FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 1997 Commission file number 2-99779 National Consumer Cooperative Bank (Exact name of registrant as specified in its charter) United States of America 52-1157795 (12 U.S.C. Section 3001 et seq.) (I.R.S. Employer (State or other jurisdiction of Identification No.) incorporation or organization) 1401 Eye Street, NW, Suite 700, Washington, D.C. 20005 (Address of principal executive offices) Registrant's telephone number, including area code (202)336-7700 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 shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at March 31, 1997 Class C 217,516 (Common stock, $100.00 par value) Class B 785,885 (Common stock, $100.00 par value) Class D 3 (Common stock, $100.00 par value) National Consumer Cooperative Bank (doing business as National Cooperative Bank) and Subsidiaries INDEX PART I FINANCIAL INFORMATION Page No. Item 1 Condensed consolidated balance sheets - March 31, 1997 and December 31, 1996 3 Condensed consolidated statements of income - for the three months ended March 31, 1997 and 1996............. 4 Condensed consolidated statements of cash flows - for the three months ended March 31, 1997 and 1996....... 5-6 Condensed notes to the consolidated financial statements - March 31, 1997................................ 7-9 Item 2 Management's discussion and analysis of financial condition and results of operations - for the three months ended March 31, 1997 and 1996....... 10-17 PART II OTHER INFORMATION Item 2 Changes in Securitites.............. 18 Item 4 Submission of Matters to a Vote of Security Holders.................... 18 Item 6 Exhibit and Reports on Form 8-K .... 19 Exhibit 10.2 - Fleet Loan Agreement Exhibit 27 - Financial Data Schedule NATIONAL COOPERATIVE BANK CONSOLIDATED BALANCE SHEETS March 31, 1997 and December 31, 1996 (Unaudited) 1997 1996 Assets Cash and cash equivalents $ 24,128,735 $ 17,150,534 Restricted cash 8,348,703 8,348,703 Investment securities Available-for-sale 29,815,426 30,337,100 Held-to-maturity 2,895,783 2,946,425 Loans and lease financing 569,742,387 565,824,579 Loans held for sale 132,807,300 184,269,872 Less: Allowance for loan losses (16,205,949) (15,504,510) 686,343,738 734,589,941 Excess servicing 31,747,959 30,758,057 Premises and equipment, net 2,187,278 2,257,362 Other assets 16,747,267 12,947,458 Total assets $802,214,889 $839,335,580 Liabilities and Members' Equity Liabilities Deposits $ 84,823,065 $ 88,620,002 Patronage dividends payable in cash 6,372,006 4,721,600 Other liabilities 17,781,385 11,332,033 Borrowings Short-term 156,500,000 224,500,000 Long-term 226,907,210 202,137,077 383,407,210 426,637,077 Subordinated debt 182,834,993 182,853,313 Total borrowings 566,242,203 609,490,390 Total liabilities 675,218,659 714,164,025 Members' equity Common stock Class B 81,143,534 78,600,416 Class C 19,196,667 21,751,584 Class D 300 300 Retained earnings Allocated 7,786,007 5,770,844 Unallocated 19,091,982 19,113,185 Unrealized (loss) on investment securities available-for-sale (222,260) (64,774) Total members' equity 126,996,230 125,171,555 Total liabilities and members' equity $802,214,889 $839,335,580 NATIONAL COOPERATIVE BANK CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the three months ended March 31, 1997 1996 Interest Income Loans and lease financing $15,371,167 $13,329,141 Investment securities 1,085,457 958,848 Total interest income 16,456,624 14,287,989 Interest expense Deposits 1,032,953 1,034,879 Short-term borrowings 2,890,864 1,853,834 Long-term debt, other borrowings and subordinated debt 6,272,295 5,565,676 Total interest expense 10,196,112 8,454,389 Net interest income 6,260,512 5,833,600 Provision for loan losses 702,000 320,000 Net interest income after provision for loan losses 5,558,512 5,513,600 Non-interest income Gain on sale of loans 1,408,427 148,761 Loan and deposit servicing fees 555,196 488,395 Other 1,547,461 903,393 Total non-interest income 3,511,084 1,540,549 Non-interest expenses Compensation and employee benefits 2,692,071 2,665,204 Contractual services 843,219 1,088,381 Occupancy and equipment 951,408 544,852 Contribution to NCB Development Corporation 125,000 125,000 Other 472,399 640,640 Total non-interest expenses 5,084,097 5,064,077 Income before income taxes 3,985,499 1,990,072 Provision for income taxes 337,147 229,337 Net income $ 3,648,352 $ 1,760,735 Distribution of net income Patronage dividends $ 3,648,352 $ 1,760,735 Retained earnings $ 3,648,352 $ 1,760,735 NATIONAL COOPERATIVE BANK CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the three months ended March 31, 1997 1996 Cash flows from operating activities Net income $ 3,648,352 $ 1,760,735 Adjustments to reconcile net income to net cash (used in)provided by operating activities Provision for loan losses 702,000 320,000 Depreciation and amortization 1,400,901 1,560,954 Gain on sale of assets (1,408,427) (148,761) Loans originated for sale (30,851,790) (75,013,963) Proceeds from sale of loans held for sale 97,016,540 459,833 Increase in other assets (4,719,625) (3,199,371) Increase in other liabilities 7,351,569 2,895,615 Other - 144,635 Net cash provided by (used in) operating activities 73,139,520 (71,220,323) Cash flows from investing activities Purchases of investment securities Available-for-sale - (3,143,917) Held-to-maturity - (5,180,000) Proceeds from maturities and sale of investment securities Available-for-sale 237,132 3,135,515 Held-to-maturity - 99,000 Net (increase) decrease in loans and lease financing (19,953,074) 13,656,809 Proceeds from sale of portfolio loans - 11,075,444 Purchases of premises and equipment (148,440) (469,485) Net cash (used in) provided by investing activities (19,864,382) 19,173,366 Cash flows from financing activities Net (decrease) increase in deposits (3,796,937) 2,791,882 Net (decrease) increase in short- term borrowings (67,500,000) 10,500,002 Proceeds from issuance of long-term debt 25,000,000 32,500,000 Repayment on long-term debt - (24,667) Redemption of common stock - (3,000) Net cash (used in) provided by financing activities (46,296,937) 45,764,217 Increase (decrease) in cash and cash equivalents 6,978,201 (6,282,740) Cash and cash equivalents, beginning of year 17,150,534 21,289,376 Cash and cash equivalents, end of period $ 24,128,735 $ 15,006,636 NATIONAL COOPERATIVE BANK CONSOLIDATED SATEMENTS OF CASH FLOWS (Unaudited) Supplemental schedule of noncash investing and financing activities: For the three months ended March 31, 1997 1996 Unrealized loss on investment available for sale $ 157,486 $ 414,162 Interest paid 5,698,684 4,993,135 Income taxes paid 135,339 102,113 NATIONAL COOPERATIVE BANK CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 (Unaudited) The accompanying financial statements have been prepared without audit and reflect all adjustments (consisting only of normal recurring adjustments) which were, in the opinion of management, necessary to a fair statement of the results of the interim period presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, these condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in NCB's most current annual report. The results of operations for the interim periods are not necessarily indicative of the results of the entire year. 1. Cash, Cash Equivalents and Investment Securities As of March 31, 1997, NCB's portfolios of investment securities, cash and cash equivalents had an average adjusted maturity of 757 days with interest rates in those portfolios varying from 4.25% to 8.0%. Cash and Investments Investments Cash Available- Held-to- Equivalents for-Sale Maturity Cash $7,645,543 $ - $ - Federal funds 2,356,992 - - Money market securities 14,126,200 - - Mutual funds - 2,020,466 - Certificates of deposit - - 100,000 Mortgage-backed securities - - 2,795,783 Corporate bonds - 16,798,116 - U.S. Treasury and Agency obligations - 10,996,844 - $24,128,735 $29,815,426 $2,895,783 At March 31, 1997, the investments in the available-for-sale portfolio were recorded at aggregate fair value. Restricted cash of $8,348,703 is held by a trustee for the benefit of certificate holders in the event of loss on certain loans sold of $37,300,000 and $92,623,000 in 1993 and 1992, respectively. The restricted cash will become available to NCB I, Inc., as the principal balance of the respective loans decreases. The loans sold have original maturities of ten to fifteen years. 2. Loans and Lease Financing Loans and leases outstanding by category at March 31, 1997 were: Commercial loans $357,112,384 Lease financing 14,597,634 Real estate loans Residential 322,167,203 Commercial 8,672,466 $702,549,687 At March 31, 1997 and December 31, 1996 real estate loans held for resale were $132.8 million and $184.3 million, respectively. 3. Impaired Assets Loans that became impaired after January 1, 1996 totaled $3,773,980 and $2,467,374 at March 31, 1997 and 1996, respectively. The 1997 impaired loans are comprised of nonaccrual loans and a restructured loan totaling $2,731,394 and $1,042,586, respectively. The 1996 impaired loans are comprised of nonaccrual loans and a restructured loan totaling $1,762,057 and $705,317, respectively. A specific allowance of $1,271,000 and $247,000 has been set aside for these loans at March 31, 1997 and 1996, respectively, as management's best estimate of their fair value is less than the recorded investment in the loans. During 1997 and 1996, the interest collected on the nonaccrual loans was applied to reduce the outstanding principal. Interest earned on the restructured loans totaled $139,234 and $13,363 during the first three months ended March 31, 1997 and 1996, respectively. At March 31, 1997 there were no commitments to lend additional funds to borrowers whose loans are non-performing. At March 31, 1997 and 1996, NCB had real estate acquired through foreclosure of $376,708 and $1,621,389, respectively, which are classified as other assets. 4. Allowance for Loan Losses The following is a summary of the activity in the allowance for loan losses during the three months ended March 31, 1997: Balance at January 1, 1997 $15,504,510 Provision for loan losses 702,000 Charge-offs (16,737) Recoveries of loans previously charged off 16,176 Balance at March 31, 1997 $16,205,949 The allowance for loan losses as a percentage of average loans and lease financing at March 31, 1997 was 2.3%. 5. New Accounting Standards Effective January 1, 1997, NCB will account for transfers and servicing of financial assets in accordance with SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment 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 measurement of asset servicing contracts and on debt extinguishment. As a result of an amendment to SFAS No. 125 issused by the FASB in December, 1996, certain provisions of SFAS No. 125 are deferred for an additional year. Although management is continuing its analysis of SFAS No. 125, it currently anticipates that impact will not be material. NATIONAL COOPERATIVE BANK MANAGEMENT DISCUSSION AND ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 SUMMARY NCB's net income for the three months ended March 31, 1997 was $3.6 million. This was a 107.2% or $2.0 million increase compared with the three months ended March 31, 1996. The variance primarily resulted from increases in non-interest income of $2.0 million and in net interest margin of $427 thousand. These were, however, partially offset by an increase in the provision for loan losses of $382 thousand. Total assets were $802.2 million at March 31, 1997, down 4.4% from $839.3 million at December 31, 1996. A $75 million sale of loans partially offset by new disbursements comprised most of the decrease in assets. NET INTEREST INCOME Net interest income of $6.3 million for the first three months of 1997 represents an increase of $427 thousand or 7.3% over the same period a year ago. As shown on Table 2, there were positive variances of $305 thousand and $121 thousand related to volume and rates, respectively. For the three months ending March 31,1997, interest income increased $2.2 million to $16.5 million from $14.3 million in the three months ended March 31,1996. As shown on Table 2, interest income increased $2.2 million due to increased real estate warehouse volume and decreased $10 thousand due to lower yields earned on the commercial loan and lease portfolio. As shown on Table 1, the average rate on interest earning assets increased to 8.43% during the three months ended March 31,1997 compared with 8.42% in the same time period in 1996. Interest expense increased $1.7 million to $10.2 million for the three months ended March 31, 1997 compared with $8.5 million for the three months ended March 31, 1996. The increased interest expense is largely a result of a higher volume of notes payable required to fund loan volume. The average rate on interest-bearing liabilities increased to 6.05% compared with 5.96% in the same period in 1996 due to the repricing of the subordinated debt. As shown on Table 2, a $1.9 million increase in interest expense was volume related while a $.1 million decrease was due to interest rates. NON-INTEREST INCOME Non-interest income for the three months ended March 31, 1997 of $3.5 million increased 128% or $2 million from $1.5 million for the same period last year. The majority of the increase was caused by the gains on loans sold to the secondary market. During the first quarter of 1997 and 1996, loans sold amounted to $75 million and $459,833, respectively. Gains recorded on the sale of blanket mortgages were $1.4 million for the three months ended March 31, 1997 compared with $149 thousand for the same period in 1996. Commercial loan fees, servicing fee income and amortization of excess servicing fees receivable accounted for the remaining increase in non-interest income. NON-INTEREST EXPENSES Non-interest expenses for the three months ended March 31, 1997 slightly increased .4% or $20 thousand to $5.1 million compared with the three months ended March 31, 1996. Occupancy and equipment expenses increased 75% to $951.4 thousand compared with $545 thousand of the prior period. The expense was low in the first quarter of 1996 due to a positive adjustment to the headquarter's rent. Partially offsetting this increase was a 22.5% or $245 thousand decrease in contractual services due to the timing of the payments of various expenses such as process redesign, strategic planning and compensation survey during the first quarter of 1996. Non-interest expenses as a percentage of average assets were 2.5% for the three months ended March 31, 1997 compared with 2.9% for the same period a year ago. Table 1 Rate Related Assets and Liabilities (dollars in thousands) Three Months Ended March 31, 1997 1996 ASSETS Average Income/ Yields/ Average Income/ Yields/ Balance Expense Rates Balance Expense Rates Interest earning assets Real estate loans $362,049 $ 7,791 8.61% $293,905 $ 6,393 8.70% Commercial loans and leases 354,643 7,580 8.55% 323,025 6,936 8.59% Total loans and leases 716,692 15,371 8.58% 616,930 13,329 8.64% Investment securities and cash equivalents 64,159 1,085 6.76% 61,913 959 6.19% Total interest earning assets 780,851 16,456 8.43% 678,843 14,288 8.42% Allowance for loan losses (15,776) (14,709) Non-interest earning assets Cash 4,079 4,266 Other assets 52,933 38,361 Total non-interest earning assets 57,012 42,627 Total assets $822,087 $706,761 LIABILITIES AND MEMBERS' EQUITY Interest bearing liabilities Subordinated debt $182,542 $ 2,547 5.58% $183,001 $ 2,415 5.28% Notes payable 404,776 6,616 6.54% 303,267 5,004 6.60% Deposits 87,222 1,033 4.74% 80,923 1,035 5.12% Total interest bearing liabilities 674,540 10,196 6.05% 567,191 8,454 5.96% Other liabilities 20,576 20,804 Members' equity 126,971 118,766 Total liabilities and members' equity $822,087 $706,761 Net interest earning assets $106,311 $111,652 Net interest revenues and spread $ 6,260 2.38% $ 5,834 2.46% Net yield on interest earning assets 3.21% 3.44% PROVISION FOR INCOME TAXES The federal income tax provision is determined on the basis of non-member income generated by NCB Savings Bank, FSB and reserves set aside for the retirement of Class A notes and dividends on Class C stock. NCB's subsidiaries are also subject to varying levels of state taxation. The federal income tax provision for the three months ended March 31, 1997 increased by $108 thousand compared with the prior year's provision of $229 thousand. CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES Cash, cash equivalents and investment securities at March 31, 1997 increased $6.4 million or 10.9% from $58.8 million at year-end 1996 due to repayment on loans and outstanding lines of credit received at the end of March. As a percentage of earning assets, cash, cash equivalents and investment securities increased to 8.5% at March 31, 1997 from 7.3% at December 31, 1996. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses at March 31, 1997 increased 4.5% to $16.2 million from $15.5 million at December 31, 1996. The allowance during the period was impacted by loans charged off, net of recoveries of loans previously charged off, amounting to $.6 thousand and the provision of $702 thousand. Overall, loan portfolio quality remained both strong and stable at the end of the first quarters of 1997 and 1996. NCB's provision for loan losses as a percentage of average loans and leases outstanding was .4% and .2% for the quarters ended March 31, 1997 and 1996, respectively. The loan loss allowance as a percentage of total loans and leases increased from 2.1% at December 31, 1996 to 2.3% at March 31, 1997. The increase is primarily due to the decreased level of loans outstanding during the period. Management considers the current allowance to be adequate to absorb known and inherent risks in the loan portfolio. As shown in Table 3, total nonperforming assets (restructured, non-accruing loans and real estate owned) increased 1% from $8.1 million at December 31, 1996 to $8.2 million at March 31, 1997. Nonperforming assets as a percentage of loans and leases outstanding plus real estate owned increased to 1.2% at March 31, 1997 compared with 1.1% at year-end 1996. The allowance for loan losses as a percentage of nonperforming assets increased to 197.5% at March 31, 1997 from 190.8% at December 31, 1996. Table 2 Changes in Net Interest Income (dollars in thousands) For the three months ended March 31, 1997 compared to 1996 Increase (decrease) due to change in: Average Average Volume* Yield Net** Interest income Cash equivalents and investment securities $ 36 $ 91 $ 127 Commercial loans and leases 676 (31) 645 Real estate loans 1,467 (70) 1,397 Total interest income 2,179 (10) 2,169 Interest expense Deposits 78 (79) (1) Notes payable 1,802 (190) 1,612 Subordinated debt (6) 138 132 Total interest expense 1,874 (131) 1,743 Net interest income $ 305 $ 121 $ 426 * 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 3 Nonperforming assets (dollars in thousands) March 31, Dec. 31, Sept. 31, June 30, March 31, 1997 1996 1996 1996 1996 Real estate owned $ 377 $ 377 $ 518 $ 547 $1,621 Non-accruing $2,731 $2,601 $1,282 $1,370 $1,762 Restructured $5,098 $5,147 $4,115 $4,145 $4,124 INTEREST BEARING LIABILITIES Interest Bearing liabilities (dollars in thousands) 3/31/97 12/31/96 % Change Deposits $ 84,823 $ 88,620 (4.3%) Lines of credit 156,500 224,500 (30.3%) Term debt 226,907 202,137 12.3% Subordinated debt 182,835 182,853 0.0% Total $651,065 $ 698,110 (6.7%) Interest-bearing liabilities decreased $47 million to $651.1 million at March 31,1997 from $698.1 million at December 31, 1996. For the first three months of 1997, deposits at NCB Saving Bank, FSB dropped 4.3% to $84.8 million due to scheduled maturities of the certificates of deposits. Average maturity of the remaining deposits is 13.0 months. At March 31,1997, short term borrowings decreased 30.3% as a result of a $67.5 million payoff against the revolving lines. The term debt increased 12.3% due to the issuance of $25 million under the new medium-term note program. Included in these borrowings are NCB's short-term borrowings from its cooperative customers which have an outstanding balance of $8.5 million at March 31, 1997. Part II OTHER INFORMATION Item 2. Changes in Securities (c) During the period covered by this report, NCB sold one share of its Class C stock without registration under the Securities Act of 1933 Act (the "1933 Act") in reliance on the exemption from registration provided by section 4(2) of the 1933 Act. The stock was sold on January 2, 1997 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 4 Submission of Matters to a Vote of Security-Holders NCB held its annual meeting on April 24, 1997. Shareholders elected the following persons to serve as directors: Kirby J. Erickson Jackie Jenkins-Scott Peter C. Young Thomas K. Zaucha The following directors continued in office after this meeting: Leo H. Barlow Harry J. Bowie James L. Burns, Jr. Joseph Cabral Marilyn J. McQuiade Michael J. Mercer (elected by the Board of Directors on January 31, 1997 to replace Pete Crear who resigned on November 27, 1996) Alfred A. Plamann Mary Ann Rotham Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this report: Exhibit 10.2 - Fleet Loan Argeement Exhibit 27 - Financial Data Schedule (c) On February 11, 1997, the registrant filed a report on Form 8-K that reported and included as and exhibit a revised Form of Floating Rate Note. SIGNATURE Pursant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. National Consumer Cooperative Bank Date: By: /s/ Richard L. Reed Richard L. Reed Managing Director, Chief Financial Officer By: /s/ Marietta J. Orcino Marietta J. Orcino Vice President, Tax & Regulatory Compliance