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.
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.
ITEM 3. LEGAL PROCEEDINGS
NCB is not involved in any pending legal proceeding, other than ordinary routine litigation incidental to its business.
Item 4.
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.
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 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.
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 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
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
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
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:
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
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
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: 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
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
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):
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.
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:
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):
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
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.
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 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
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
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.
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
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:
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
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
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: 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
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
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):
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.
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:
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):
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS, ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. PART III ITEM 10.
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.
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.
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.
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.
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