Univ. Ave., S.E.
Minneapolis, MN 55414
(1) Included in the above are 2,622.03 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 to GHI.
Because the Act restricts ownership of NCB's Class B and Class C stock to
eligible cooperatives, NCB's officers and directors do not own any Class B or
Class C stock, although cooperatives with which they are affiliated may own such
stock.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Certain Transactions
The following table sets forth information concerning certain transactions
by which NCB and its subsidiaries have made loans or leases to organizations
with which NCB directors or executive officers are affiliated. The first
column lists the name of the director or executive officer who is related
with the loan or lease recipient. The second column sets forth the name of
the organization to which the loan or lease was made. (Loans labeled as
"personal" were made to the named director or officer). The last three
columns list loan balances and interest rates as of the specified dates.
The text following the table further describes the nature of the transactions
set forth in the table.
The following loans and leases were made in the ordinary course of NCB's
business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than the normal risk of uncollectability
or present other unfavorable features.
National Cooperative Bank
Largest Interest
Balance Balance as Rate as
in of of
Related Party 1996 12/31/96 12/31/96
Leo H. Barlow Sealaska Timber Corp 11,960,188 7,953,690 9.18%
Sealaska Corp 1,963,878 1,519,226 8.90%
Sealaska Corp 200,000 200,000 5.16%
Joseph Cabral Chatsworth Products 1,000,000 0
Chatsworth Products 556,600 325,200 8.56%
Chatsworth Products 1,294,453 411,714 8.56%
Chatsworth Products 698,178 616,724 8.56%
Chatsworth Products 2,950,000 2,941,667 8.56%
Thomas D. Henrion KFC National
Purchasng Coop 3,000,000 0
Kazi HFP 1,100,000 1,075,556 7.31%
Kazi/NJ 550,000 550,000 7.31%
Best Mexican Food, Inc. 350,000 332,240 8.31%
Quality Foods, Inc. 400,000 380,000 8.31%
Italian American Foods 250,000 225,00 8.31%
KFC/Cerritos 350,000 345,833 8.56%
Dinsmoor Mini Mart 354,930 354,930 10.31%
Tollgate Foods, Inc. 300,000 296,429 8.63%
Siegel Food Services 250,000 250,000 8.06%
Ross Point KFC, Inc. 275,000 271,726 11.68%
Development Diversified
Corp 1,450,000 1,385,556 8.50%
Marvin L & Phyllis
White 1,100,000 1,079,117 8.50%
E.A.P. Management Corp 160,000 136,000 8.20%
Karbach 580,000 580,000 8.38%
Alfred A. Plamann Grocers Cap Revolver 1,250,000 1,250,000 8.50%
Grocers Cap Revolver 500,000 500,000 6.75%
Mollie Stone 6,200,000 6,200,000 9.25%
K.V. Mart 785,069 785,096 9.25%
Park and Shop Market 2,403,664 2,363,603 8.84%
Park and Shop Market 3,300,000 2,915,000 8.74%
Superior Warehouse 9,750,000 9,425,130 8.63%
Grocers Cap Program
Purchase 7,073,557 4,940,792 7.06%
Mary Ann Rothman 110- 118 Riverside
Tenants 3,200,450 0
110-118 Riverside
Tenants 6,000,000 5,942,558 7.33%
James L. Burns, Jr. Co-op Central Bank 5,000,000 5,000,000 6.38%
Charles H. Hackman Watergate South 670,000 0
Nominees for Directorship
David A. Cox 718 Apartments, Inc. 1,675,923 1,646,028 10.10%
David I. Ferber 40 Fifth Avenue 1,496,967 1,495,719 8.12%
Village Community
School 201,706 190,336 9.00%
Village Community
School 491,632 466,780 9.00%
Susan Kargman 74 Fifth Avenue Owners 1,392,085 1,382,633 9.48%
Kirby Erickson Central Minnesota Group
Health 3,474,220 3,474,220 8.10%
Central Minnesota Group
Health 3,218,280 3,008,280 7.25%
Peter C. Young Area Coop Education
Services 670,000 670,000 8.75%
Area Coop Education
Services 1,445,675 1,291,760 8.75%
Area Coop Education
Services 199,312 145,183 8.95%
NCB Savings Bank, FSB
Charles H. Hackman Personal 121,509 113,593 7.00%
NCB has three loans outstanding to Sealaska Corporation of which Mr.
Barlow is President and Chief Executive Officer. The first loan was used to
refinance a real estate term loan and the remaining two loans were lines of
credit to provide working capital financing. In addition, NCB has a $13
million loan participation with National Bank of Alaska to acquire timber.
NCB has two term loans, two lines of credit outstanding and a revolving line
of credit to Chatsworth Products, Inc. of which Mr. Cabral is the President. The
term loans were used to facilitate an Employee Stock Ownership Purchase. The
lines of credit are used for the purchase of machinery and equipment and are
termed out after the initial draw periods. The revolving line of credit is
being used for working capital financing.
NCB has one line of credit to KFC National Purchasing Cooperative, Inc. d/b/a
FoodService Purchasing Cooperative of which Mr. Henrion is the President and
Chief Executive Officer. The line of credit is used for working capital
purposes. NCB has also started a member finance program whereby NCB provides
financing to KFC and Taco Bell retail members for store renovation, purchase
of new stores and the purchase of equipment and inventory. The remaining
loans listed with respect to Mr. Henrion were made under this program.
NCB has loans outstanding to members of Certified Grocers of California
(CERGRO) of which Mr. Plamann is the President and Chief Executive Officer
CERGRO provides guarantees for two K.V. Mart loans of which one has been sold
and is not reflected on NCB's books. NCB also provides a line of credit to
CERGRO's financing arm, Grocers Capital Company. Finally, NCB has entered into
an agreement to purchase at par member loans held by Grocers Capital Company.
NCB has a line of credit outstanding to 110-118 Riverside Tenants
Cooperative of which Ms. Rothman is a member. The line of credit is used to
fund capital improvements for the housing cooperative.
NCB has a $10 million participation in a $30 million revolving line of
credit with Co-operative Central Bank of which Mr. Burns is the President
and Chief Executive.
NCB has a line of credit outstanding to Watergate South, Inc. of which Mr.
Hackman, an officer of NCB, is a member of the Board. The purpose of the line of
credit is for capital improvements to the property.
Board nominee David A. Cox is the President and Board Member of 718
Apartments, Inc. The loan outstanding, which refinanced a previously existing
loan, was used to fund capital improvements and establish a reserve.
Board nominee David I. Ferber is presently a Council Member of Village
Community School and President and Board Member of 40 Fifth Avenue Corporation.
NCB has a real estate loan outstanding to 40 Fifth Avenue which was used to
refinance a previously existing loan and to fund capital improvements. The
two commercial loans outstanding to Village Community School were used to
refinance an existing loan and for major improvements to the school facility.
Board nominee Susan Kargman has an ownership interest in 74 Fifth Avenue
Owners, Corp. NCB has a real estate loan outstanding with 74 Fifth Owners which
was used to refinance a previously existing loan.
Board nominee Kirby J. 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 Central Minnesota Group
Health Plan, Inc.(CMGHP). NCB has two outstanding commercial loans with
CMGHP. These loans were used to fund a new healthcare center and refinance
an existing term loan.
Board nominee Peter C. Young is the Executive Director of Area Cooperative
Educational Services. NCB has three commercial loans outstanding with Area
Cooperative. The first is a line of credit used for working capital; the second
consolidated an existing line of credit and first deed of trust; and the third
one is a term facility to finance the reroofing of the Educational Center for
the Arts Building.
In its normal course of business, NCB Savings Bank makes loans to
employees at competitive market rates. NCB Savings Bank has issued a home
mortgage loan to Charles Hackman.
NCB believes that the foregoing transactions contain terms comparable to
those obtainable in an arm's length transaction. NCB had determined that
these loans are in accordance with its lending policies, were properly
approved and were within the applicable regulatory limitations and any or
all were evaluated for disclosure in the financial statements.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are filed as a part of this
report.
Financial Statements as of December 31, 1994, 1995, and 1996.
Page #
25 Report of Independent Auditors
26 Consolidated Balance Sheets
27 Consolidated Statements of Income
28 Consolidated Statements of Changes in Members' Equity
29-30 Consolidated Statements of Cash Flows
31-62 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.
(g) 3.3 Bylaws of NCB
(h) 4.1 Election Rules of the NCB. For other instruments defining
the rights of security holders, see Exhibits 3.1 and 3.2.
(i) 4.2 Form of Assumption Agreements and Amended and Restated
Senior Note Agreemens
(i) 4.3 Schedule Concerning Senior Note Agreements
(m) 4.4 Financing Agreement with U.S. Treasury
(n) 4.5 Note Purchase Agreement with Lutheran Brotherhood et al.
(o) 4.6 Master Shelf Agreement with Prudential Insurance Co. of
America et al.
(p) 4.7 Senior Note Agreement (Dec. 1995)
(t) 4.8 First Amendment Agreement to Master Shelf Agreement
with Prudential Insurance Co. of America
(t) 4.9 First Amendment Agreements to the Assumption Agreement
and Amended and Restated Note Purchase Agreements
(t) 4.10 First Amendment Agreements to the Note Purchase
Agreements with Lutheran Brotherhood et al.
(q) 4.11 Form of Indenture for Debt Securities
(r) 4.12 Form of Fixed Rate Medium Term Note
(s) 4.13 Form of Floating Rate Medium Term Note
(i) 10.1 Second Amended and Restated Loan Agreement with
National Westminster Bank USA et al.
10.2 (No Exhibit)
*(j) 10.3 Deferred Compensation Agreement with Charles E. Snyder
*(g) 10.4 Severance Agreement with Charles E. Snyder
10.5 (No Exhibit)
*(a) 10.6 Insurance Plan for NCB Executive Officers
(b) 10.7 Subordination Agreement with Consumer Cooperative
Development Corporation (now NCB Development
Corporation)
10.8 (No Exhibit)
(j) 10.11 Amendment No. 1 to Second Amended and Restated Loan
Agreement with National Westminster Bank, USA et al.
(e) 10.12 Lease on Headquarters of NCB
10.13 (No Exhibit)
*(h) 10.14 Employment Agreement with Marlon W. Pickles
10.15 (No Exhibit)
10.16 (No Exhibit)
(j) 10.17 Term Loan Agreement with Credit Suisse ( Nov. 1994)
(j) 10.18 Term Loan Agreement with Credit Suisse ( Feb. 1995)
(k) 10.19 Amendment No. 2 to the Second Amended and Restated
Loan Agreement with Natwest Bank et al.
(k) 10.20 Term Loan Agreement with Credit Suisse (Sept. 1995)
10.21 (No Exhibit)
10.22 (No Exhibit)
(k) 10.23 Term Loan Agreement with Comerica Bank (Dec. 1995)
(l) 10.24 Amendment No. 3 to Second Amemded and Restated Loan
Agreement with Fleet Bank (formerly NatWest) et al.
(l) 10.25 Term Loan Agreement with PNC Bank (Aug 1996)
*(t) 10.26 Incentive Plan for NCB Executive Officers
(t) 10.27 Amendment No. 1 to Term Loan Agreement with
Credit Suisse (Nov. 1994)
(t) 10.28 Amendment No. 1 to Term Loan Agreement with
Credit Suisse (Feb. 1995)
(t) 10.29 Amendment No. 1 to Term Loan Agreement with
Credit Suisse (Sept. 1995)
(t) 10.30 Amendment to Term Loan Agreement with
Comerica Bank (Dec. 1995)
(t) 10.31 Amendment No. 4 to Second Amended and Restated
Loan Agreement with Fleet Bank (formerly NatWest Bank)
(k) 22.1 List of Subsidiaries and Affiliates of the NCB
(t) 23.1 Consent of Deloitte & Touche LLP
(k) 25.1 Power of Attorney by Joseph Cabral
(i) 25.2 Power of Attorney by Leo Barlow
(d) 25.3 Power of Attorney by Jerry W. Davis
(f) 25.4 Power of Attorney by Harry J. Bowie
(f) 25.5 Power of Attorney by Thomas D. Henrion
(t) 25.6 Power of Attorney by James L. Burns, Jr.
(i) 25.7 Power of Attorney by Mary Ann Rothman
(d) 25.8 Power of Attorney by Edward J. Dirkswager, Jr.
(d) 25.9 Power of Attorney by Wally Smith
(f) 25.10 Power of Attorney by Terry Lewis
(k) 25.11 Power of Attorney by Alfred A. Plamann
(k) 25.12 Power of Attorney by Anthony J. Scallon
(k) 25.13 Power of Attorney by Sheila A. Smith
(d) 25.14 Power of Attorney by Robert L. Thompson
(t) 25.15 Power of Attorney by Marilyn J. McQuaide
(t) 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 the registrant's annual report on Form 10-K for the year ended
December 31, 1990 (File No. 2-99779).
(e) Incorporated by reference to the exhibit of the same number filed as
part of Registration Statement No. 33-42403 ( filed September 6, 1991 ).
(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, 1991(File No. 2-99779).
(g) 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).
(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, 1992 (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, 1993 (File No. 2-99779).
(j) Incorporated by reference to the exhibit of the same number filed as
part of the registrant's annual report on Form 10-K for the year ended
December 31, 1994 (File No. 2-99779).
(k) 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).
(l) 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).
(m) 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).
(n) 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).
(o) 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).
(p) 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).
(q) Incorporated by reference to Exhibit 4.1 filed as part of Amendment
No. 1 to Registration Statement No. 333-17003 (Filed January 21, 1997).
(r) Incorporated by reference to Exhibit 4.2 filed as part of Amendment
No. 1 to Registration Statement No. 333-17003( Filed January 21, 1997).
(s) Incorporated by reference to Exhibit 4 to the registrant's report
on Form 8-K filed February 11, 1997 (File No. 2-99779).
(t) Filed herewith.
(b) The Registrant filed a report on Form 8-K on November 27, 1996 that
reported the resignation of Pete Crear as a director.
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 31, 1997 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/Thomas D. Henrion Chairman of the Board and 3/31/97
Thomas D. Henrion Director
/s/Richard L. Reed Managing Director, 3/31/97
Richard L. Reed (Principal Financial Officer)
/s/Marietta J. Orcino Vice President,Tax & 3/31/97
Marietta J. Orcino Regulatory Compliance
/s/Patricia A. Ferrick Vice President (Principal 3/31/97
Patricia A. Ferrick Accounting Officer)
*/s/Leo H. Barlow Director 3/31/97
Leo H. Barlow
*/s/Harry J. Bowie Director 3/31/97
Harry J. Bowie
*/s/James L. Burns, Jr. Director 3/31/97
James L. Burns, Jr.
Signature Title Date
*/s/Joseph Cabral Director 3/31/97
Joseph Cabral
*/s/Terry Lewis Director 3/31/97
Terry Lewis
*/s/Marilyn J. McQuiade Director 3/31/97
Marilyn J. McQuiade
*/s/Alfred A. Plamann Director 3/31/97
Alfred A. Plamann
*/s/Mary Ann Rothman Director 3/31/97
Mary Ann Rothman
*/s/Anthony J. Scallon Director 3/31/97
Anthony J. Scallon
*/s/Sheila A.Smith Director 3/31/97
Sheila A. Smith
*/s/Wally Smith Director 3/31/97
Wally Smith
*/s/Dr. Robert L. Thompson Director 3/31/97
Robert L. Thompson
* By /s/Richard L.Reed
Richard L. Reed
(Attorney-in-Fact)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT
With this report, the registrant is furnishing to the Commission for its
information the registrant's election materials for its 1997 annual meeting. The
registrant has not yet distributed an 1996 annual report to securityholders and
will furnish such report to the Commission when it is sent to securityholders.
INDEX TO EXHIBITS
Exhibit No. Description
4.8 First Amendment to Master Shelf Agreement with
Prudential Company of America
4.9 First Amendment Agreements to the Assumption
Agreements and Amended and Repurchase Note
Purchase Agreements
4.10 First Amendment Agreements to the Note Purchase
Agreements with Lutheran Brotherhood et al.
10.26 Incentive Plan for NCB Executive Officers
10.27 Amendment No. 1 to the Term Loan Agreement with
Credit Suisse (Nov. 1994)
10.28 Amendment No. 1 to the Term Loan Agreement with
Credit Suisse (Feb. 1995)
10.29 Amendment No. 1 to the Term Loan Agreement with
Credit Suisse (Sept. 1995)
10.30 Amendment to Term Loan Agreement with
Comerica Bank (Dec. 1995)
10.31 Amendment No. 4 to Second Amended and Restated
Loan Agreement with Fleet Bank (formerly NatWest) et al.
23.1 Consent of Deloitte & Touche LLP
25.6 Power of Attorney by James L. Burns, Jr.
25.15 Power of Attorney by Marilyn J. McQuiade
27 Financial Data Schedule
Supplemental Information
Registrant's 1997 Election Materials