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, 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 by borrowers or entities eligible to borrow from NCB. NCB maintains its executive offices at 1401 Eye Street, N.W., Washington, D.C. 20005. The telephone number of its executive offices is (202) 336-7700. NCB also maintains regional offices in Anchorage, New York City, and San Francisco. 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 international, national and regional economic conditions, the availability of capital and other risks described from time to time in NCB's filings with the Commission. Given these uncertainties, investors are cautioned not to place undue reliance on such statements. NCB also undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances.
LOAN REQUIREMENTS, RESTRICTIONS AND POLICIES
Eligibility Requirements. Cooperatives, cooperative-like organizations, and legally chartered entities primarily owned and controlled by cooperatives are eligible to borrow from NCB if they are operated on a cooperative basis and are engaged in producing or furnishing goods, services or facilities primarily for the benefit of their members or voting stockholders who are the ultimate consumers of such goods, services or facilities. In addition, to be eligible to borrow from NCB, the borrower must, among other things, (1) be controlled by its members or voting stockholders on a democratic basis; (2) agree not to pay dividends on voting stock or membership capital in excess of such percentage per annum as may be approved by NCB; (3) provide that its net savings shall be allocated or distributed to all members or patrons, in proportion to their patronage, or retain such savings for the actual or potential expansion of its services or the reduction of its charges to the patrons, and (4) make membership available on a voluntary basis, without any social, political, racial or religious discrimination and without any discrimination on the basis of age, sex, or marital status to all persons who can make use of its services and are willing to accept the responsibilities of membership. NCB may also purchase obligations issued by members of eligible cooperatives.
Lending Authorities. The Board of Directors establishes its policies governing the lending operations in compliance with the Act and the policies are carried out by management pursuant to written loan policies adopted by the Board. The management in turn adopts and implements guidelines and procedures consistent with stated Board directives. Lending policies and guidelines are reviewed regularly by the Board of Directors and management to make needed changes and amendments.
Management may approve individual credit exposures of up to 75% of the single borrower lending limit which is equal to 15% of NCB's capital (using the definition of capital for national banks as set forth by the Office of the Comptroller of the Currency) without prior approval of the Board. The President may delegate authorities up to this limit to such committees and individual officers as he may deem appropriate.
The Bank's senior management approves credit 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 defined 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 outstanding to any producer cooperative may not exceed 20% of the amount available for loans to all producer cooperatives.
INTEREST RATES
Generally
NCB charges interest rates approximately equal to the market rates charged by other lending institutions for comparable types of loans. NCB seeks to price its loans to yield a reasonable return on its portfolio in order to build and maintain its financial viability and to encourage the development of new and existing cooperatives. In addition, in an attempt to ensure that NCB will have access to additional sources of capital in order to sustain its growth, it seeks to maintain a portfolio that is competitively priced and of sound quality.
Interest Rates for Real Estate Loans
NCB offers both adjustable and fixed rates based on a basis point spread over recognized indexes such as LIBOR and U.S. Treasury securities with yields adjusted to a constant maturity. Interest rates may be fixed at the time of commitment for a period generally not exceeding 30 days. NCB takes the following factors into consideration in pricing its real estate loans: prevailing market conditions, loan-to-value ratios, lien position, cooperative payment history, reserves, occupancy level and cash flow.
Interest Rates on Commercial Loans
NCB makes commercial loans at fixed and variable interest rates. Loan pricing is based on prevailing market conditions, income and portfolio diversification objectives and the overall assessment of risk of the transaction. Typically, commercial loan repayment schedules are structured by NCB with flat monthly principal reduction plus interest on the outstanding balance.
Fees
NCB typically assesses fees to cover the costs to NCB of its consideration of and handling of loan transactions, and to compensate NCB for setting aside funds for future draws under a commitment. The fees paid to outside vendors such as appraisers, environmental consultants and legal counsel retained by NCB for loan transactions are charged to the borrower.
Underwriting
When evaluating credit requests, NCB seeks to determine whether a prospective borrower has and/or will have sound management, sufficient cash flow to service debt, assets in excess of liabilities and a continuing demand for its products, services or use of its facilities, so that the 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 fiscal year at least 35% of NCB's outstanding loans are to (1) cooperatives whose members are predominantly low-income persons, as defined by NCB, and (2) other cooperatives that propose to undertake to provide specialized goods, services, or facilities to serve the needs of predominantly low-income persons. NCB defines a "low-income person," for these purposes, as an individual whose family's income does not exceed 80% of the median family income, adjusted for family size for the area where the cooperative is located, as determined by the Department of Housing and Urban Development. As of December 31, 1997, 25.4% of the outstanding loans was to "low income persons".
Loans for Residential Purposes
The Act prohibits NCB from making loans for financing, construction, ownership, acquisition or improvement of any structure used primarily for residential purposes if, after giving effect to such loan, the aggregate amount of all loans outstanding for such purposes will exceed 30 percent of the gross assets of NCB.
To date, the 30% cap on residential real estate loans has not restricted NCB's ability to provide financial services to residential borrowers. NCB has been able to maintain its position in the residential real estate market without increased real estate portfolio exposure by selling real estate loans to secondary market purchasers of such loans. The preponderance of NCB real estate origination volume in recent years has been predicated upon sale to secondary market purchasers. There can, however, be no assurance that NCB's future lending for residential purposes will not be impaired by the statutory limit. As of December 31, 1997, approximately 15.0% of NCB's total assets consisted of loans which qualify under the residential cap.
Operations of Subsidiaries
NCB also attempts to fulfill its statutory mission by providing financing opportunities to cooperatives through several subsidiaries.
NCB Financial Corporation ("NCBFC") is a Delaware chartered, wholly-owned, 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 Capital Corporation ("NCBCC") is a wholly-owned subsidiary of NCB that originates loans to cooperatives and sells loans in the secondary market. The company's name was changed from NCB Mortgage Corporation in November, 1997.
NCB Insurance Brokers, Inc. ( "NCBIB") is engaged in the business of brokering housing-related insurance to cooperatives.
NCB I, Inc. ("NCB I") is a wholly-owned, special purpose corporation that holds credit enhancement certificates related to the securitization and sale of cooperative real estate loans. NCB and NCB I are parties to an agreement under which each agrees not to commingle the assets of NCB I with those of NCB.
NCB Retail Finance Corporation ( "NCBRFC") is a wholly-owned special purpose corporation that participates in the securitization and sale of loans to customers involved in the grocery business. NCBRFC is required by its certificate of incorporation to have at least two directors independent of NCB and to avoid commingling its assets with those of NCB.
COMPETITION
Congress created and capitalized NCB because it found that existing financial institutions were not making adequate financial services available to cooperative, not-for-profit business enterprises. However, NCB experiences considerable competition in lending to the most credit worthy cooperative enterprises.
REGULATION
NCB is organized under the laws of the United States. NCB is examined annually by the Farm Credit Administration, and the General Accounting Office is authorized to audit NCB. Reports of such examinations and audits are to be forwarded to Congress, which has the sole authority to amend or revoke NCB's charter. NCB Savings Bank, FSB is regulated by the Office of Thrift Supervision.
TAXES
The Act provides that NCB shall be treated as a cooperative within the meaning of Section 1381 (a)(2) of the Internal Revenue Code. As such and pursuant to the provisions of the Act, NCB, in determining its taxable income for federal income tax purposes, is allowed a deduction for an amount equal to any patronage refunds in the form of cash, Class B or Class C stock, or allocated surplus that are distributed or set aside by NCB during the applicable tax period. To date, NCB has followed the policy of distributing or setting aside such patronage refunds during the applicable tax period which has reduced NCB's federal income tax liability.
Section 109 of the Act, as amended, provides that NCB, including its franchise, capital, reserves, surplus, mortgages or other security holding and income, is exempt from taxation by any state, county, municipality or local taxing authority, except that any real property held by NCB is subject to any state, county, municipal or local taxation to the same extent according to its value as other real property is taxed.
NCB has determined that under the Internal Revenue Code as amended by the Bank Act, all income generated by NCB and its subsidiaries, with the exception of NCB Savings Bank, qualifies as patronage income under the Internal Revenue Code, with the consequence that NCB is able to issue tax deductible patronage refunds with respect to all such income.
NCB's subsidiaries are subject to state income taxes.
AGREEMENT CONCERNING CLASS A NOTES
Following passage of a technical amendment to the Act, NCB entered into, as of December 21, 1989, a Financing Agreement with the U.S. Treasury to govern the interest rates payable on the Class A notes until their final redemption on October 31, 2020. Pursuant to the Financing Agreement, NCB has issued to the U.S Treasury four replacement Class A notes. As of January 1, 1998, the face amounts and current maturities of the outstanding replacement notes were as follows:
Current Replacement Maturity Face Note Date Amount Maturity
1 4/1/98 $53,553,328 3 months
2 10/1/99 $36,854,000 36 months
3 10/1/00 $55,281,000 60 months
4 10/1/00 $36,854,000 120 months
When each note matures NCB has the right to borrow again from the Treasury the maturing amount under the same terms and conditions. At each maturity date, the interest rate to be paid upon the note for the succeeding period will be calculated by the U.S. Treasury based upon the prevailing interest rates for Treasury obligations of comparable maturities. NCB intends generally to avail itself of this right. Thus, until the final redemption of the Class A notes, NCB would have outstanding to the U.S. Treasury four tranches of Class A notes in the maturities stated above. In November 1994, however, NCB adopted a Capitalization and Patronage Refund Policy 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 1997, 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 Anchorage, New York City, and San Francisco. 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, 1997 was $1,293,000 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
1998 $1,320,000 $231,960
1999 $1,340,000 $ 21,609
2000 $1,360,000
2001 $1,380,000
2002 $ 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 1997.
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 of NCB and requires each borrower to hold Class B stock at the time the loan is made whose par value is equal to 1% of its loan amount. The Act prohibits NCB from paying dividends on Class B stock. There are two series of Class B stock. Class B-1 stock is Class B stock purchased for cash at par value on or after June 29, 1984, while Class B-2 stock is all other Class B stock. Class B stock is transferable to another eligible holder only with the approval of NCB. NCB does not permit any transfers of Class B-2 stock and permits only such transfers, at the stock's $100 par value, of Class B-1 stock as are required to permit new borrowers to obtain their required holdings of Class B stock. In each instance, NCB specifies which holder(s) are permitted to transfer their stock to the new borrower, based upon which Class B stockholders with holdings of such stock beyond that required to support their loans have held such stock for the longest time. NCB will also repurchase, at par value, any shares of Class B stock that it is required to be repurchased from holders by the terms of the contracts under which such stock was originally sold by NCB. At December 31, 1997, the stock required to be repurchased was approximately $150,000. Class B stock has voting rights, but such voting rights are limited in accordance with the weighted voting system described in Item 10.
Class C Stock - The Act permits Class C stock to be held only by cooperatives eligible to borrow from NCB. The Act allows NCB to pay dividends on Class C stock, but so long as any Class A notes are outstanding, limits dividends on Class C stock(or any other NCB stock) to the interest rate payable on such notes, which was a blended rate of 6.4% during 1997. 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. On April 24, 1997, the Board declared a cash dividend of $1.02 per share of Class C stock payable on or before June 30, 1997 to holders of record as of March 31, 1997. In November, 1996, the Board approved a dividend de minimus provision which states that Class C stock dividends shall not be distributed to a stockholder until such time as the cumulative amount of the dividend payable to the stockholder is equal to, or exceeds, twenty-five dollars ($25.00) unless specifically requested by the stockholder. Class C stock is transferable to another eligible holder only with the approval of NCB. Class C stock has voting rights, but such voting rights are limited in accordance with the weighted voting system described in Item 10.
Class D Stock - Class D stock is non-voting stock that may be held by any person. Only three shares are outstanding and NCB has no present intention to issue any additional shares of such stock. The Act permits NCB to pay dividends on Class D stock but NCB has no present intention to declare any such dividends. Class D stock is transferable only with the approval of NCB. No requests for approval of such transfers have been made to NCB.
There is no established public trading market for any class of NCB's common equity, and it is unlikely that any such market will develop in view of the restrictions on transfer of NCB's stock discussed above. Holders of Class B stock may use such stock to meet the Class B stock ownership requirements established in the Bank Act for borrowers from NCB and may be permitted by NCB, within the limits set forth above, to transfer Class B stock to another borrower from NCB.
As of December 31, 1997 there were 1,188 holders of Class B stock, 374 holders of Class C stock, and 3 holders of Class D stock.
Under the Act, NCB must make annual patronage refunds to its patrons, which are those cooperatives from whose loans or other business NCB derived interest or other income during the year with respect to which a patronage refund is declared. NCB allocates its patronage refunds among its patrons generally in proportion to the amount of income derived during the year from each patron. NCB stockholders, as such, are not entitled to any patronage refunds. They are entitled to patronage refunds only in the years when they have patronized NCB, and the amount of their patronage does not depend on the amount of their stockholding. Under the Act, patronage refunds may be paid only from taxable income and only in the form of cash, Class B or Class C stock, or allocated surplus.
Under NCB's current patronage refund policy that became effective in 1995, NCB makes the non-cash portion of the refund in the form of Class B stock until a patron has holdings of Class B or Class C stock of 16% of its loan amount and thereafter in Class C stock. Under the current patronage refund policy, NCB intends to pay a higher percentage of the patronage refund in cash to those patrons who have greater holdings of Class B and Class C stock in proportion to their loan amount. NCB generally intends to pay a minimum 35% of the patronage refund in cash to those patrons with stock holdings of 1.0% or more of their loan amount and up to 55% to those patrons with stock holding of 12.5% or more of their loan amount. There can, however, be no assurance that a cash patronage refund of any amount will be declared for any year.
NCB has declared a patronage refund for the year ended December 31, 1997 of approximately $14.0 million of which $5.9 million will be distributed in cash and $8.1 million in Class B or Class C stock.
Sales of Unregistered Shares of Class C Stock
During the last quarter of 1997, NCB sold one share 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
1997 vs. 1996
Net income of $12.5 million in 1997 increased 11.3% from $11.2 million in 1996. The growth in net income was due to increased volume of commercial and mortgage lending activities, servicing fees and other non-interest income. The impact of the increase in net interest income was partially offset by increases in the provision for loan losses, non-interest expenses and provision for income taxes.
Credit quality in NCB's lending portfolio remained strong during 1997. Nonperforming assets amounted to 1.3% of total assets at year end. Net chargeoffs as a percentage of total loans and leases outstanding at December 31, 1997 was .18%. The provision for loan losses as a percentage of average loans and leases increased to .5% in 1997 from .3% in 1996. In this same period, the allowance for loan losses as a percentage of loans and leases has increased to 2.3% in 1997 from 2.1% in 1996.
The return on average assets remained unchanged in 1997 and 1996 at 1.5%. The return on average equity increased to 9.7% compared with 9.2% in 1996.
Total assets increased 3.6% or $30.0 million to $869.3 million as of December 31, 1997 from $839.3 million at year end 1996. Loans outstanding showed a 3.2% increase over last year primarily due to growth in real estate loans held for sale and lease financing.
Net Interest Income
Net interest income for the year ended December 31, 1997 increased 3.4% or $0.9 million from the same period in the prior year. The increase resulted primarily from higher volume of loans and leases outstanding.
As shown on Table 2, the net yield on interest earning assets dropped 29 basis points to 3.32% from 3.61% for the year ended December 31, 1996. The yields on average interest earning assets dropped slightly to 8.51% in 1997 from 8.52% in 1996 due to a declining market interest rates on interest bearing assets. Yields on interest bearing liabilities increased from 6.01% in 1996 to 6.20% in 1997 due to the repricing of the subordinated debt and higher volume and interest rates on our borrowings. As a result, the net spread decreased 20 basis points to 2.31% at year end December 31, 1997 compared with 2.51% at the prior year end.
For the year ended December 31, 1997, interest income increased 13.7% to $68.8 million compared with $61.3 million from the prior year. The increase in interest income was mostly due to a higher average balance of interest earning assets. Average loans and leases outstanding at December 31, 1997 increased to $720.3 million compared with $633.4 million at December 31, 1996.
Total interest expense increased $6.6 million to $41.9 million for the year ended December 31, 1997 from $35.3 million in 1996. As shown on Table 2, the average rate on interest bearing liabilities at December 31, 1997 went up 19 basis points to 6.20% compared with 6.01% at December 31, 1996. The increase was primarily due to the repricing of $53.5 million of subordinated debt and increased use of long term facilities.
See Table 1 & Table 2
Credit quality
Credit quality remained strong in 1997. NCB maintains loan loss reserves that, in management's judgement based on current expectations relative to portfolio characteristics, are adequate to absorb future losses inherent in the loan portfolio.
An inevitable aspect of the lending or risk assumption process is the fact that losses will be incurred. The extent to which losses occur depends on the risk characteristics of the loan portfolio. NCB emphasizes continuous credit risk management. Specific procedures have been established that seek to eliminate undue credit risk on the balance sheet. They include a multilevel approval 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.
To manage credit risk over a wide geographic area and lending in multiple industries, NCB uses a team-based approval process which relies upon the expertise of lending teams familiar with particular segments of our industry. Those credit facilities exceeding delegated lending authority for each team are approved by senior management in an attempt to ensure the quality of lending decisions. Financial analysis of the industries and regions serviced is regularly performed by the various lending teams that keep abreast of economic events and market conditions throughout the United States.
Loans with developed risk characteristics that make their full and timely payment uncertain are assigned to the Special Assets Department. The Department determines, on a case-by-case basis, the best course of action to restore a credit to an acceptable risk rating or to minimize potential losses to NCB.
By maintaining an adequate allowance for loan losses, management seeks to protect NCB's capital against the risk of losses inherent in the credit extension process. The allowance is increased by the provision for possible credit losses and decreased by the amount of charge-offs, net of recoveries. The adequacy of the allowance for loan losses is determined based on risk ratings, current and projected economic conditions, concentrations, diversification, and portfolio size, among other relevant factors.
The provision for loan losses increased to $3.5 million in 1997 from $1.95 million in 1996. The increase was largely attributable to identified downgrade of loans as well as growth in the portfolio. The provision as a percentage of average loans and leases outstanding increased to .5% in 1997 from .3% in 1996.
The allowance for loan losses increased 13.8% to $17.6 million in 1997. The allowance as a percentage of loans and leases outstanding increased to 2.3% at December 31, 1997 from 2.1% at December 31, 1996. The allowance as a percentage of non-performing loans ( restructured and non-accruing loans ) increased to 303% in 1997 compared with 200% in the prior year.
Total non-performing assets ( non-accruing and restructured loans and real estate owned(REO)) increased to $10.9 million at December 31, 1997 from $8.1 million at December 31, 1996. Non-performing assets as a percentage of loans and leases outstanding plus REO increased to 1.4% in 1997 from 1.1% in 1996. Non-performing assets as a percentage of total capital increased to 8.3% in 1997 from 6.5% in 1996.
See Table 3 & Table 4
Non-accruing loans, as a percentage of loans and leases, remained at .3% at year-end 1997 and 1996. Restructured loans decreased to $2.8 million in 1997 compared with $5.1 million in 1996 due to a repayment of a real estate loan in July 1997. As of year end, all restructured loans were current.
The majority of NCB's loans are to cooperatives in industries such as owner-occupied multi-family residential housing, food distribution, health care, and financial services. NCB bases credit decisions on the cash flows of its customers and views collateral as a secondary source of repayment.
The real estate portfolio contains a concentration of loans in the New York City area; however, the majority of loans are to seasoned housing cooperatives with low loan-to-value ratios. NCB also has minimal credit exposure to highly leveraged transactions, commercial real estate and construction loans. NCB has no foreign loan exposure.
See Table 5
Non-interest income
Non-interest income increased by 32.6% to $14.6 million in 1997. 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. The majority of the increase was caused by the higher amount of asset sales to the secondary market. Gains on sales of loans were $7.2 million in 1997 which represented 49.6% of non-interest income. Real estate loan sales in 1997 of $320.4 million reflected an increase of 85.0% or $147.2 million compared with $173.2 million in 1996. NCB maintains a conservative interest rate risk policy; accordingly, warehoused loans were fully hedged in 1997 and 1996.
Servicing income remained a stable source of non-interest income for NCB in 1997. NCB earned servicing fee income of $2.2 million and $2.1 million in 1997 and 1996, respectively. As of December 31, 1997, NCB serviced $1.37 billion in single and multi-family real estate and commercial loans for investors compared with $1.2 billion at year end 1996.
Other income increased 19% to $5.1 million for the year ended December 31, 1997 compared with $4.3 million for the prior year. The majority of other income is related to the commercial line of business activities.
Non-interest expenses
Non-interest expenses increased 4.6% from $23.0 million to $24.1 million. Increases in compensation and employee benefits and contributions to NCBDC were offset by a decrease in contractual services, occupancy and equipment, and other expenses. Non-interest expenses as a percentage of average assets were 2.9% for 1997 compared with 3.1% in 1996. Salaries and benefits, the single largest component of non-interest expenses, increased 16.9% or $1.8 million. During 1997, loan officers were paid more commissions due to high levels of loan originations while bonuses paid to the remaining employees were at their maximum payout based on NCB's performance. Salaries and employee benefits accounted for 52.6% of non-interest expenses in 1997 compared with 47.1% in 1996. As of December 31, 1997, NCB and its consolidated subsidiaries employed 159 employees compared with 162 employees one year earlier.
Table 5 NONPERFORMING ASSETS (dollars in thousands)
At December 31, 1997 1996 1995 1994 1993
Real estate owned $5,115 $ 377 $1,397 $ 300 $ 172
Non-accruing $3,030 $2,601 $1,741 $ 723 $ 886
Restructured $2,791 $5,147 $4,041 $2,143 $2,283
Under the provisions of the National Consumer Cooperative Bank Act, NCB makes tax deductible, voluntary contributions to the NCB Development Corporation. These contributions are discretionary and are based upon the approval of NCB's Board of Directors. In 1997, NCB agreed to make a contribution to NCBDC to fund certain business activities. The contribution to NCB Development Corporation was $1.0 million in 1997 and $.72 million in 1996. Non-interest expenses, adjusted for the contribution to NCBDC, as a percentage of average assets decreased to 2.7% in 1997 compared with 3.0% in 1996.
Year 2000
A significant challenge facing NCB, its subsidiaries and affiliate as well as all companies, is the readiness of its computer systems for the next millennium. NCB is dependent upon its internal computer systems and has external interdependencies with other financial institutions and customers. While the interdependencies may not be within NCB's influence, internal systems are.
Following the adoption of a Year 2000 policy governing the purchase of new software and process for remediating existing software, management began to identify and test internal systems in 1997. All systems have been identified and evaluated as to their critical impact. Those core systems where Year 2000 compliance is known to be deficient have been designated for replacement. Conversion to the new systems is scheduled for completion before December 31, 1998. Testing of all other systems is scheduled for completion by June, 1999.
Management does not expect costs associated with modification to NCB's information systems infrastructure to have a material impact on NCB's business, operations or financial condition. In the event significant customers, financial institutions, or companies with which NCB is interdependent do not successfully and timely achieve Year 2000 compliance, or NCB's own Year 2000 compliance is not achieved on schedule, NCB's business could be adversely affected.
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.
1996 vs. 1995
Net income of $11.2 million in 1996 increased 23.9% 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.
Net interest income of $26.0 million for the year ended December 31, 1996 represented an increase of $3.9 million or 17.9% over year end 1995. Net yield on interest earning assets decreased 9 basis points to 3.65% in 1996 from 3.74% in 1995 while net spread slightly decreased from 2.61% in 1995 to 2.60% in 1996.
Credit quality in NBC's lending portfolio remained strong during 1996. Nonperforming assets as a percentage of total assets at year end was 1%. Net chargeoffs as a percentage of total loans and leases outstanding was .13%. The provision for loan losses as a percentage of average loans and leases decreased to .3% in 1996 from .4% in 1995. In this same period, the allowance for loan losses as a percentage of average loans and leases decreased to 2.1% in 1996 from 2.5% in 1995.
Non-interest income decreased by 10.9% to $11.0 million in 1996. Non-interest income was composed of gains from sales of blanket mortgages and share loans to secondary market investors, servicing fees, origination fees and advisory fees. Gains on loan sales were $4.6 million in 1996 which represented 41.7% 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 and 1995.
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.
1997 vs. 1996 Fourth quarter results
Net income for the fourth quarter of 1997 was $5.1 million compared with $1.1 million in the fourth quarter of 1996. The increase was due primarily to higher non-interest income. Non-interest income for the quarter increased to $7.9 million in 1997 from $1.9 million in 1996 due primarily to the timing of gains realized in loan sales. This increase however was partially offset by an increase in the provision for loan losses and non-interest expenses of $.5 million and $.8 million, respectively.
See Table 6
Sources of Funds
Capital Markets Access
NCB maintains line of credit facilities provided by a consortium of banks. At year end, total borrowing capacity under these facilities was $320 million, and the outstanding balance at December 31, 1997 was $218.2 million compared with an outstanding balance of $224.5 million at December 31, 1996. Usage, as measured by average outstanding balances during the year, increased from $120.6 million in 1996 to $186.2 million in 1997 due to growth in commercial loan volume and additional activity to fund warehoused real estate loans.
In 1996, NCB developed a program under which it borrows, on a short-term basis, from certain of its customers. At December 31, 1997 and 1996, the short-term borrowings outstanding were $12.2 million and $6.5 million, respectively.
In 1997, 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. As of December 31, 1997, NCB had $40 million outstanding under this program. In addition, during 1997, NCB implemented a commercial paper program of which a face value of $25.0 million was outstanding at year end.
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 1997, NCB sold $366.2 million compared to $173.2 million of cooperative real estate, commercial and share loans sold in the prior year.
In 1998, NCB expects to sell $390 million of cooperative real estate, commercial, and share loans. Actual sales through February, 1998 were $126.9 million.
At NCB's wholly-owned subsidiary, NCB Savings Bank, FSB, deposits declined 5.4% to $83.8 million in 1997 from $88.6 million a year earlier. The decrease was attributable to scheduled maturities of the certificate of deposits. The weighted average rates on deposits at December 31, 1997 and 1996 were 4.9% and 4.8%, respectively. Although NCB relies heavily on funds raised through the capital markets, deposits are a major portion of interest bearing liabilities -- 11.7% in 1997 compared with 12.7% in 1996. Management anticipates that deposits will represent an increasing portion of its funding structure.
Uses of funds
Loans and leases
Loans and leases outstanding increased 3.2% to $773.8 million at year-end 1997 from $750.1 million in 1996.
NCB's commercial loan portfolio expanded with new business opportunities. The commercial loan and lease portfolio increased 5.7% to $377.6 million at December 31, 1997 compared with $357.3 a year earlier. The commercial loan portfolio reflects an increase in the food processing and distribution areas even though $19.0 million of loans were sold through the retail loan securitization program. Decreases in the areas of financial services and other, which includes native Alaskan and hardware wholesale cooperatives, were due to scheduled loan repayments and maturities.
NCB's real estate portfolio increased 1.0% to $396.2 million at the end of 1997 from $392.8 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 1998, NCB expects continued strength in its origination and secondary marketing activities. Net loan volume is expected to increase approximately $37 million based on new loan originations (net of scheduled amortization) of $427 million and sales of $390 million.
Cash, Cash Equivalents, and Investment Securities
Cash, cash equivalents, and investments increased 6.7% or $5.8 million to $91.8 million compared with $86.3 million in 1996. Cash, cash equivalents, and investment securities, represent 10.6% of interest earning assets in 1997 compared with 7.3% in 1996.
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, 1997, NCB held $21.7 million in cash and cash equivalents compared with $17.2 million in cash and cash equivalents at year end 1996. These funds are normally used to fund business operations.
NCB's had at year end a $32.5 million investment portfolio which is a second source of asset liquidity. The portfolio consists of high-grade corporate and government obligations. The weighted average period to maturity remained at 5 years for 1997 and 1996.
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 $320 million of revolving lines of credit, $130 million of which are committed until May 27, 2000 and $130 million committed until May 27, 1998. The remaining balance of $60 million is uncommitted at December 31, 1997. Average outstanding balances were $186.2 million in 1997 compared with $120.6 million in 1996.
Finally, NCB's wholly-owned subsidiary, NCB Savings Bank, FSB raises both local and national deposits from NCB members, which also serve as a source of liquidity. NCB Savings Bank, FSB, uses cooperative deposits to co-originate loans with NCB.
See Table 7
ITEM 7A, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NCB's principal market risk exposure is to interest rates.
NCB's asset and liability management process is utilized to manage NCB's interest rate risk through the structuring of the balance sheet and off-balance sheet portfolios to maximize net interest income while maintaining an acceptable level of risk to changes in market interest rates. The achievement of this goal requires a balance between profitability, liquidity, and interest rate risk.
Interest rate risk is managed by the Risk Management Committee (RMC), which is composed of senior officers of NCB, in accordance with policies approved by NCB's Board of Directors. The RMC formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the RMC considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional and national economies, liquidity, business strategies, and other factors. The RMC meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activity, warehouse loans and commitments to originate loans ("mortgage pipeline"),and the maturities of investments and borrowings. Additionally, the RMC reviews liquidity, cash flow flexibility, maturities of deposits, and consumer and commercial deposit activity.
To effectively measure and manage interest rate risk, NCB uses simulation analysis to determine the impact on net interest income under various interest rate scenarios, balance sheet trends, and strategies. From these simulations, interest rate risk is quantified and appropriate strategies are developed and implemented. Additionally, duration and market value sensitivity measures are utilized when they provide added value to the overall interest rate risk management process. The overall interest rate risk position and strategies are reviewed by executive management and NCB's Board of Directors on an ongoing basis. NCB has traditionally managed its business to reduce its overall exposure to changes in interest rates. However, under current policies of NCB's Board of Directors, management has been given some latitude to increase NCB's interest rate sensitivity position within certain limits if, in management's judgement, it will enhance profitability. As a result, changes in market interest rates may have a greater impact on NCB's financial performance in the future than they have had historically.
NCB manages its exposure to interest rates by entering into certain financial instruments with off-balance sheet risk in the ordinary course of business. The financial instruments used for hedging interest rate risk include interest rate swaps, caps, floors, financial options, financial futures contracts, and forward delivery contracts. A hedge is an attempt to reduce risk by creating a relationship whereby any losses on the hedged asset or liability are expected to be offset in whole or in part by gains on the financial instrument used for hedging. Thus, market risk resulting from a particular instrument is normally offset by other on or off-balance-sheet instruments. See Note 21 to the Consolidated Financial Statements.
The following table presents an analysis of the sensitivity inherent in NCB's net interest income and market value of portfolio equity (market value of assets, less liabilities, adjusted for the market value of mortgage servicing rights and off-balance-sheet instruments). The interest rate scenarios presented in the table include interest rates at December 31, 1997 and as adjusted by instantaneous parallel rate changes upward and downward of up to 200 basis points. Each rate scenario reflects unique prepayment and repricing assumptions. Substantially, all of NCB's portfolio is held for non-trading purposes.
Since there are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates, this analysis is not intended to be a forecast of the actual effect of a change in market interest rates on NCB. The net interest income variability reflects NCB's interest sensitivity gap (defined below).
CHANGE IN CHANGE IN CHANGE IN NET INTEREST MARKET VALUE OF INTEREST RATES INCOME PORTFOLIO EQUITY
+200 (1.9)% (6.7)% +100 (1.0) (3.5) 0 0.0 0.0 -100 .8 3.8 -200 1.7 8.2
Assumptions with respect to the model's projections of the effect of changes in interest rates on Net Interest Income include:
1. Target balances for various asset and liability classes which are solicited from the management of the various business units. 2. Interest rate scenarios which are generated by RMC. 3. Spread relationships between various interest rate indices, which are generated by the analysis of historical relationships and RMC consensus. 4. Assumptions about the effect of embedded options and prepayment speeds:
NCB is subject to limited prepayment risk given the structure of the loans; therefore limited prepayments are factored into the assumptions.
The interest rate sensitivity gap ("gap") is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. During a period of rising interest rates, a positive gap (where the amount of maturing and repricing assets exceed liabilities) would tend to have a positive impact on net interest income while a negative gap (where the amount of maturing and repricing liabilities exceeds assets) would tend to have a detrimental impact. During a period of declining interest rates, a negative gap would tend to have a positive impact on net interest income while a positive gap would tend to have a detrimental impact.
NCB's one-year cumulative gap position at December 31, 1997 was a positive $20.6 million or 2.37% of assets. Though NCB had a positive gap at December 31, 1997, a rising interest rate environment would marginally reduced net interest income. This results from interest rate sensitive liabilities maturing and/or repricing more frequently than interest rate sensitive assets within the specified time period, generally twelve months. The December 31 one-year gap position is a one-day position that is continually changing and is not indicative of NCB's position at any other time. While the gap position is a useful tool in measuring interest rate risk and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates solely on that measure, without accounting for alterations in the maturity or repricing characteristics of the balance sheet that occur during changes in market interest rates. For example, the gap position reflects only the prepayment assumptions pertaining to the current rate environment. Assets tend to prepay more rapidly during periods of declining interest rates than during periods of rising interest rates. Because of this and other risk factors not contemplated by the gap position, an institution could have a matched gap position in the current rate environment and still have its net interest income exposed to interest rate risk.
The following table sets forth the expected maturity and repricing characteristics of NCB's consolidated assets, liabilities and off-balance sheet contracts at December 31, 1997.
See Table 8
It is clear from Table 8 that NCB had a positive gap (as a percentage of total assets) of 2.37% and 2.94% at the one year and 180 day time horizons, respectively. At December 31, 1997, NCB's static gap position was in compliance with existing Board policies.
Table 7 MATURITY SCHEDULE OF LOANS (dollar in thousands)
One Year One Year Through Over At December 31, 1997 or Less Five Years Five Years Total
Commercial $41,880 $126,897 $178,881 $347,658 Real estate- residential 11,755 34,987 342,410 389,152 Real estate- commercial 5,018 2,007 7,025 Lease 420 17,290 12,223 29,933
Total loans and leases $54,055 $184,192 $535,521 $773,768
Fixed interest rate loans $ 68,886 $321,594
Variable interest rate loans 115,306 213,927
$184,192 $535,521
Capital
NCB's strong capital position should support growth, continuing access to financial markets, and allow for greater flexibility during difficult economic periods.
Historically, NCB has maintained a strong capital structure. NCB's average equity to average assets was 15.3% in 1997 compared with 16.5% in 1996. When including NCB's subordinated debt, NCB's average total capital to average assets was 37.0% and 41.5% in 1997 and 1996, respectively. The Bank Act limits NCB's outstanding debt to ten times its capital and surplus (including the subordinated debt). As of December 31, 1997, NCB Savings Bank, FSB, had a risk based capital ratio of 21.6%, well in excess of regulatory requirements.
Patronage policy
Each year, NCB declares patronage refunds approximately equal to its taxable net income thereby substantially reducing its Federal income tax. In June 1997, NCB distributed $10.8 million to its active member-borrowers. Of this total, approximately $4.1 million was distributed in cash.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NCB's financial statements and notes thereto are set forth beginning at page 25 below. NCB is not subject to any of the requirements for supplementary financial information contained in Item 302 of Regulation S-K.
Report of Independent Public Accountants
To the Board of Directors and Members of National Cooperative Bank:
We have audited the accompanying consolidated balance sheet of National Cooperative Bank and subsidiaries as of December 31, 1997, and the related consolidated statements of income, changes in members' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Cooperative Bank and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, effective January 1, 1997, the Company changed its method of accounting for loan-servicing rights and interest-only receivables.
Washington, D.C., January 28, 1998 (except with respect to the matter discussed in Note 24, as to which the date is February 13, 1998)
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 the related consolidated statements of income, changes in members' equity, and cash flows for each of the two 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 the results of their operations and their cash flows for each of the two years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
Washington, D.C. January 30, 1997
NATIONAL COOPERATIVE BANK CONSOLIDATED BALANCE SHEETS December 31,
Assets 1997 1996
Cash and cash equivalents $ 21,689,245 $ 17,150,534 Restricted cash 6,884,572 8,348,703 Investment securities Available-for-sale (amortized cost of $60,911,708 and $57,967,940 in 1997 and 1996) 61,268,440 57,903,166 Held-to-maturity (fair value of $1,911,605 and $2,294,294 in 1997 and 1996) 1,942,312 2,946,425
Loans and lease financing 584,635,993 565,824,579 Loans held for sale 189,132,330 184,269,872
Less: Allowance for loan losses (17,638,136) (15,504,510)
756,130,187 734,589,941
Other assets 21,389,059 18,396,811
Total assets $869,303,815 $839,335,580
Liabilities and Members' Equity Liabilities Deposits $ 83,825,979 $ 88,620,002 Patronage dividends payable in cash 5,872,708 4,721,600 Other liabilities 17,072,271 11,332,033 Borrowings Short-term 243,120,607 224,500,000 Long-term 204,793,392 202,137,077 447,913,999 426,637,077
Subordinated debt 182,785,385 182,853,313 Total borrowings 630,699,384 609,490,390 Total liabilities 737,470,342 714,164,025
Members' equity Common stock Class B 84,004,502 78,600,416 Class C 21,904,447 21,751,584 Class D 300 300 Retained earnings Allocated 8,109,931 5,770,844 Unallocated 17,474,132 19,113,185 Unrealized gain (loss) on investment securities available-for-sale 340,161 (64,774)
Total members' equity 131,833,473 125,171,555
Total liabilities and members' equity $869,303,815 $839,335,580
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997 1996 1995
Interest income Loans and lease financing $62,549,700 $55,671,365 $48,563,512 Investment securities 6,237,441 5,593,678 4,206,876 Total interest income 68,787,141 61,265,043 52,770,388
Interest expense Deposits 3,970,498 4,109,098 3,457,902 Short-term borrowings 11,229,046 7,851,964 6,196,456 Long-term debt, other borrowings and subordinated debt 26,744,347 23,338,194 21,098,803 Total interest expense 41,943,891 35,299,256 30,753,161
Net interest income 26,843,250 25,965,787 22,017,227
Provision for loan losses 3,504,000 1,950,000 1,904,500 Net interest income after provision for loan losses 23,339,250 24,015,787 20,112,727
Non-interest income Gain on sale of loans 7,229,368 4,578,209 6,009,720 Loan and deposit servicing fees 2,237,082 2,125,131 1,701,682 Other 5,097,382 4,283,556 4,629,503 Total non-interest income 14,563,832 10,986,906 12,340,905
Non-interest expense Compensation and employee benefits 12,658,409 10,828,385 10,406,220 Contractual services 3,808,267 4,182,131 5,808,285 Occupancy and equipment 4,016,118 4,140,589 3,060,293 Contribution to NCB Development Corporation 1,000,000 720,000 500,000 Other 2,582,435 3,135,476 2,817,915 Total non-interest expense 24,065,229 23,006,581 22,592,713
Net income before taxes 13,837,853 11,996,112 9,860,919
Provision for income taxes 1,375,498 796,914 777,683
Net income $12,462,355 $11,199,198 $ 9,083,236
Distribution for net income Patronage dividends $13,982,639 $10,492,444 $11,308,558 Retained earnings (1,520,284) 706,754 (2,225,332) $12,462,355 $11,199,198 $ 9,083,236
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 1997 1996 1995
Cash flows from operating activities Net income $ 12,462,355 $ 11,199,198 $ 9,083,236 Adjustments to reconcile net income to net cash provided by (used in) operating activities Provision for loan losses 3,504,000 1,950,000 1,904,500 Depreciation and amortization 5,212,091 5,148,255 4,950,807 Gain on sale of loans (7,229,368) (4,578,209) (6,009,720) Loans originated for sale (365,279,273) (243,114,015) (251,781,768) Proceeds from sale of loans held for sale 362,446,396 135,955,259 250,676,820 Decrease (increase) in other assets 3,441,735 (5,443,982) (1,689,307) Increase (decrease) in other liabilities 5,740,238 (2,186,480) 1,782,807 Other - - 798,211
Net cash provided by used in operating activities 20,298,174 (101,069,974) 9,715,586
Cash flows from investing activities Purchase of investment securities Available-for-sale (7,046,767) (9,435,643) (722,785) Held-to-maturity 1,464,131 - (9,155,293) Proceeds from maturities of investments Available-for-sale 5,009,306 8,006,556 4,503,907 Held-to-maturity 154,113 198,000 3,306,785 Proceeds from sales of investments Available-for-sale - - 4,385,281 Net increases in loans and lease financing (44,351,586) (84,941,273) (158,775,397) Proceeds from sale of portfolio loans 17,276,924 38,679,408 51,405,022 Purchases of premises and equipment (712,729) (1,235,856) (613,576)
Net cash used in investing activities (28,206,608) (48,728,808) (105,666,056)
Cash flows from financing activities Net (decrease) increase in deposits (4,794,023) 10,519,829 19,181,624 Net increase in short-term borrowings 18,620,607 92,000,000 41,468,884 Proceeds from issuance of long-term debt 30,916,680 47,500,000 74,500,000 Repayment on long-term debt (28,000,000) - (25,168,822) Repayment on other borrowings - - (922,176) Redemption of common stock (15,000) (68,000) (310,366) Dividends paid (4,281,119) (4,341,889) (4,056,132)
Net cash provided by financing activities 12,447,145 145,659,940 104,693,012
Increase (decrease) in cash and cash equivalents 4,538,711 (4,138,842) 8,742,542
Cash and cash equivalents, beginning of year 17,150,534 21,289,376 12,546,834
Cash and cash equivalents, end of year $ 21,689,245 $ 17,150,534 $ 21,289,376
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of investing and financing activities:
1997 1996 1995 Unrealized gain (loss) on investment available-for-sale $ 404,935 $ (318,812) $ 1,675,619 Common stock cancelled against allowance for loan losses $ 9,114 $ 21,390 $ 288,585 Contributions of excess concentration to NCBRFC $ - $ - $ 2,697,010 Interest paid $40,722,565 $34,582,531 $30,177,706 Income taxes paid $ 1,223,695 $ 670,122 $ 709,879
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization
National Consumer Cooperative Bank, doing business as National Cooperative Bank (NCB), is a U.S. Government-chartered corporation organized under the National Consumer Cooperative Bank Act (the Act). NCB provides loans and financial services to cooperatives. NCB Capital Corporation (NCBCC), previously named NCB Mortgage Corporation, a wholly-owned subsidiary, originates, sells and services real estate and commercial loans for cooperatives. Cooperative Funding Corporation (CFC), a wholly-owned subsidiary, is a registered broker-dealer and provides corporate financial services. NCB Investment Advisers, Inc. (NCBIA), a wholly-owned subsidiary, provides investment advisory services to cooperatives. NCB Financial Corporation (NCBFC), a wholly-owned subsidiary, is the holding company of NCB Savings Bank, FSB (NCBSB), a federally-chartered thrift institution. NCB I, Inc. (NCB 1), a wholly-owned subsidiary, is a special purpose corporation that holds credit enhancement certificates related to the securitization and sale of cooperative real estate loans. NCB Retail Finance Corporation (NCBRFC), a wholly-owned subsidiary, purchases and sells commercial loans which are then securitized into commercial paper.
The Act also provided for the formation of NCB Development Corporation (NCBDC), 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.
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
Securities are accounted for under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires, among other things, for NCB to classify and account for debt and equity securities as follows:
Available-for-sale- Securities that will be held for indefinite periods of time, including those that may be sold in response to changes in market interest rates and related changes in the security's prepayment risk, needs for liquidity and changes in the availability of and the yield of alternative investments are classified as available-for-sale. These assets are carried at fair value. Unrealized gains and losses are determined on an aggregate basis, excluded from earnings and reported as 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.
Interest Rate Futures, Forward Contracts and Interest Rate Swaps
Gains and losses on futures and forward contracts to hedge certain interest-sensitive assets and liabilities are deferred and unamortized hedging gains or losses are recognized at the time of disposition of the assets or liabilities being hedged. They 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 fixed rate debt. The interest income and expense is earned or charged based on the outstanding balances of the receivable and payable positions, respectively, applying the related market rates at which the agreements were purchased and the term outstanding during the period. The interest income and expense are treated as an adjustment to interest expense on the hedged liability.
Loans and Lease Financing
Loans are carried at their principal amounts outstanding, except for loans held for sale which are carried at the lower of cost or market as determined on an aggregate basis. NCB discontinues the accrual of interest on loans when principal or interest payments are ninety days or more in arrears or sooner when there is reason-able doubt as to collectibility. Loans may be reinstated to accrual status when all payments are brought current and, in the opinion of management, collection of the remaining balance can reasonably be expected.
Leasing operations consist principally of leasing equipment under direct financing leases expiring in various years through 2004. All lease financing transactions are full payout direct financing leases. Lease income is recorded over the term of the lease contract which provides a constant rate of return on the unrecovered investment. Lease financing is carried net of unearned income.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance which management believes to be adequate to cover estimated loan and lease financing losses in the existing portfolio. A provision for loan losses is added to the allowance and charged to expense. Loan and lease charge-offs, net of recoveries, are deducted from the allowance. When a portion of a loan is deemed uncollectible, a full or partial charge-off against the allowance for loan losses is made. The factors utilized by management in determining the adequacy of the allowance include, but are not limited to, the following: the present and prospective financial condition of the borrowers and the values of any underlying collateral; evaluation of the loan and lease financing portfolio in conjunction with historical loss experience; portfolio composition; and current and projected economic conditions. The allowance for loan losses is maintained at a level believed by management to be adequate to absorb 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 NCB 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 and direct origination costs are accounted for in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income over the contractual life of the loans. Fees relating to expired commitments are recognized as non-interest income. If a commitment is exercised during the commitment period, the fee at the time of exercise is recognized over the life of the loan as an adjustment of yield.
Servicing Assets and Interest-Only Receivables
Effective January 1, 1997, NCB adopted Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which supersedes, but generally retains, the requirements of SFAS No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 122"). Both statements require that entities that acquire servicing assets through either purchase or origination of loans and sells or securitizes those loans with servicing assets retained must allocate the total cost of the loans to the servicing assets and the loans (without the servicing assets) based on their relative fair value.
Upon NCB's adoption of SFAS No. 125, previously recognized excess spread assets were reclassified as interest-only receivables. Interest-only receivables represent rights to certain future net cash flows from securitized assets that are available after all expenses of the transaction have been paid ("residual cash flow"). Interest-only receivables are amortized using the effective yield method over the estimated lives of the underlying loans.
Servicing assets and interest-only receivables, stated net of accumulated amortization, are amortized in proportion to the remaining net servicing revenues estimated to be generated by the underlying loans using the effective yield method over the remaining lives of the underlying loans.
SFAS No. 125 requires a periodic assessment of the carrying of interest-only receivables. Because these assets can be contractually prepaid or otherwise settled such that NCB would not recover substantially all of its recorded investment, the assets are being measured like available-for-sale securities under SFAS No. 115.
Substantially all interest-only receivables pertain to blanket loans made to cooperative housing corporations as first mortgages. These mortgages are typically structured with prepayment lockouts followed by prepayment penalties or yield maintenance provisions through maturity. In calculating interest-only receivables, NCB discounts the cash flows through the lockout period. Cash flows beyond the lockout period are discounted only to the extent that NCB is entitled to receive the prepayment or yield maintenance penalty.
The cost of loan-servicing rights, the interest-only receivables 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 estimates made by management.
Interest-only receivables that are certificated have been included as investment securities consistent with SFAS No. 115. Interest-only receivables that are not certificated are included as other assets.
Other Assets
Foreclosed property pending disposition is carried at fair value less estimated costs to sell. Goodwill relating to the acquisition of NCBSB by NCBFC is being amortized over the estimated remaining lives of the long-term interest-bearing assets acquired. Interest-only receivables are carried at fair value with unrealized gains and losses carried as an adjustment to members' equity.
Premises and equipment are carried at cost less accumulated depreciation and include equipment owned under lease financing arrangements. Depreciation is computed using an accelerated method. Leasehold improvements are amortized on a straight-line basis over the terms of the leases.
Income Taxes
The Act Amendments of 1981 (P.L. 97-35) provide that, effective January 1, 1982, NCB shall be treated as a cooperative and subject to the provisions of Subchapter T of the Internal Revenue Code. Under Subchapter T, NCB issues its member-borrowers patronage refunds, which are tax deductible to NCB thereby reducing its taxable income. NCB has determined that all income generated by NCB and its subsidiaries, with the exception of NCBSB, qualifies as patronage income under the Internal Revenue Code, with the consequence that NCB is able to issue tax deductible patronage refunds with respect to all such income. Section 109 of the Act, as amended, provides that NCB is exempt from state and local taxes with the exception of real estate taxes. Certain NCB subsidiaries, however, are subject to federal and state income taxes.
NCB provides for income taxes under SFAS No. 109, "Accounting for Income Taxes." The asset and liability approach of SFAS No. 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts of the existing assets and liabilities and their respective tax bases.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997 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: 1997 1996
Cash in bank $ 8,082,813 $ 5,186,085 Federal funds 5,949,195 4,377,837 Overnight investments 7,657,237 7,586,612 $21,689,245 $17,150,534
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
U.S. Treasury and agency obligations $18,027,503 $140,820 $ 28,840 $18,139,483 Corporate bonds 12,169,073 129,615 8,368 12,290,320 Mutual funds 1,164,610 - 2,493 1,162,117 Money market 1,068,825 - 112,403 956,422 Interest-only receivables 28,481,697 238,401 - 28,720,098
$60,911,708 $508,836 $152,104 $61,268,440
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value
U.S. 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 Interest-only receivables 27,566,066 - - 27,566,066
$57,967,940 $162,345 $227,119 $57,903,166
Interest-only receivables substantially pertain to blanket loans to cooperative housing corporations.
The maturities of investment securities available-for-sale at December 31, 1997 are as follows:
Weighted Amortized Average Cost Yield Fair Value
Within 1 year $ 7,637,639 6.27% $ 7,523,541 After 1 year through 5 years 30,660,024 6.79% 31,080,652 After 5 years through 10 years 19,208,305 6.88% 19,255,536 After 10 years 3,405,740 6.56% 3,408,711
$60,911,708 6.74% $61,268,440
The composition of investment securities held-to-maturity at December 31 is as follows:
Gross Amortized Unrealized Fair Cost Losses Value
Mortgage-backed security $1,942,312 $ 30,707 $1,911,605
Gross Amortized Unrealized Fair Cost 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
The 1997 mortgage-backed security held-to-maturity has a weighted average yield of 9.4% and matures after ten years.
In 1997 and 1996, NCB had no sales of securities available-for-sale. In 1995, securities available-for-sale totaling $4,459,219, were sold resulting in a loss of $73,938. There were no sales of securities classified as held-to-maturity during 1997, 1996, or 1995. NCB held callable investment securities with amortized costs of $8,323,643 and $6,824,483 at December 31, 1997 and 1996, respectively. The fair values of the callable securities are $8,478,587 and $6,950,818 in the same respective periods.
4. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans at December 31, 1997 and 1996 are $1,366,353,000 and $1,194,113,000, respectively.
5. Loans and Lease Financing
Loans and leases outstanding, including loans held for sale, by category at December 31 are as follows:
1997 1996
Commercial loans Portfolio $344,849,332 $337,717,275 Loans held for sale 2,808,807 4,493,469 Real estate loans Residential 202,828,605 204,258,591 Loans held for sale 186,323,523 179,776,403 Commercial 7,025,073 8,742,343 Lease financing 29,932,983 15,106,370
$773,768,323 $750,094,451
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
1997 1996 1997 1996 By Region Northeast 21.4% 19.7% 75.6% 70.0% South Atlantic 7.0 6.7 10.2 7.9 Central 33.5 29.3 12.0 14.1 West 38.1 44.3 2.2 8.0
100.0% 100.0% 100.0% 100.0%
Percentage of Total Loan Portfolio
1997 1996 By Borrower Type Real estate Residential 50.4% 51.3% Commercial .8 1.2 Commercial Food processing and distribution 19.6 8.9 Financial services 4.4 5.5 Medical service and supplies 2.1 4.7 Hardware 6.1 4.9 Alaskan native corporations 4.4 4.9 Other 8.3 16.6 Lease financing 3.9 2.0
100.0% 100.0%
NCB originates multi-family blanket mortgages to predominantly owner-occupied housing cooperatives. A significant portion of NCB's mortgage loans is secured by real estate in New York City due to that city's extensive cooperative market. At December 31, 1997, $239 million of real estate loans are secured by real estate in New York. The collateral for almost all of the real estate loans consists of first mortgage liens on the land and improvements of cooperatively owned, multi-family residential properties and property leases. The real estate portfolio also includes loans secured by second mortgage liens and, in several rare circumstances, unsecured loans to residential cooperative corporations. The loans are repaid from operations of the real estate cooperative. NCB's exposure to credit loss in the event of nonperformance by other parties to the loans is the carrying amounts of the loans.
NCB's commercial portfolio has a concentration in the food processing and distribution industry. The loan types include lines of credit, revolving credits, and term loans. These loans are typically collateralized with general business assets (e.g., inventory, receivables, fixed assets, and leasehold interests). The loans are expected to be repaid from cash flows generated by the borrower's operating activities. NCB's exposure to credit loss in the event of nonperformance by the other parties to the loan is the carrying amounts of the loans.
The carrying amounts and respective estimated fair values of loans and leases outstanding at December 31 are as follows (amounts in thousands):
Carrying Amount Estimated Fair Value
1997 1996 1997 1996 Commercial Fixed rate loans $137,723 $157,727 $140,855 $160,979 Adjustable rate loans 207,126 179,990 207,872 180,732 Loans held for sale 2,809 4,493 2,818 4,459 Real Estate Loans held for sale 186,324 179,777 187,453 181,243 Portfolio-fixed rate 45,326 59,188 44,905 60,405 Portfolio-adjustable 164,528 153,813 170,675 152,913 Lease financing 29,932 15,106 31,426 15,570
$773,768 $750,094 $786,004 $756,301
6. Receivables Sold with Recourse
At December 31, 1997 and 1996, restricted cash of $6,884,572 and $8,348,703, respectively, is held by a trustee for the benefit of certificate holders in the event of a loss on certain loans sold with balances totaling $37,300,000 and $92,623,000 in 1993 and 1992, respectively. At December 31, 1997 and 1996, the outstanding balances of the 1993 and 1992 recourse loan sales totaled $76,636,254 and $108,755,626, respectively. 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 limited to the required restricted cash balance. To date NCB has not incurred any losses on these loan sales.
In an unrelated 1993 transaction, NCB sold loans totaling $25,924,380 of which any losses on the subordinate tranche are repaid from a security held by NCB totaling $1,942,312 and $2,746,425 at December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, the outstanding balances of the 1993 recourse loan sale totaled $14,832,919 and $19,013,777, respectively. 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 limited to the required balance of the security held. NCB is prohibited from disposing of this security until all senior holders of the security have been repaid. To date NCB has not incurred any losses on these loan sales.
7. Impaired Assets
Loans that became impaired after January 1, 1994 totaled $4,057,539 and $3,878,357 at December 31, 1997 and 1996, respectively, and averaged $4,909,000 and $3,443,000 during the same respective periods. Nonaccrual loans totaled $3,030,448 and $2,829,221 at December 31, 1997 and 1996, respectively. Restructured loans totaled $1,027,091 and $1,049,136 at December 31, 1997 and 1996, respectively. Specific allowances of $911,938 and $1,535,000 have been set aside for these loans in 1997 and 1996, respectively, as management's best estimate of their fair value is less than the recorded investment in the loans. During 1997 and 1996, the interest collected on the nonaccrual loans was applied to reduce the outstanding principal. Interest earned on the restructured loans totaled $112,000 and $109,000 during 1997 and 1996, respectively.
At December 31, 1997, there are no commitments to lend additional funds to borrowers whose loans are non-performing.
At December 31, 1997 and 1996, NCB had real estate owned of $5,114,991 and $376,708, respectively, which is classified as other assets.
8. Allowance for Loan Losses
The following is a summary of the activity in the allowance for loan losses:
1997 1996 1995
Balance at beginning of year $15,504,510 $14,554,240 $13,031,499 Provision for loan losses 3,504,000 1,950,000 1,904,500 Charge-offs (1,555,226) (1,137,229) (699,014) Recoveries of loans previously charged-off 184,852 137,499 317,255
Balance at end of year $17,638,136 $15,504,510 $14,554,240
The allowance for loan losses was 2.3%, 2.1%, and 2.5% of loans and leases outstanding at December 31, 1997, 1996, and 1995, 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, 1997, loans to affiliated cooperatives, directors, officers, and their family members have the following outstanding balances:
January 1, December 31, 1997 Additions Deductions 1997 Loans to affiliated cooperatives $60,552,761 $19,198,198 $12,160,395 $67,590,564
Loans to directors, officers, and family members 923,220 - 829,849 93,371
$61,475,981 $19,198,198 $12,990,244 $67,683,935
Percent of loans outstanding 8.2% 8.7%
During 1997, 1996, and 1995, NCB recorded interest income of $6,412,886 $3,216,776, and $2,957,590, respectively, on loans to related parties.
Included in the analysis of loans outstanding to affiliated cooperatives as of December 31, 1997, is a $30 million revolving line of credit to the Co-operative Central Bank. This line of credit is 50% participated to outside banks without recourse to NCB. At December 31, 1997, none of the loan is outstanding. The loan is secured by U.S. Government guaranteed obligations equal to 110% of the outstanding balance. The Co-operative Central Bank is an organization with which an NCB director serves as the chief executive officer.
Certain NCB affiliates, and certain directors and officers of NCB and NCBSB, have deposits with NCBSB. Such deposits aggregated $1,307,365 and $1,092,299 as of December 31, 1997 and 1996, respectively.
10. Premises and Equipment
Premises and equipment are included in other assets and consist of the following as of December 31:
1997 1996
Furniture and equipment $3,046,361 $3,366,620 Leasehold improvements 846,538 1,128,359 Other 2,461,694 2,196,400 6,354,593 6,691,379 Less: Accumulated depreciation and amortization (4,286,837) (4,434,017)
$2,067,756 $2,257,362
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 6, 1999 to July 31, 2000. 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, 1997 are as follows:
1998 $1,686,336 1999 1,471,836 2000 1,424,161 2001 1,422,516 2002 355,629
$6,360,478
Rental expense on premises and office equipment in 1997, 1996, and 1995 is $1,689,415, $1,686,788, and $1,744,329, 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, 1997 and 1996, the unamortized lease incentive is $955,892 and $1,092,627, respectively.
12. Deposits
Deposits as of December 31 are summarized as follows:
1997 1996 Weighted Weighted Average Average Balance Rate Balance Rate
Balances by type Passbook accounts $ 4,937,068 2.72% $ 5,647,482 2.71% Money market demand and NOW accounts 15,578,000 2.26% 18,260,850 2.24% Fixed-rate certificates Less than $100,000 45,397,875 5.74% 42,122,451 5.93% $100,000 or greater 17,913,036 5.51% 22,589,219 5.28%
$83,825,979 4.87% $88,620,002 4.80%
The remaining contractual maturities of certificate accounts at December 31, 1997 are as follows:
Less than $100,000 $100,000 or greater Total
Three months or less $ 5,813,377 $ 2,438,924 $ 8,252,301 Three to six months 11,048,122 4,511,613 15,559,735 Six to twelve months 12,589,617 4,371,608 16,961,225 Twelve months or longer 15,946,759 6,590,891 22,537,650
$45,397,875 $17,913,036 $63,310,911
The estimated fair value of deposits is $83,281,000 and $88,211,000 at December 31, 1997 and 1996, respectively.
13. Short-Term Borrowings
Revolving credit facilities
NCB has $320 million of revolving lines of credit, $130 million of which is committed until May 27, 2000 and $130 million of which is committed until May 27, 1998. The remaining balance of $60 million is uncommitted at December 31, 1997.
Interest expense from borrowings under the revolving line of credit facilities was $8,732,851, $6,671,725, and $5,004,701 in 1997, 1996, and 1995, respectively. The following is a summary of the borrowings under the facilities for the years ended December 31:
1997 1996
Borrowings outstanding at December 31 $206,000,000 $218,000,000 Unfunded capacity at December 31 114,000,000 33,000,000 Average line of credit borrowings outstanding during the year 186,157,083 120,576,776 Maximum borrowings during the year 227,000,000 218,000,000 Weighted average borrowing rate During the year 5.9% 5.9% At December 31 6.5% 6.6%
Borrowing rates under the revolving credit facility are indexed off the prime rate, federal funds rate or the London Interbank Offered Rate (LIBOR) and vary with the amount of borrowings outstanding. As of December 31, 1997, commitment fees for the line of credit are .15% on $130 million and .125% on $130 million. Total commitment fees paid for revolving credit facilities were $479,000 in 1997, and $340,000 in 1996 and 1995. 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 $290 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 Borrowings
In an effort to reduce NCB's cost of funds, NCB developed a program under which it borrows, on a short-term basis, from certain customers. At December 31, 1997 and 1996, the short-term borrowings outstanding totaled $12.2 million and $6.5 million, respectively. In 1997, NCB also implemented a commercial paper program to further reduce NCB's cost of funds. At December 31, 1997, commercial paper totaled $24.9 million.
During 1997 and 1996, NCB also entered into a series of reverse repurchase agreements. The average balances of reverse repurchase agreements outstanding during 1997 and 1996 were $14,364,135 and $9,288,258, respectively, and the maximum borrowings during 1997 and 1996 were $17,047,000 and $13,523,500, respectively. The weighted average rates on the reverse repurchase agreements during 1997 and 1996 were 5.73% and 5.65%, respectively. There were no reverse repurchase agreements outstanding at December 31, 1997 and 1996.
The carrying amounts of short-term borrowings at December 31 are as follows (amounts in thousands):
Carrying Amount
1997 1996
Line of credit $206,000 $218,000 Commercial paper 24,921 - Other 12,200 6,500
$243,121 $224,500
14. Long-term Debt
NCB has entered into various agreements for extension of credit with third parties. NCB has an agreement for a $30 million extension of credit with a major insurance company which expires on June 30, 1999. $10 million has been borrowed under this agreement. In January 1997, NCB received approval to issue up to $100 million under the medium term note program. As of December 31, 1997, NCB had $40 million outstanding under this program. In addition, as of December 31, 1997, NCB had outstanding $154.8 million of private placements issued to various institutional investors. The majority of the long-term debt has semi-annual interest with principal payments due on a 30/360 basis.
NCB is required under these lending agreements to, among other things, maintain $25 million of cash, cash equivalents and investments and have an effective net worth of not less than $290 million (defined as total members' equity plus subordinated debt). NCB shall not at any time permit consolidated senior debt to exceed 650% of consolidated adjusted net worth.
The following is a schedule of outstanding long-term debt at December 31, 1997:
Amount Rate Maturity
$ 47,951,623 7.45% 1998 19,979,843 5.92% 1999 31,967,749 8.51% 2000 29,969,765 7.15% 2001 74,924,412 6.75% 2002 and thereafter
$204,793,392
NCB has entered into a series of interest rate swap agreements which have a combined notional amount of $63 million. The effect of the agreements is to convert $63 million of the long-term debt from a weighted average fixed rate of 7.02% to a floating rate based on LIBOR.
The interest rate swap agreements are tied to the three and six month LIBOR rates plus a spread and reprice at different times throughout the year. At December 31, 1997 the three and six month LIBOR were 5.81% and 5.84%, respectively. These agreements expire as follows:
Maturity LIBOR Amount Date Index
$ 13,000,000 1998 Six month 20,000,000 1999 Three month 30,000,000 2001 Six month
$ 63,000,000
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 1997 and 1996, 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 totaling $4 million and $3 million, respectively, plus accrued interest at December 31, 1997 and 1996.
The Act states that the amount of NCB borrowings which may be outstanding at any time shall not exceed 10 times the paid-in capital and surplus which, as defined by the Act, includes the subordinated debt.
The annual interest payments for each tranche are determined in accordance with the following schedule which also includes the carrying amounts, excluding hedge gains, and respective estimated fair values of the subordinated debt at December 31, 1997 (in thousands): Next Carrying Estimated Index Rate Repricing Date Amount Fair Value
91-day Treasury rate 5.06% January 1, 1998 $ 53,553 $ 53,437 3-year Treasury rate 6.28% October 1, 1999 36,854 37,847 5-year Treasury rate 6.01% October 1, 2000 55,281 56,593 10-year Treasury rate 8.82% October 1, 2000 36,854 40,866
$182,542 $188,743
In addition to the $63 million of interest rate swaps on the long-term debt, NCB has entered into a series of interest rate swap agreements totaling $60 million which have the effect of converting the subordinated debt from a fixed rate of 7.42% to a floating rate based on LIBOR.
The interest rate swap agreements are tied to the one, three and six month LIBOR rates and reprice at different times throughout the year. At December 31, 1997, the one, three and six month LIBOR rates were 5.72%, 5.81% and 5.84%, respectively. The agreements, which expire in the year 2000, are described below:
Debt LIBOR Swapped Amount Index
Five year $30,000,000 Six month Ten year 10,000,000 Six month Ten year 10,000,000 Three month Ten year 10,000,000 One month
$60,000,000
16. Common Stock and Members' Equity
NCB's common stock consists of Class B stock owned by its borrowers, Class C stock owned by entities eligible to borrow from NCB, and Class D non-voting stock owned by others.
1997 1996 Class B Class Class D Class B Class C Class D
Par value per share $ 100 $ 100 $ 100 $ 100 $ 100 $ 100 Shares authorized 900,000 300,000 100,000 800,000 300,000 100,000 Shares issued and outstanding 840,045 219,004 3 786,004 217,516 3
The changes in each class of common stock are described below:
Class B Class C Class D Total
Balance, December 31, 1994 $67,823,071 $24,844,625 $300 $92,667,996 Cancellation and redemption of common stock (1,135,617) (2,408,962) - (3,544,579) 1994 patronage dividend distributed in common stock 4,746,618 211,185 - 4,957,803 Reclassification of stock surplus 915,682 (915,682) - -
Balance, December 31, 1995 72,349,754 21,731,166 300 94,081,220 Proceeds from issuance of common stock - 1,000 - 1,000 Cancellation and redemption of common stock (468,024) (190,460) - (658,484) 1995 patronage dividend distributed in common stock 6,718,686 209,878 - 6,928,564
Balance, December 31, 1996 78,600,416 21,751,584 300 100,352,300 Proceeds from issuance of common stock - 500 - 500 Cancellation and redemption of common stock (1,088,713) (45,205) - (1,133,918) 1996 patronage dividend distributed in common stock 6,492,799 197,568 - 6,690,367
Balance, December 31, 1997 $84,004,502 $21,904,447 $300 $105,909,249
Members' equity includes the three classes of common stock, and allocated and unallocated retained earnings. Allocated retained earnings have been designated for patronage dividend distribution, whereas unallocated retained earnings have not been designated for patronage dividend distribution.
17. Regulatory Capital and Retained Earnings of NCBSB
In connection with the insurance of savings accounts, NCBSB is required to maintain minimum amounts of regulatory capital. If NCBSB fails to meet its minimum required capital, the appropriate regulatory authorities may take such actions, as they deem appropriate, to protect the Savings Association Insurance Fund (SAIF), NCBSB, and its depositors and investors. Such actions may include various operating restrictions, limitations on liability growth, limitations on deposit account interest rates, and investment restrictions.
NCBSB's capital exceeds the minimum capital requirements at December 31, 1997. The following table summarizes NCBSB's capital at December 31, 1997:
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, 1997, 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 1997, 1996, and 1995 is $428,676, $362,621, and $329,471, respectively.
NCB maintains an employee thrift plan organized under Internal Revenue Code Section 401(k) and contributes up to 6% of each participant's salary. Contributions and expense for 1997, 1996, and 1995 are $359,401, $278,720, and $275,457, respectively.
Effective January 1, 1997, the Board of Directors approved the Executive Long-Term Incentive Plan (the Plan) to provide incentive compensation to certain key executives of NCB. NCB expensed $210,000 for the Plan in 1997.
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 1998, NCB anticipates that it will declare a patronage dividend for 1997 of $13,983,000. The anticipated cash portion of the 1997 patronage dividend is included in patronage dividends payable at December 31, 1997. The anticipated stock portion of the patronage dividend of 1997 earnings to be distributed has been added to allocated retained earnings at December 31, 1997. Patrons of NCB receiving such patronage dividends consent to include them in their taxable income.
The provision for income taxes consists of the following:
Year Ended December 31,
1997 1996 1995 Current tax expense Federal $1,270,100 $674,728 $665,429 State and local 143,504 148,054 19,184
Total current 1,413,604 822,782 684,613 Deferred tax expense (benefit) Federal (38,106) (25,868) (14,858) State and local - - 107,928
Total deferred (38,106) (25,868) 93,070
Total provision $1,375,498 $796,914 $777,683
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,
1997 1996 1995
Statutory U.S. tax rate $ 5,884,348 $ 4,242,158 $ 4,510,339 Patronage dividends (4,754,097) (3,567,430) (3,844,910) State and local taxes 143,504 148,054 127,112 Other 101,743 (25,868) (14,858)
Income tax provision $ 1,375,498 $ 796,914 $ 777,683
Deferred tax assets net of liabilities, included in other assets, are comprised of the following at December 31, 1997 and 1996:
1997 1996
Deferred commitment fees $ 133,609 $ 129,067 Allowance for loan losses 313,112 280,185 Other 146,925 96,455
Gross deferred tax assets 593,646 505,707
Mortgage servicing rights (60,994) - Loan bad debt expense - (56,342) Federal Home Loan Bank stock dividends (65,175) (48,697) Other (58,078) (14,412)
Gross deferred tax liabilities (184,247) (119,451)
Net deferred tax asset $ 409,399 $ 386,256
20. Income Available for Dividends on Stock
Under a existing long-term debt agreements, the aggregate amount of cash dividends on Class C or Class D Stock, together with patronage dividends payable in cash, is limited to the sum of $15,000,000 plus 50% of NCB's consolidated adjusted net income accumulation (or minus 100% of NCB's consolidated adjusted net income in case of a deficit) from January 1, 1992 through the end of the most current fiscal year ended. If the aggregate amount of cash dividends and patronage dividends payable in cash exceeds the limitation previously described, total patronage dividends payable in cash and cash dividends payable on any calendar year may not exceed 20% of NCB's taxable income for such calendar year.
Notwithstanding the above restriction, NCB is prohibited by law from paying dividends on its Class C Stock at a rate greater than the statutory interest rate payable on the subordinated debt. Those rates for 1997, 1996, and 1995 are 6.4%, 6.1% and 6.7%, respectively. Consequently, the amounts available for payment on the Class C Stock for 1997, 1996, and 1995 are $1,399,694, $1,326,847, and $1,455,988, 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
1997 1996 1997 1996 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $414,905 $184,625 $1,899 $ 435 Standby letters of credit $116,814 $100,845 $1,309 $1,157
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, and forward commitments.
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 $3.1 million representing the estimated cost of replacing, at current market rates, all outstanding swap agreements. NCB does not anticipate nonperformance by any of its counterparties. Income or expense from interest rate swaps is treated as an adjustment to interest expense/income on the hedged asset or liability.
Financial futures are contracts for delayed delivery of specific securities at a specified future date and at a specified price or yield. NCB purchases/sells these contracts to hedge the interest rate risk associated with originating mortgage loans that will be held for sale. NCB has minimal credit risk exposure on these financial instruments since changes in market value of financial futures are settled in cash on the following business day, and payment is guaranteed by the clearinghouse. Gains and losses from these contracts are deferred until the time of disposition of the asset or liability.
NCBSB and NCB enter into forward commitments to sell a portion of their production of loans to Federal National Mortgage Association (Fannie Mae) and Residential Funding Corporation. The market value of forward commitments is considered in the lower of cost or market valuation of the loan portfolio held for sale.
The contract or notional amounts and the respective estimated fair value of NCB's off-balance sheet financial instruments at December 31, are as follows: (amounts in thousands):
Contract or Notional Amounts Estimated Fair Value 1997 1996 1997 1996 Financial instruments whose notional or contract amounts exceed the amount of credit risk:
Financial futures contracts $218,200 $167,200 $217,050 $170,421 Interest rate swap agreements $123,000 $161,000 $126,144 $164,722
At December 31, 1997 and 1996, NCB had deferred gains and (losses) outstanding on financial futures contracts totaling $81,156 and ($3,688,563), $15,313 and ($1,347,082), respectively, which are included in loans held for sale.
22. Fair Value of Financial Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available for identical or comparable instruments, fair values are based on estimates using the present value of estimated cash flows using a discount rate commensurate with the risks involved or other valuation techniques. The resultant fair values are affected by the assumptions used, including the discount rate and estimates as to the amounts and timing of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of year end or that will be realized in the future.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:
Cash and cash equivalents - The carrying amount approximates fair value.
Investments - Fair values are based on quoted market prices for identical or comparable securities.
Loans and lease financing - For adjustable rate commercial loans that reprice frequently and with no significant changes in credit risk, fair values are based on carrying values. The fair market value of other adjustable rate loans is estimated by discounting the future cash flows assuming that the loans mature on the next repricing date using the rates at which similar loans would be made to borrowers with similar credit quality and the same stated maturities. The fair value of fixed rate commercial and other loans and leases, excluding loans held for sale, is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit quality and for the same remaining maturities. The fair value of loans held for sale is based on market prices for similar loans sold in the secondary market adjusted for differences in loan characteristics.
Interest-only receivables - The fair value of interest-only receivables is estimated by discounting the future cash flows using current market investor pass-through rates for similar securities and loans for which the interest-only receivable 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, 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 subordinated debt is estimated by discounting the future cash flows using the current borrowing rates at which similar types of borrowing arrangements with the same remaining maturities could be obtained by NCB.
Interest rate swap agreements - The fair value of interest rate swaps (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, 1997 and 1996. The fair value of forward contracts is based on current market prices for similar contracts.
Commitments to extend credit, standby letters of credit, and financial guarantees written - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
The estimated fair value of the Bank's financial instruments as of December 31, 1997 and 1996 are as follows (dollars in thousands):
1997 1996 Financial Assets: Carrying Fair Carrying Fair Amount Value Amount Value
Cash and cash equivalents $ 21,689 $ 21,689 $ 17,150 $ 17,150 Investments Available-for-sale 61,268 61,268 57,903 57,903 Held-to-maturity 1,942 1,912 2,946 2,294 Interest-only receivables 4,450 4,450 3,192 2,791 Loans and lease financing 773,768 786,004 750,094 756,301
Financial Liabilities: Deposits 83,826 83,281 88,620 88,211 Short-term and other borrowings 243,121 243,121 224,500 224,500 Long-term debt 204,793 207,079 202,137 204,824 Subordinated debt 182,785 189,137 182,853 188,743
Off-Balance Sheet Financial Instruments: Interest rate swap agreements 123,000 126,144 161,000 164,722 Financial futures and forward commitments 218,200 217,050 167,200 170,421 Commitments to extend credit 414,905 1,899 184,625 435 Standby letters of credit 116,814 1,309 100,845 1,157
23. New Accounting Standards
In June 1997, SFAS Nos. 130 and 131 were issued: "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information," respectively. SFAS No. 130 requires that certain financial activity typically disclosed in members' equity be reported in the financial statement as an adjustment to net income in determining comprehensive income. Items applicable to NCB would include unrealized gain/loss on securities available-for-sale. Items identified as comprehensive income should be reported in the statements of condition and the statements of changes in members' equity, under separate captions. SFAS NO. 130 is effective for NCB on January 1, 1998, including the restatement of prior periods reported consistent with this pronouncement. NCB does not anticipate any financial impact from the implementation of SFAS NO. 130.
SFAS No. 131 requires the reporting of selected segment information in quarterly and annual reports. Information from operating segments is derived from methods used by NCB's management to allocate resources and measure performance. SFAS No. 131 is effective for NCB on January 1, 1998, including the restatement of prior periods reported consistent with this pronouncement, if practical. NCB does not anticipate any material impact from the implementation of SFAS No. 131.
24. Subsequent Events
On January 15, 1998, the Board of Directors authorized the dissolution of CFC at which time NCB will assume all liabilities of CFC and receive a distribution of all assets after satisfaction of CFC's liabilities. Management expect the dissolution to occur by December 31, 1998.
In February 1998, NCB sold and securitized $130 million in real estate loans generating gains of $3 million. The gain on sale of loans will be included in the first quarter 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS, ON ACCOUNTING AND FINANCIAL DISCLOSURE
On May 13, 1997, the Registrant filed a report on Form 8-K that reported a change in the Registrant's Certifying Accountant.
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of NCB and the positions held by each are as follows:
Year First End of Position Appointed Term Age Alfred A. Plamann Chairman of the Board of Directors and Director 1995 1998 55
Charles E. Snyder President and Chief Executive Officer 1983 - 44
Leo H. Barlow Director 1993 1999 45
Harry J. Bowie Director 1991 1998 62
James L. Burns, Jr. Vice Chairman of the Board Of Directors and Director 1996 1999 59
Joseph Cabral Director 1995 1998 49
Kirby J. Erickson Director 1997 2000 57
Jackie Jenkins-Scott Director 1997 2000 48
Marilyn J. McQuaide Director 1996 1999 48
Michael J. Mercer Director 1997 1998 44
Mary Ann Rothman Director 1993 1999 55
Anthony J. Scallon Director 1995 1998 52
Sheila A. Smith Director 1995 1998 52
Peter C. Young Director 1997 2000 52
Thomas K.Zaucha Director 1997 2000 53
Year First End of Position Appointed Term Age
Caroline Blakely Managing Director, Chief Marketing Officer President, NCB Capital Corporation President and Director, NCB 1, Inc. President and Director, NCB Insurance Brokers, Inc. 1992 - 43
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 - 53
Mark W. Hiltz Managing Director, Chief Credit Risk Officer 1982 - 50
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 - 39
Thomas C. Schoettle President, NCB Savings Bank,FSB 1997 - 42
Alfred A. Plamann has been the President and Chief Executive Officer of Certified Grocers of California, Ltd. since 1994. He was the Senior Vice President and Chief Financial Officer of Certified Grocers from 1989 to 1993. He has served in an executive capacity with Atlantic Richfield Co. (ARCO) and has served on the Board of Directors of several of the cooperative's subsidiaries. Additionally, he has served on the Board of Directors of the National American Wholesale Grocers Association (NAWGA) and the California Grocer's Association (CGA), and has been a member of the Industry Relations Committee of the Food Marketing Institute (FMI).
Charles E. Snyder was named President and Chief Executive Officer of NCB in January, 1992. He had been Corporate Vice President and Chief Financial Officer of NCB from 1983 to December 1991.
Leo H. Barlow is a shareholder of Sealaska Corporation. Previously, he was President & Chief Executive Officer of Sealaska Timber Corporation from August, 1992 until August 31, 1997. Prior to that, he was President and 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.
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.
Jackie Jenkins-Scott is the President and Chief Executive Officer of the New England Hospital d/b/a Dimock Community Health Center for the past 14 years. Prior to her position with Dimock, she served as Director of the Roxbury Court Clinic and held several positions with the Commonwealth of Massachusetts, Department of Public Health from 1973 to 1977. She has been a Board Member of the Massachusetts League of Commmunity Health Centers and a member of the National Association of Community Health Centers, Inc.
Michael J. Mercer has been the President of Georgia Credit Union Affiliates since 1985 and Vice Chairman of the Association of Credit Union League Executives since 1996. He was also one of the founders of the Credit Union Service Corporation and was its former Chairman.
Mary Ann Rothman has been Executive Director of the Council of New York Cooperatives since 1980. She also serves on the executive committee of the National Association of Housing Cooperatives and is Vice Chairman of the NCBDC's Board of Directors.
Anthony J. Scallon has been Chairman of the Board of Directors, Federal Home Loan Bank of Des Moines since 1994. He also has been a Vocational Coordinator, Independent School District # 197, West St. Paul, Minnesota from 1994 to the present time. He was elected as a Minneapolis City Council Member in 1979 and served until 1993.
Sheila A. Smith has been President 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.
Peter C. Young has been the Executive Director of Area Cooperative Educational Services for almost 26 years. Currently, he is a member of the Board of Trustees and the Finance Committee of CT Hospital Association/Workers Compensation Trust. He is also the Fiscal Agent (Treasurer) and was a member of the Governing Board of the American Association of Educational Service Agencies.
Thomas K.Zaucha has been the President and Chief Executive Oficer of the National Grocers Association (NGA) since 1982. He served as President and Chief Executive Officer of the Grocers Fixtures & Equipment Company from 1978 to 1982 prior to its merger with NGA. He is also currently serving as a Board Member of NCB Retail Finance Corporation and Cooperative Development Foundation.
Caroline E. Blakely is a Managing Director and Chief Marketing Officer 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 and 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.
Mark W. Hiltz is a Managing Director and 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.
Richard L. Reed is a Managing Director and Chief Financial Officer with NCB. He was named Senior Vice President and Chief Financial Officer in 1994. Prior to that, he was Vice President and Treasurer from 1992 to 1994. He was Vice President, Treasury from 1989 to 1992.
Thomas C. Shoettle was named President and Chief Executive Officer of NCB Savings Bank, FSB in 1997. He was the Executive Vice President of the Savings Bank from 1995 to 1996. Previously, he served for eight years as Vice President, Commercial and Residential Lending and Regional Manager with Merchants National Bank and for three years as Manager, Special Assets with Farm Credit System.
Non-Incumbent Nominees for Directorships
Harold L. Citrin David A. Cox Kenneth L. Hartung Lynn M. Hoopingarner Donald E. Lien Alex N. Miller
Harold L. Citrin has been a Board Member of 1036 Park Corporation for three years. He is also a Managing Director of Bear, Stearns and Company. Prior to joining the board of 1036 Park Corporation, he was the Chairman of the Board of Appeals of the Village of Kings Point, Long Island and was a Board Member for 12 years.
David A. Cox has served as President and Treasurer of 718 Apartments, Inc. He is currently employed as Director of Economic Development in the South Bronx. Dave founded Dave's Distributing, a food distribution company in New York City. He was also a member of the High Falls Food Co-op for three years and was an ex-officio Board Member and Chairman of the Legislative and Education Committee of Bethex Federal Credit Union.
Kenneth L. Hartung has been a Vice President of FoodService Purchasing Cooperative since 1993. He also serves as President of the Cooperative's Canadian subsidiary (FoodService Purchasing of Canada) since 1994 and currently is the Chairman of the Cooperative's insurance subsidiary (Kenco Insurance Agency). He is also a Board Member of Bridgehaven, a member health provider agency.
Lynn M. Hoopingarner is the Owner/President of Hoopingarner, a business and management consulting company founded in 1992. She has been the President of White House Owners Association for the past four years and held various positions at the Association for three years. She also previously worked as a banker at Chase Manhattan Bank and Wells Fargo Bank.
Donald E. Lien has been the President and Chief Executive Officer of Panhandle Cooperative Association for two years. He is also the Vice Chairman of the North Platte Petroleum Partnership, a joint venture with twenty one other co-ops to buy and sell petroleum products. He was also a Regional Manager of Farmland Industries, Inc. for four years and a General Manager of Central Farmer Co-op for twelve years.
Alex N. Miller has been the President of G & M Management Corporation since 1974 and President and Chief Executive Officer of CAM Systems, Inc. since 1986. In 1996, he founded and now serves as the President of Share Credit Corporation which provides low cost share financing to limited equity housing cooperatives. He founded the Registered Cooperative Manager Program and serves on its Board of Governors. He also served as a member of the Board of Directors of the National Association of Housing Cooperatives for four consecutive terms.
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 athority of another committee. The members of the committee are Leo H. Barlow, Harry J. Bowie, James L. Burns, Jr., Joseph Cabral, Alfred A.Plamann(Chair), Mary Ann Rothman, and Sheila A. Smith.
The Loan and Business Development Committee is responsible for providing policy to management and for monitoring the lending, fee for service and business development efforts of NCB and its subsidiaries, consistent with the board's approved strategic plan. The members of the committee are Harry J. Bowie(Chair), James L. Burns, Jr., Jackie Jenkins-Scott, Mary Ann Rothman, Anthony J. Scallon, Sheila A. Smith and Thomas K. Zaucha.
The Finance Committee is responsible for monitoring NCB's financial planning, budgeting process, asset liability management and funding strategies. The members of the committee are Leo H. Barlow(Chair), Joseph Cabral, Kirby J. Erickson, Marilyn J. McQuaide, Michael J. Mercer, Anthony J. Scallon, Peter C. Young and Alfred A. Plamann.
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, Joseph Cabral(Chair), Kirby J. Erickson, Marilyn J. McQuiade, Michael J. Mercer and Anthony J. Scallon.
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, James L. Burns, Jr., Jackie Jenkins-Scott, Mary Ann Rothman, Sheila A. Smith(Chair), Thomas K. Zaucha and Peter C. Young.
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 Annual Compensation Compensation (a) (b) (c) (d) (e) Name and Principal Position Year Salary Bonus
Charles E. Snyder, 1997 $310,013 $103,250 $20,440 President & CEO 1996 295,000 96,670 19,380 1995 275,534 86,450 19,320
Caroline Blakely 1997 203,678 59,500 20,440 Managing Director, Chief 1996 170,627 53,375 19,267 Marketing Officer 1995 138,130 44,750 17,669
Charles H. Hackman 1997 189,387 63,591 20,440 Managing Director, Chief 1996 182,664 63,591 19,380 Credit Officer 1995 175,147 52,950 19,320
Richard L. Reed 1997 150,005 52,500 19,037 Managing Director, Chief 1996 117,500 36,575 15,010 Financial Officer 1995 102,918 20,000 13,148
Mark Hiltz 1997 145,005 48,125 18,592 Managing Director, Chief 1996 137,505 45,719 15,520 Risk Officer 1995 124,147 20,400 8,481
* The "All Other Compensation" reported for 1997 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 $9,500 $9,500 $1,440 Ms. Blakely 9,500 9,500 1,440 Mr. Hackman 9,500 9,500 1,440 Mr. Reed 9,000 9,000 1,037 Mr. Hiltz 8,700 8,700 1,192
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 1997 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, 1997.
Class B Stock Class C Stock
Name and Addresses No. of Percent No. of Percent of Shareholders Shares of Class Shares of Class
Co-op Central Bank 30,500.00 3.63% 28,281.01 12.91% 265 Franklin Street Boston, MA. 92110
Greenbelt Homes Inc. 14,424.28 1.71% 29,451.26 13.44% Hamilton Place Greenbelt, MD. 20770
Group Health, Inc (1) 11,637.75 1.38% 14,249.60 6.50% 2829 Univ. Ave., S.E. Minneapolis, MN 55414
(1) Included in the above are 2,878.79 shares and 2,769.48 shares of Class B and C stock, respectively, held of record by Central Minnesota Group Health Plan which is affiliated with GHI.
Because the Act restricts ownership of NCB's Class B and Class C stock to eligible cooperatives, NCB's officers and directors do not own any Class B or Class C stock, although cooperatives with which they are affiliated may own such stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Transactions
The following table sets forth information concerning certain transactions by which NCB and its subsidiaries have made loans or leases to organizations with which NCB directors or executive officers are affiliated. The first column lists the name of the director or executive officer who is related with the loan or lease recipient. The second column sets forth the name of the organization to which the loan or lease was made. (Loans labeled as "personal" were made to the named director or officer). The last three columns list loan balances and interest rates as of the specified dates. The text following the table further describes the nature of the transactions set forth in the table.
The following loans and leases were made in the ordinary course of NCB's business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of uncollectability or present other unfavorable features.
National Cooperative Bank Largest Interest Balance Balance as Rate as in of of 1997 12/31/97 12/31/97
Leo H. Barlow Sealaska Timber Corp $7,953,690 $6,389,603 9.18% Sealaska Corp 1,519,226 1,074,584 9.15% Sealaska Corp 5,800,000 3,816,666 8.10%
James L. Burns, Jr. Co-op Central Bank 15,00,000 0
Joseph Cabral Chatsworth Products 325,200 111,600 8.97% Chatsworth Products 411,714 411,350 8.97% Chatsworth Products 616,724 477,081 8.97% Chatsworth Products 3,824,602 3,440,471 8.97%
Kirby J. Erickson Central Minnesota Group Health 3,474,220 3,123,085 8.10% Central Minnesota Group Health 3,008,280 3,008,280 7.63%
Alfred A. Plamann Grocers Cap Revolver 1,250,000 0 Grocers Cap Revolver 1,750,000 0 Mollie Stone 7,151,227 7,102,455 9.50% K.V. Mart 1,964,244 1,964,244 9.87% Major Market 732,790 574,512 10.00% Andronico's 2,363,603 2,091,188 8.84% Andronico's 2,915,000 2,420,000 8.84% Andronico's 2,400,000 2,340,000 8.38% Superior Warehouse 9,425,130 8,450,520 9.00% Grocers Cap Program Purchase 5,815,949 4,701,140 7.25%
Mary Ann Rothman 110-118 Riverside Tenants 1,000,000 0
Largest Interest Balance Balance as Rate as in of of 1997 12/31/97 12/31/97
Peter C. Young Area Coop Education Services 670,000 670,000 9.00% Area Coop Education Services 1,291,760 1,135,310 8.75% Area Coop Education Services 145,184 93,466 8.95%
Charles H. Hackman Watergate South 0 0
Charles E. Snyder National Cooperative Business Association 400,000 0 National Cooperative Business Association 108,160 100,990 Lease
Nominees for Directorship
Harold L. Citrin 1036 Park Corporation 1,398,769 1,397,330 7.32%
David A. Cox 718 Apartments, Inc. 1,646,028 0 718 Apartments, Inc. 1,800,000 1,793,129 7.42%
Kenneth L. Hartung KFC National Purchasing Coop 3,000,000 0 Kazi HFP 1,075,556 1,002,222 7.72% Kazi/NJ 701,110 689,447 7.72% Best Mexican Foods, Inc. 332,240 297,240 8.72% Quality Foods, Inc. 380,000 340,000 8.72% Italian American Foods 225,000 175,000 8.72% KFC/Cerritos 345,833 295,833 8.97% Dinsmoor Mini Mart 741,667 725,000 8.75% Tollgate Foods, Inc. 296,429 253,571 9.00% Siegel Food Services 446,037 405,488 8.47% Ross Point KFC, Inc. 271,726 234,134 11.68% Dev. Diversified Corp 1,385,556 1,288,889 8.50% Dev. Diversified Corp 850,000 576,842 11.50% Marvin L & Phyllis White 1,079,117 1,040,658 8.50% E.A.P. Management Corp 136,000 104,000 8.20% Karbach 580,000 504,148 8.75% KFC/Southgate 15,000 13,750 9.50% KFC/Ecorse 15,500 14,208 9.50% KFC/Lincoln 13,000 11,917 9.50% KFC/River Rou 10,000 9,167 9.50% KFC/Wyandote 15,000 13,750 9.50% Easter Food 350,000 326,667 9.25% Carolina Bell 150,000 140,854 9.25%
Lynn M. Hoopingarner White House Owners Corp 200,000 189,585 9.38%
Donald E. Lien Panhandle Cooperative 2,300,000 600,000 8.50% Panhandle Cooperative 83,333 0 Panhandle Cooperative 1,075,862 827,586 8.63%
Alex N. Miller The Columns at East Hill 205,148 205,148 9.24% Tanglewood Garden Coop 872,491 864,859 9.69%
NCB Savings Bank, FSB
Charles H. Hackman Personal 113,593 93,371 7.00%
NCB has one direct loan outstanding and one participation through National Bank of Alaska outstanding to Sealaska Corporation of which Mr. Barlow is a shareholder. The proceeds of the loan were used to refinance real estate while the proceeds of the participation were used for general working purposes. In addition, NCB has a $6.4 million loan participation with National Bank of Alaska which was used to acquire timber.
NCB has a $15 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 Officer.
NCB has one term loan and two lines of credit outstanding to Chatsworth Products, Inc. of which Mr. Cabral is the President. The term loan was 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.
NCB has two outstanding commercials loans with Central Minnesota Group Health Plan, Inc. (CMGHP). Mr. Erickson is the Executive Vice President of Group Health, Inc. (GHI)/HealthPartners, Inc. HealthPartners, Inc. is GHI's parent company and GHI is the sole corporate member of CMGHP. These loans were used to fund a new healthcare center and refinance an existing term loan.
NCB has 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 three commercial loans outstanding with Area Cooperative Educational Services of which Peter C. Young is the Executive Director. 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.
NCB has a line of credit outstanding to Watergate South, Inc. of which Mr. Hackman, an officer of NCB, is the President of the Board. The purpose of the line of credit is for capital improvements to the property.
NCB has a line of credit outstanding and a lease financing to National Cooperative Business Association of which Mr. Snyder, President and CEO of NCB, is a Board Member. The line of credit is to provide working capital while the lease financing is for computer hardware and software purchased.
Board nominee Harold L. Citrin is presently a Board Member of 1036 Park Avenue Corporation. NCB has a real estate loan to 1036 Park Avenue Corporation which was used to refinance an existing mortgage and to provide capital reserves. This loan has been sold and is not reflected on NCB's books.
Board nominee David A. Cox is the President and Treasurer of 781 Apartments, Inc. NCB has a real estate loan to 781 Apartments, Inc. which was used to refinance an existing mortgage and to finance repairs and improvements. This loan has been sold and is not reflected on NCB's books.
Board nominee Kenneth L. Hartung is a Vice President of FoodService Purchasing Cooperative(FSPC). NCB has a line of credit to KFC National Purchasing Cooperative, Inc. d/b/a FoodService Purchasing Cooperative which is available for working capital purposes. NCB also has started a member finance program whereby NCB provides financing to KFC and Taco Bell retail members for store renovation, purchase of new stores and the purchase of equipment and inventory. FSPC provides guarantees for these member loans. The remaining loans listed with respect to Mr. Hartung were made under this program.
Board nominee Lynn M. Hoopingarner is the President of White House Owners Association. NCB has an outstanding real estate loan to the White House Owners which was used to finance capital improvements.
Board nominee Donald E. Lien is the President and Chief Executive Officer of Panhandle Cooperative Association. NCB has two outstanding commercial loans with Panhandle Cooperative. These loans were used to finance equipment purchases and provide operating capital.
Board nominee Alex N. Miller is the President of G & M Management Company. NCB has outstanding loans to The Columns at East Hill and Tanglewood Garden Coop. G & M provides management services for these cooperatives. The purposes of these loans were to refinance acquisition and for capital improvements. These loans have been sold and are not reflected on NCB's books.
In its normal course of business, NCB Savings Bank makes loans to employees at competitive market rates. NCB Savings Bank has issued a home mortgage to Charles Hackman.
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, 1995, 1996, and 1997. Page #
27 Report of Independent Public Accountants
28 Independent Auditors' Report
29 Consolidated Balance Sheets
30 Consolidated Statements of Income
31 Consolidated Statements of Changes in Members' Equity
32-33 Consolidated Statements of Cash Flows
34-61 Notes to the Consolidated Financial Statements
(a)(2) Not applicable
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements, or the notes thereto.
(a)(3) The following exhibits are filed as a part of this report.
Exhibit No.
(a) 3.1 National Consumer Cooperative Bank Act, as amended through 1981.
(c) 3.2 1989 Amendment to National Consumer Cooperative Bank Act.
(d) 3.3 Bylaws of NCB
(g) 4.1 Election Rules of the NCB. For other instruments defining the rights of security holders, see Exhibits 3.1 and 3.2.
(h) 4.2 Form of Assumption Agreements and Amended and Restated Senior Note Agreements
(h) 4.3 Schedule Concerning Senior Note Agreements
(l) 4.4 Financing Agreement with U.S. Treasury
(m) 4.5 Note Purchase Agreement with Lutheran Brotherhood et al.
(n) 4.6 Master Shelf Agreement with Prudential Insurance Co. of America et al.
(o) 4.7 Senior Note Agreement (Dec. 1996)
(s) 4.8 First Amendment Agreement to Master Shelf Agreement with Prudential Insurance Co. of America
(s) 4.9 First Amendment Agreements to the Assumption Agreement and Amended and Restated Note Purchase Agreements
(s) 4.10 First Amendment Agreements to the Note Purchase Agreements with Lutheran Brotherhood et al.
(p) 4.11 Form of Indenture for Debt Securities
(q) 4.12 Form of Fixed Rate Medium Term Note
(r) 4.13 Form of Floating Rate Medium Term Note
*(u) 10.1 Chief Executive Officer Incentive Plan
10.2 (No Exhibit)
*(i) 10.3 Deferred Compensation Agreement with Charles E. Snyder
*(f) 10.4 Severance Agreement with Charles E. Snyder
(t) 10.5 Third Amended and Restated Loan Agreement with Fleet Bank as Agent
*(a) 10.6 Insurance Plan for NCB Executive Officers
(b) 10.7 Subordination Agreement with Consumer Cooperative Development Corporation (now NCB Development Corporation)
(t) 10.8 Master Shelf Agreement with Prudential Insurance Co. of America et al. (June 1997)
10.11 (No Exhibit)
(d) 10.12 Lease on Headquarters of NCB
*(u) 10.13 NCB Executive Long-Term Incentive Plan
*(g) 10.14 Employment Agreement with Marlon W. Pickles
10.15 (No Exhibit)
10.16 (No Exhibit)
10.17 (No Exhibit)
(i) 10.18 Term Loan Agreement with Credit Suisse (Feb. 1996)
10.19 (No Exhibit)
(j) 10.20 Term Loan Agreement with Credit Suisse (Sept. 1996) 10.21 (No Exhibit)
10.22 (No Exhibit)
(j) 10.23 Term Loan Agreement with Comerica Bank (Dec. 1995)
10.24 (No Exhibit)
(k) 10.25 Term Loan Agreement with PNC Bank (Aug. 1997)
*(u) 10.26 Incentive Plan for NCB Executive Officers
10.27 (No Exhibit)
(s) 10.28 Amendment No. 1 to Term Loan Agreement with Credit Suisse (Feb. 1995)
(s) 10.29 Amendment No. 1 to Term Loan Agreement with Credit Suisse (Sept. 1995)
(s) 10.30 Amendment to Term Loan Agreement with Comerica Bank (Dec. 1995)
(j) 22.1 List of Subsidiaries and Affiliates of the NCB
(u) 23.1 Consent of Arthur Andersen LLP
(j) 25.1 Power of Attorney by Joseph Cabral
(h) 25.2 Power of Attorney by Leo Barlow
(u) 25.3 Power of Attorney by Kirby J. Erickson
(e) 25.4 Power of Attorney by Harry J. Bowie
(u) 25.5 Power of Attorney by Jackie Jenkins-Scott
(s) 25.6 Power of Attorney by James L. Burns, Jr.
(h) 25.7 Power of Attorney by Mary Ann Rothman
(u) 25.8 Power of Attorney by Michael J. Mercer
(u) 25.9 Power of Attorney by Peter C. Young
(u) 25.10 Power of Attorney by Thomas K.Zaucha
(j) 25.11 Power of Attorney by Alfred A. Plamann
(j) 25.12 Power of Attorney by Anthony J. Scallon
(j) 25.13 Power of Attorney by Sheila A. Smith
25.14 (No Exhibit)
(s) 25.15 Power of Attorney by Marilyn J. McQuaide
(u) 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, 1996).
(c) Incorporated by reference to the exhibit of the same number filed as part of the registrant's annual report on Form 10-K for the year ended December 31, 1989 (File No.2-99779).
(d) Incorporated by reference to the exhibit of the same number filed as part of Registration Statement No. 33-42403 (filed September 6, 1991 ).
(e) Incorporated by reference to the exhibit of the same number filed as part of the registrant's annual report on Form 10-K for the year ended December 31, 1991(File No. 2-99779).
(f) 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).
(g) Incorporated by reference to the exhibit of the same number filed as part of the registrant's annual report on Form 10-K for the year ended December 31, 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, 1993 (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, 1994 (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, 1995 (File No. 2-99779).
(k) 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).
(l) 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).
(m) 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).
(n) 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).
(o) 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).
(p) Incorporated by reference to Exhibit 4.1 filed as part of Amendment No. 1 to Registration Statement No. 333-17003 (Filed January 21, 1997).
(q) Incorporated by reference to Exhibit 4.2 filed as part of Amendment No. 1 to Registration Statement No. 333-17003( Filed January 21, 1997).
(r) Incorporated by reference to Exhibit 4 to the registrant's report on Form 8-K filed February 11, 1997 (File No. 2-99779).
(s)Incorporated by reference to the exhibit of the same number filed as part of the registrant's annual report on Form 10-K for the year ended December 31, 1996 (File No. 2-99779).
(t) Incorporated by reference to the exhibit of the same number filed as part of the registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1997 (File No. 2-99779).
(u) Filed herewith
(b) The Registrant did not file any report on Form 8-K during the last quarter of 1997.
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned, thereunto duly authorized.
NATIONAL CONSUMER COOPERATIVE BANK
DATE March 30, 1998 BY/s/Charles E. Snyder Charles E. Snyder President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates noted:
Signature Title Date */s/Alfred A. Plamann Chairman of the Board and 3/30/98 Alfred A. Plamann Director
/s/Richard L. Reed Managing Director, 3/30/98 Richard L. Reed (Principal Financial Officer)
/s/Marietta J. Orcino Vice President, Tax & 3/30/98 Marietta J. Orcino Regulatory Compliance
/s/Patricia A. Ferrick Vice President (Principal 3/30/98 Patricia A. Ferrick Accounting Officer)
*/s/Leo H. Barlow Director 3/30/98 Leo H. Barlow
*/s/Harry J. Bowie Director 3/30/98 Harry J. Bowie
*/s/James L. Burns, Jr. Director 3/30/98 James L. Burns, Jr.
*/s/Joseph Cabral Director 3/30/98 Joseph Cabral
*/s/Kirby J. Erickson Director 3/30/98 Kirby J. Erickson
*/s/Jackie Jenkins-Scott Director 3/30/98 Jackie Jenkins-Scott
Signature Title Date
*/s/Marilyn J. McQuiade Director 3/30/98 Marilyn J. McQuiade
*/s/Michael J. Mercer Director 3/30/98 Michael J. Mercer
*/s/Mary Ann Rothman Director 3/30/98 Mary Ann Rothman
*/s/Anthony J. Scallon Director 3/30/98 Anthony J. Scallon
*/s/Sheila A. Smith Director 3/30/98 Sheila A. Smith
*/s/Peter C. Young Director 3/30/98 Peter C. Young
*/s/Thomas K. Zaucha Director 3/30/98 Thomas K. Zaucha
* By /s/Richard L. Reed Richard L. Reed (Attorney-in-Fact)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
With this report, the registrant is furnishing to the Commission for its information the registrant's election materials for its 1997 annual meeting. The registrant has not yet distributed an 1997 annual report to security holders and will furnish such report to the Commission when it is sent to security holders.
INDEX TO EXHIBITS
Exhibit No. Description
10.1 Chief Executive Officer Incentive Plan
10.13 NCB Executive Long-Term Incentive Plan
10.26 Incentive Plan for NCB Executive Officers
23.1 Consent of Arthur Andersen LLP
25.3 Power of Attorney by Kirby J. Erickson
25.5 Power of Attorney by Jackie Jenkins-Scott
25.8 Power of Attorney by Michael J. Mercer
25.9 Power of Attorney by Peter C. Young
25.10 Power of Attorney by Thomas K. Zaucha
27 Financial Data Schedule
Supplemental Information Registrant's 1998 Election Materials
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial summary
1997 vs. 1996
Net income of $12.5 million in 1997 increased 11.3% from $11.2 million in 1996. The growth in net income was due to increased volume of commercial and mortgage lending activities, servicing fees and other non-interest income. The impact of the increase in net interest income was partially offset by increases in the provision for loan losses, non-interest expenses and provision for income taxes.
Credit quality in NCB's lending portfolio remained strong during 1997. Nonperforming assets amounted to 1.3% of total assets at year end. Net chargeoffs as a percentage of total loans and leases outstanding at December 31, 1997 was .18%. The provision for loan losses as a percentage of average loans and leases increased to .5% in 1997 from .3% in 1996. In this same period, the allowance for loan losses as a percentage of loans and leases has increased to 2.3% in 1997 from 2.1% in 1996.
The return on average assets remained unchanged in 1997 and 1996 at 1.5%. The return on average equity increased to 9.7% compared with 9.2% in 1996.
Total assets increased 3.6% or $30.0 million to $869.3 million as of December 31, 1997 from $839.3 million at year end 1996. Loans outstanding showed a 3.2% increase over last year primarily due to growth in real estate loans held for sale and lease financing.
Net Interest Income
Net interest income for the year ended December 31, 1997 increased 3.4% or $0.9 million from the same period in the prior year. The increase resulted primarily from higher volume of loans and leases outstanding.
As shown on Table 2, the net yield on interest earning assets dropped 29 basis points to 3.32% from 3.61% for the year ended December 31, 1996. The yields on average interest earning assets dropped slightly to 8.51% in 1997 from 8.52% in 1996 due to a declining market interest rates on interest bearing assets. Yields on interest bearing liabilities increased from 6.01% in 1996 to 6.20% in 1997 due to the repricing of the subordinated debt and higher volume and interest rates on our borrowings. As a result, the net spread decreased 20 basis points to 2.31% at year end December 31, 1997 compared with 2.51% at the prior year end.
For the year ended December 31, 1997, interest income increased 13.7% to $68.8 million compared with $61.3 million from the prior year. The increase in interest income was mostly due to a higher average balance of interest earning assets. Average loans and leases outstanding at December 31, 1997 increased to $720.3 million compared with $633.4 million at December 31, 1996.
Total interest expense increased $6.6 million to $41.9 million for the year ended December 31, 1997 from $35.3 million in 1996. As shown on Table 2, the average rate on interest bearing liabilities at December 31, 1997 went up 19 basis points to 6.20% compared with 6.01% at December 31, 1996. The increase was primarily due to the repricing of $53.5 million of subordinated debt and increased use of long term facilities.
See Table 1 & Table 2
Credit quality
Credit quality remained strong in 1997. NCB maintains loan loss reserves that, in management's judgement based on current expectations relative to portfolio characteristics, are adequate to absorb future losses inherent in the loan portfolio.
An inevitable aspect of the lending or risk assumption process is the fact that losses will be incurred. The extent to which losses occur depends on the risk characteristics of the loan portfolio. NCB emphasizes continuous credit risk management. Specific procedures have been established that seek to eliminate undue credit risk on the balance sheet. They include a multilevel approval 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.
To manage credit risk over a wide geographic area and lending in multiple industries, NCB uses a team-based approval process which relies upon the expertise of lending teams familiar with particular segments of our industry. Those credit facilities exceeding delegated lending authority for each team are approved by senior management in an attempt to ensure the quality of lending decisions. Financial analysis of the industries and regions serviced is regularly performed by the various lending teams that keep abreast of economic events and market conditions throughout the United States.
Loans with developed risk characteristics that make their full and timely payment uncertain are assigned to the Special Assets Department. The Department determines, on a case-by-case basis, the best course of action to restore a credit to an acceptable risk rating or to minimize potential losses to NCB.
By maintaining an adequate allowance for loan losses, management seeks to protect NCB's capital against the risk of losses inherent in the credit extension process. The allowance is increased by the provision for possible credit losses and decreased by the amount of charge-offs, net of recoveries. The adequacy of the allowance for loan losses is determined based on risk ratings, current and projected economic conditions, concentrations, diversification, and portfolio size, among other relevant factors.
The provision for loan losses increased to $3.5 million in 1997 from $1.95 million in 1996. The increase was largely attributable to identified downgrade of loans as well as growth in the portfolio. The provision as a percentage of average loans and leases outstanding increased to .5% in 1997 from .3% in 1996.
The allowance for loan losses increased 13.8% to $17.6 million in 1997. The allowance as a percentage of loans and leases outstanding increased to 2.3% at December 31, 1997 from 2.1% at December 31, 1996. The allowance as a percentage of non-performing loans ( restructured and non-accruing loans ) increased to 303% in 1997 compared with 200% in the prior year.
Total non-performing assets ( non-accruing and restructured loans and real estate owned(REO)) increased to $10.9 million at December 31, 1997 from $8.1 million at December 31, 1996. Non-performing assets as a percentage of loans and leases outstanding plus REO increased to 1.4% in 1997 from 1.1% in 1996. Non-performing assets as a percentage of total capital increased to 8.3% in 1997 from 6.5% in 1996.
See Table 3 & Table 4
Non-accruing loans, as a percentage of loans and leases, remained at .3% at year-end 1997 and 1996. Restructured loans decreased to $2.8 million in 1997 compared with $5.1 million in 1996 due to a repayment of a real estate loan in July 1997. As of year end, all restructured loans were current.
The majority of NCB's loans are to cooperatives in industries such as owner-occupied multi-family residential housing, food distribution, health care, and financial services. NCB bases credit decisions on the cash flows of its customers and views collateral as a secondary source of repayment.
The real estate portfolio contains a concentration of loans in the New York City area; however, the majority of loans are to seasoned housing cooperatives with low loan-to-value ratios. NCB also has minimal credit exposure to highly leveraged transactions, commercial real estate and construction loans. NCB has no foreign loan exposure.
See Table 5
Non-interest income
Non-interest income increased by 32.6% to $14.6 million in 1997. 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. The majority of the increase was caused by the higher amount of asset sales to the secondary market. Gains on sales of loans were $7.2 million in 1997 which represented 49.6% of non-interest income. Real estate loan sales in 1997 of $320.4 million reflected an increase of 85.0% or $147.2 million compared with $173.2 million in 1996. NCB maintains a conservative interest rate risk policy; accordingly, warehoused loans were fully hedged in 1997 and 1996.
Servicing income remained a stable source of non-interest income for NCB in 1997. NCB earned servicing fee income of $2.2 million and $2.1 million in 1997 and 1996, respectively. As of December 31, 1997, NCB serviced $1.37 billion in single and multi-family real estate and commercial loans for investors compared with $1.2 billion at year end 1996.
Other income increased 19% to $5.1 million for the year ended December 31, 1997 compared with $4.3 million for the prior year. The majority of other income is related to the commercial line of business activities.
Non-interest expenses
Non-interest expenses increased 4.6% from $23.0 million to $24.1 million. Increases in compensation and employee benefits and contributions to NCBDC were offset by a decrease in contractual services, occupancy and equipment, and other expenses. Non-interest expenses as a percentage of average assets were 2.9% for 1997 compared with 3.1% in 1996. Salaries and benefits, the single largest component of non-interest expenses, increased 16.9% or $1.8 million. During 1997, loan officers were paid more commissions due to high levels of loan originations while bonuses paid to the remaining employees were at their maximum payout based on NCB's performance. Salaries and employee benefits accounted for 52.6% of non-interest expenses in 1997 compared with 47.1% in 1996. As of December 31, 1997, NCB and its consolidated subsidiaries employed 159 employees compared with 162 employees one year earlier.
Table 5 NONPERFORMING ASSETS (dollars in thousands)
At December 31, 1997 1996 1995 1994 1993
Real estate owned $5,115 $ 377 $1,397 $ 300 $ 172
Non-accruing $3,030 $2,601 $1,741 $ 723 $ 886
Restructured $2,791 $5,147 $4,041 $2,143 $2,283
Under the provisions of the National Consumer Cooperative Bank Act, NCB makes tax deductible, voluntary contributions to the NCB Development Corporation. These contributions are discretionary and are based upon the approval of NCB's Board of Directors. In 1997, NCB agreed to make a contribution to NCBDC to fund certain business activities. The contribution to NCB Development Corporation was $1.0 million in 1997 and $.72 million in 1996. Non-interest expenses, adjusted for the contribution to NCBDC, as a percentage of average assets decreased to 2.7% in 1997 compared with 3.0% in 1996.
Year 2000
A significant challenge facing NCB, its subsidiaries and affiliate as well as all companies, is the readiness of its computer systems for the next millennium. NCB is dependent upon its internal computer systems and has external interdependencies with other financial institutions and customers. While the interdependencies may not be within NCB's influence, internal systems are.
Following the adoption of a Year 2000 policy governing the purchase of new software and process for remediating existing software, management began to identify and test internal systems in 1997. All systems have been identified and evaluated as to their critical impact. Those core systems where Year 2000 compliance is known to be deficient have been designated for replacement. Conversion to the new systems is scheduled for completion before December 31, 1998. Testing of all other systems is scheduled for completion by June, 1999.
Management does not expect costs associated with modification to NCB's information systems infrastructure to have a material impact on NCB's business, operations or financial condition. In the event significant customers, financial institutions, or companies with which NCB is interdependent do not successfully and timely achieve Year 2000 compliance, or NCB's own Year 2000 compliance is not achieved on schedule, NCB's business could be adversely affected.
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.
1996 vs. 1995
Net income of $11.2 million in 1996 increased 23.9% 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.
Net interest income of $26.0 million for the year ended December 31, 1996 represented an increase of $3.9 million or 17.9% over year end 1995. Net yield on interest earning assets decreased 9 basis points to 3.65% in 1996 from 3.74% in 1995 while net spread slightly decreased from 2.61% in 1995 to 2.60% in 1996.
Credit quality in NBC's lending portfolio remained strong during 1996. Nonperforming assets as a percentage of total assets at year end was 1%. Net chargeoffs as a percentage of total loans and leases outstanding was .13%. The provision for loan losses as a percentage of average loans and leases decreased to .3% in 1996 from .4% in 1995. In this same period, the allowance for loan losses as a percentage of average loans and leases decreased to 2.1% in 1996 from 2.5% in 1995.
Non-interest income decreased by 10.9% to $11.0 million in 1996. Non-interest income was composed of gains from sales of blanket mortgages and share loans to secondary market investors, servicing fees, origination fees and advisory fees. Gains on loan sales were $4.6 million in 1996 which represented 41.7% 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 and 1995.
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.
1997 vs. 1996 Fourth quarter results
Net income for the fourth quarter of 1997 was $5.1 million compared with $1.1 million in the fourth quarter of 1996. The increase was due primarily to higher non-interest income. Non-interest income for the quarter increased to $7.9 million in 1997 from $1.9 million in 1996 due primarily to the timing of gains realized in loan sales. This increase however was partially offset by an increase in the provision for loan losses and non-interest expenses of $.5 million and $.8 million, respectively.
See Table 6
Sources of Funds
Capital Markets Access
NCB maintains line of credit facilities provided by a consortium of banks. At year end, total borrowing capacity under these facilities was $320 million, and the outstanding balance at December 31, 1997 was $218.2 million compared with an outstanding balance of $224.5 million at December 31, 1996. Usage, as measured by average outstanding balances during the year, increased from $120.6 million in 1996 to $186.2 million in 1997 due to growth in commercial loan volume and additional activity to fund warehoused real estate loans.
In 1996, NCB developed a program under which it borrows, on a short-term basis, from certain of its customers. At December 31, 1997 and 1996, the short-term borrowings outstanding were $12.2 million and $6.5 million, respectively.
In 1997, 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. As of December 31, 1997, NCB had $40 million outstanding under this program. In addition, during 1997, NCB implemented a commercial paper program of which a face value of $25.0 million was outstanding at year end.
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 1997, NCB sold $366.2 million compared to $173.2 million of cooperative real estate, commercial and share loans sold in the prior year.
In 1998, NCB expects to sell $390 million of cooperative real estate, commercial, and share loans. Actual sales through February, 1998 were $126.9 million.
At NCB's wholly-owned subsidiary, NCB Savings Bank, FSB, deposits declined 5.4% to $83.8 million in 1997 from $88.6 million a year earlier. The decrease was attributable to scheduled maturities of the certificate of deposits. The weighted average rates on deposits at December 31, 1997 and 1996 were 4.9% and 4.8%, respectively. Although NCB relies heavily on funds raised through the capital markets, deposits are a major portion of interest bearing liabilities -- 11.7% in 1997 compared with 12.7% in 1996. Management anticipates that deposits will represent an increasing portion of its funding structure.
Uses of funds
Loans and leases
Loans and leases outstanding increased 3.2% to $773.8 million at year-end 1997 from $750.1 million in 1996.
NCB's commercial loan portfolio expanded with new business opportunities. The commercial loan and lease portfolio increased 5.7% to $377.6 million at December 31, 1997 compared with $357.3 a year earlier. The commercial loan portfolio reflects an increase in the food processing and distribution areas even though $19.0 million of loans were sold through the retail loan securitization program. Decreases in the areas of financial services and other, which includes native Alaskan and hardware wholesale cooperatives, were due to scheduled loan repayments and maturities.
NCB's real estate portfolio increased 1.0% to $396.2 million at the end of 1997 from $392.8 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 1998, NCB expects continued strength in its origination and secondary marketing activities. Net loan volume is expected to increase approximately $37 million based on new loan originations (net of scheduled amortization) of $427 million and sales of $390 million.
Cash, Cash Equivalents, and Investment Securities
Cash, cash equivalents, and investments increased 6.7% or $5.8 million to $91.8 million compared with $86.3 million in 1996. Cash, cash equivalents, and investment securities, represent 10.6% of interest earning assets in 1997 compared with 7.3% in 1996.
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, 1997, NCB held $21.7 million in cash and cash equivalents compared with $17.2 million in cash and cash equivalents at year end 1996. These funds are normally used to fund business operations.
NCB's had at year end a $32.5 million investment portfolio which is a second source of asset liquidity. The portfolio consists of high-grade corporate and government obligations. The weighted average period to maturity remained at 5 years for 1997 and 1996.
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 $320 million of revolving lines of credit, $130 million of which are committed until May 27, 2000 and $130 million committed until May 27, 1998. The remaining balance of $60 million is uncommitted at December 31, 1997. Average outstanding balances were $186.2 million in 1997 compared with $120.6 million in 1996.
Finally, NCB's wholly-owned subsidiary, NCB Savings Bank, FSB raises both local and national deposits from NCB members, which also serve as a source of liquidity. NCB Savings Bank, FSB, uses cooperative deposits to co-originate loans with NCB.
See Table 7
ITEM 7A, QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NCB's principal market risk exposure is to interest rates.
NCB's asset and liability management process is utilized to manage NCB's interest rate risk through the structuring of the balance sheet and off-balance sheet portfolios to maximize net interest income while maintaining an acceptable level of risk to changes in market interest rates. The achievement of this goal requires a balance between profitability, liquidity, and interest rate risk.
Interest rate risk is managed by the Risk Management Committee (RMC), which is composed of senior officers of NCB, in accordance with policies approved by NCB's Board of Directors. The RMC formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the RMC considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional and national economies, liquidity, business strategies, and other factors. The RMC meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activity, warehouse loans and commitments to originate loans ("mortgage pipeline"),and the maturities of investments and borrowings. Additionally, the RMC reviews liquidity, cash flow flexibility, maturities of deposits, and consumer and commercial deposit activity.
To effectively measure and manage interest rate risk, NCB uses simulation analysis to determine the impact on net interest income under various interest rate scenarios, balance sheet trends, and strategies. From these simulations, interest rate risk is quantified and appropriate strategies are developed and implemented. Additionally, duration and market value sensitivity measures are utilized when they provide added value to the overall interest rate risk management process. The overall interest rate risk position and strategies are reviewed by executive management and NCB's Board of Directors on an ongoing basis. NCB has traditionally managed its business to reduce its overall exposure to changes in interest rates. However, under current policies of NCB's Board of Directors, management has been given some latitude to increase NCB's interest rate sensitivity position within certain limits if, in management's judgement, it will enhance profitability. As a result, changes in market interest rates may have a greater impact on NCB's financial performance in the future than they have had historically.
NCB manages its exposure to interest rates by entering into certain financial instruments with off-balance sheet risk in the ordinary course of business. The financial instruments used for hedging interest rate risk include interest rate swaps, caps, floors, financial options, financial futures contracts, and forward delivery contracts. A hedge is an attempt to reduce risk by creating a relationship whereby any losses on the hedged asset or liability are expected to be offset in whole or in part by gains on the financial instrument used for hedging. Thus, market risk resulting from a particular instrument is normally offset by other on or off-balance-sheet instruments. See Note 21 to the Consolidated Financial Statements.
The following table presents an analysis of the sensitivity inherent in NCB's net interest income and market value of portfolio equity (market value of assets, less liabilities, adjusted for the market value of mortgage servicing rights and off-balance-sheet instruments). The interest rate scenarios presented in the table include interest rates at December 31, 1997 and as adjusted by instantaneous parallel rate changes upward and downward of up to 200 basis points. Each rate scenario reflects unique prepayment and repricing assumptions. Substantially, all of NCB's portfolio is held for non-trading purposes.
Since there are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates, this analysis is not intended to be a forecast of the actual effect of a change in market interest rates on NCB. The net interest income variability reflects NCB's interest sensitivity gap (defined below).
CHANGE IN CHANGE IN CHANGE IN NET INTEREST MARKET VALUE OF INTEREST RATES INCOME PORTFOLIO EQUITY
+200 (1.9)% (6.7)% +100 (1.0) (3.5) 0 0.0 0.0 -100 .8 3.8 -200 1.7 8.2
Assumptions with respect to the model's projections of the effect of changes in interest rates on Net Interest Income include:
1. Target balances for various asset and liability classes which are solicited from the management of the various business units. 2. Interest rate scenarios which are generated by RMC. 3. Spread relationships between various interest rate indices, which are generated by the analysis of historical relationships and RMC consensus. 4. Assumptions about the effect of embedded options and prepayment speeds:
NCB is subject to limited prepayment risk given the structure of the loans; therefore limited prepayments are factored into the assumptions.
The interest rate sensitivity gap ("gap") is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. During a period of rising interest rates, a positive gap (where the amount of maturing and repricing assets exceed liabilities) would tend to have a positive impact on net interest income while a negative gap (where the amount of maturing and repricing liabilities exceeds assets) would tend to have a detrimental impact. During a period of declining interest rates, a negative gap would tend to have a positive impact on net interest income while a positive gap would tend to have a detrimental impact.
NCB's one-year cumulative gap position at December 31, 1997 was a positive $20.6 million or 2.37% of assets. Though NCB had a positive gap at December 31, 1997, a rising interest rate environment would marginally reduced net interest income. This results from interest rate sensitive liabilities maturing and/or repricing more frequently than interest rate sensitive assets within the specified time period, generally twelve months. The December 31 one-year gap position is a one-day position that is continually changing and is not indicative of NCB's position at any other time. While the gap position is a useful tool in measuring interest rate risk and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates solely on that measure, without accounting for alterations in the maturity or repricing characteristics of the balance sheet that occur during changes in market interest rates. For example, the gap position reflects only the prepayment assumptions pertaining to the current rate environment. Assets tend to prepay more rapidly during periods of declining interest rates than during periods of rising interest rates. Because of this and other risk factors not contemplated by the gap position, an institution could have a matched gap position in the current rate environment and still have its net interest income exposed to interest rate risk.
The following table sets forth the expected maturity and repricing characteristics of NCB's consolidated assets, liabilities and off-balance sheet contracts at December 31, 1997.
See Table 8
It is clear from Table 8 that NCB had a positive gap (as a percentage of total assets) of 2.37% and 2.94% at the one year and 180 day time horizons, respectively. At December 31, 1997, NCB's static gap position was in compliance with existing Board policies.
Table 7 MATURITY SCHEDULE OF LOANS (dollar in thousands)
One Year One Year Through Over At December 31, 1997 or Less Five Years Five Years Total
Commercial $41,880 $126,897 $178,881 $347,658 Real estate- residential 11,755 34,987 342,410 389,152 Real estate- commercial 5,018 2,007 7,025 Lease 420 17,290 12,223 29,933
Total loans and leases $54,055 $184,192 $535,521 $773,768
Fixed interest rate loans $ 68,886 $321,594
Variable interest rate loans 115,306 213,927
$184,192 $535,521
Capital
NCB's strong capital position should support growth, continuing access to financial markets, and allow for greater flexibility during difficult economic periods.
Historically, NCB has maintained a strong capital structure. NCB's average equity to average assets was 15.3% in 1997 compared with 16.5% in 1996. When including NCB's subordinated debt, NCB's average total capital to average assets was 37.0% and 41.5% in 1997 and 1996, respectively. The Bank Act limits NCB's outstanding debt to ten times its capital and surplus (including the subordinated debt). As of December 31, 1997, NCB Savings Bank, FSB, had a risk based capital ratio of 21.6%, well in excess of regulatory requirements.
Patronage policy
Each year, NCB declares patronage refunds approximately equal to its taxable net income thereby substantially reducing its Federal income tax. In June 1997, NCB distributed $10.8 million to its active member-borrowers. Of this total, approximately $4.1 million was distributed in cash.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NCB's financial statements and notes thereto are set forth beginning at page 25 below. NCB is not subject to any of the requirements for supplementary financial information contained in Item 302 of Regulation S-K.
Report of Independent Public Accountants
To the Board of Directors and Members of National Cooperative Bank:
We have audited the accompanying consolidated balance sheet of National Cooperative Bank and subsidiaries as of December 31, 1997, and the related consolidated statements of income, changes in members' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Cooperative Bank and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, effective January 1, 1997, the Company changed its method of accounting for loan-servicing rights and interest-only receivables.
Washington, D.C., January 28, 1998 (except with respect to the matter discussed in Note 24, as to which the date is February 13, 1998)
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 the related consolidated statements of income, changes in members' equity, and cash flows for each of the two 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 the results of their operations and their cash flows for each of the two years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
Washington, D.C. January 30, 1997
NATIONAL COOPERATIVE BANK CONSOLIDATED BALANCE SHEETS December 31,
Assets 1997 1996
Cash and cash equivalents $ 21,689,245 $ 17,150,534 Restricted cash 6,884,572 8,348,703 Investment securities Available-for-sale (amortized cost of $60,911,708 and $57,967,940 in 1997 and 1996) 61,268,440 57,903,166 Held-to-maturity (fair value of $1,911,605 and $2,294,294 in 1997 and 1996) 1,942,312 2,946,425
Loans and lease financing 584,635,993 565,824,579 Loans held for sale 189,132,330 184,269,872
Less: Allowance for loan losses (17,638,136) (15,504,510)
756,130,187 734,589,941
Other assets 21,389,059 18,396,811
Total assets $869,303,815 $839,335,580
Liabilities and Members' Equity Liabilities Deposits $ 83,825,979 $ 88,620,002 Patronage dividends payable in cash 5,872,708 4,721,600 Other liabilities 17,072,271 11,332,033 Borrowings Short-term 243,120,607 224,500,000 Long-term 204,793,392 202,137,077 447,913,999 426,637,077
Subordinated debt 182,785,385 182,853,313 Total borrowings 630,699,384 609,490,390 Total liabilities 737,470,342 714,164,025
Members' equity Common stock Class B 84,004,502 78,600,416 Class C 21,904,447 21,751,584 Class D 300 300 Retained earnings Allocated 8,109,931 5,770,844 Unallocated 17,474,132 19,113,185 Unrealized gain (loss) on investment securities available-for-sale 340,161 (64,774)
Total members' equity 131,833,473 125,171,555
Total liabilities and members' equity $869,303,815 $839,335,580
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997 1996 1995
Interest income Loans and lease financing $62,549,700 $55,671,365 $48,563,512 Investment securities 6,237,441 5,593,678 4,206,876 Total interest income 68,787,141 61,265,043 52,770,388
Interest expense Deposits 3,970,498 4,109,098 3,457,902 Short-term borrowings 11,229,046 7,851,964 6,196,456 Long-term debt, other borrowings and subordinated debt 26,744,347 23,338,194 21,098,803 Total interest expense 41,943,891 35,299,256 30,753,161
Net interest income 26,843,250 25,965,787 22,017,227
Provision for loan losses 3,504,000 1,950,000 1,904,500 Net interest income after provision for loan losses 23,339,250 24,015,787 20,112,727
Non-interest income Gain on sale of loans 7,229,368 4,578,209 6,009,720 Loan and deposit servicing fees 2,237,082 2,125,131 1,701,682 Other 5,097,382 4,283,556 4,629,503 Total non-interest income 14,563,832 10,986,906 12,340,905
Non-interest expense Compensation and employee benefits 12,658,409 10,828,385 10,406,220 Contractual services 3,808,267 4,182,131 5,808,285 Occupancy and equipment 4,016,118 4,140,589 3,060,293 Contribution to NCB Development Corporation 1,000,000 720,000 500,000 Other 2,582,435 3,135,476 2,817,915 Total non-interest expense 24,065,229 23,006,581 22,592,713
Net income before taxes 13,837,853 11,996,112 9,860,919
Provision for income taxes 1,375,498 796,914 777,683
Net income $12,462,355 $11,199,198 $ 9,083,236
Distribution for net income Patronage dividends $13,982,639 $10,492,444 $11,308,558 Retained earnings (1,520,284) 706,754 (2,225,332) $12,462,355 $11,199,198 $ 9,083,236
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 1997 1996 1995
Cash flows from operating activities Net income $ 12,462,355 $ 11,199,198 $ 9,083,236 Adjustments to reconcile net income to net cash provided by (used in) operating activities Provision for loan losses 3,504,000 1,950,000 1,904,500 Depreciation and amortization 5,212,091 5,148,255 4,950,807 Gain on sale of loans (7,229,368) (4,578,209) (6,009,720) Loans originated for sale (365,279,273) (243,114,015) (251,781,768) Proceeds from sale of loans held for sale 362,446,396 135,955,259 250,676,820 Decrease (increase) in other assets 3,441,735 (5,443,982) (1,689,307) Increase (decrease) in other liabilities 5,740,238 (2,186,480) 1,782,807 Other - - 798,211
Net cash provided by used in operating activities 20,298,174 (101,069,974) 9,715,586
Cash flows from investing activities Purchase of investment securities Available-for-sale (7,046,767) (9,435,643) (722,785) Held-to-maturity 1,464,131 - (9,155,293) Proceeds from maturities of investments Available-for-sale 5,009,306 8,006,556 4,503,907 Held-to-maturity 154,113 198,000 3,306,785 Proceeds from sales of investments Available-for-sale - - 4,385,281 Net increases in loans and lease financing (44,351,586) (84,941,273) (158,775,397) Proceeds from sale of portfolio loans 17,276,924 38,679,408 51,405,022 Purchases of premises and equipment (712,729) (1,235,856) (613,576)
Net cash used in investing activities (28,206,608) (48,728,808) (105,666,056)
Cash flows from financing activities Net (decrease) increase in deposits (4,794,023) 10,519,829 19,181,624 Net increase in short-term borrowings 18,620,607 92,000,000 41,468,884 Proceeds from issuance of long-term debt 30,916,680 47,500,000 74,500,000 Repayment on long-term debt (28,000,000) - (25,168,822) Repayment on other borrowings - - (922,176) Redemption of common stock (15,000) (68,000) (310,366) Dividends paid (4,281,119) (4,341,889) (4,056,132)
Net cash provided by financing activities 12,447,145 145,659,940 104,693,012
Increase (decrease) in cash and cash equivalents 4,538,711 (4,138,842) 8,742,542
Cash and cash equivalents, beginning of year 17,150,534 21,289,376 12,546,834
Cash and cash equivalents, end of year $ 21,689,245 $ 17,150,534 $ 21,289,376
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of investing and financing activities:
1997 1996 1995 Unrealized gain (loss) on investment available-for-sale $ 404,935 $ (318,812) $ 1,675,619 Common stock cancelled against allowance for loan losses $ 9,114 $ 21,390 $ 288,585 Contributions of excess concentration to NCBRFC $ - $ - $ 2,697,010 Interest paid $40,722,565 $34,582,531 $30,177,706 Income taxes paid $ 1,223,695 $ 670,122 $ 709,879
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization
National Consumer Cooperative Bank, doing business as National Cooperative Bank (NCB), is a U.S. Government-chartered corporation organized under the National Consumer Cooperative Bank Act (the Act). NCB provides loans and financial services to cooperatives. NCB Capital Corporation (NCBCC), previously named NCB Mortgage Corporation, a wholly-owned subsidiary, originates, sells and services real estate and commercial loans for cooperatives. Cooperative Funding Corporation (CFC), a wholly-owned subsidiary, is a registered broker-dealer and provides corporate financial services. NCB Investment Advisers, Inc. (NCBIA), a wholly-owned subsidiary, provides investment advisory services to cooperatives. NCB Financial Corporation (NCBFC), a wholly-owned subsidiary, is the holding company of NCB Savings Bank, FSB (NCBSB), a federally-chartered thrift institution. NCB I, Inc. (NCB 1), a wholly-owned subsidiary, is a special purpose corporation that holds credit enhancement certificates related to the securitization and sale of cooperative real estate loans. NCB Retail Finance Corporation (NCBRFC), a wholly-owned subsidiary, purchases and sells commercial loans which are then securitized into commercial paper.
The Act also provided for the formation of NCB Development Corporation (NCBDC), 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.
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
Securities are accounted for under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires, among other things, for NCB to classify and account for debt and equity securities as follows:
Available-for-sale- Securities that will be held for indefinite periods of time, including those that may be sold in response to changes in market interest rates and related changes in the security's prepayment risk, needs for liquidity and changes in the availability of and the yield of alternative investments are classified as available-for-sale. These assets are carried at fair value. Unrealized gains and losses are determined on an aggregate basis, excluded from earnings and reported as 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.
Interest Rate Futures, Forward Contracts and Interest Rate Swaps
Gains and losses on futures and forward contracts to hedge certain interest-sensitive assets and liabilities are deferred and unamortized hedging gains or losses are recognized at the time of disposition of the assets or liabilities being hedged. They 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 fixed rate debt. The interest income and expense is earned or charged based on the outstanding balances of the receivable and payable positions, respectively, applying the related market rates at which the agreements were purchased and the term outstanding during the period. The interest income and expense are treated as an adjustment to interest expense on the hedged liability.
Loans and Lease Financing
Loans are carried at their principal amounts outstanding, except for loans held for sale which are carried at the lower of cost or market as determined on an aggregate basis. NCB discontinues the accrual of interest on loans when principal or interest payments are ninety days or more in arrears or sooner when there is reason-able doubt as to collectibility. Loans may be reinstated to accrual status when all payments are brought current and, in the opinion of management, collection of the remaining balance can reasonably be expected.
Leasing operations consist principally of leasing equipment under direct financing leases expiring in various years through 2004. All lease financing transactions are full payout direct financing leases. Lease income is recorded over the term of the lease contract which provides a constant rate of return on the unrecovered investment. Lease financing is carried net of unearned income.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance which management believes to be adequate to cover estimated loan and lease financing losses in the existing portfolio. A provision for loan losses is added to the allowance and charged to expense. Loan and lease charge-offs, net of recoveries, are deducted from the allowance. When a portion of a loan is deemed uncollectible, a full or partial charge-off against the allowance for loan losses is made. The factors utilized by management in determining the adequacy of the allowance include, but are not limited to, the following: the present and prospective financial condition of the borrowers and the values of any underlying collateral; evaluation of the loan and lease financing portfolio in conjunction with historical loss experience; portfolio composition; and current and projected economic conditions. The allowance for loan losses is maintained at a level believed by management to be adequate to absorb 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 NCB 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 and direct origination costs are accounted for in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income over the contractual life of the loans. Fees relating to expired commitments are recognized as non-interest income. If a commitment is exercised during the commitment period, the fee at the time of exercise is recognized over the life of the loan as an adjustment of yield.
Servicing Assets and Interest-Only Receivables
Effective January 1, 1997, NCB adopted Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which supersedes, but generally retains, the requirements of SFAS No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 122"). Both statements require that entities that acquire servicing assets through either purchase or origination of loans and sells or securitizes those loans with servicing assets retained must allocate the total cost of the loans to the servicing assets and the loans (without the servicing assets) based on their relative fair value.
Upon NCB's adoption of SFAS No. 125, previously recognized excess spread assets were reclassified as interest-only receivables. Interest-only receivables represent rights to certain future net cash flows from securitized assets that are available after all expenses of the transaction have been paid ("residual cash flow"). Interest-only receivables are amortized using the effective yield method over the estimated lives of the underlying loans.
Servicing assets and interest-only receivables, stated net of accumulated amortization, are amortized in proportion to the remaining net servicing revenues estimated to be generated by the underlying loans using the effective yield method over the remaining lives of the underlying loans.
SFAS No. 125 requires a periodic assessment of the carrying of interest-only receivables. Because these assets can be contractually prepaid or otherwise settled such that NCB would not recover substantially all of its recorded investment, the assets are being measured like available-for-sale securities under SFAS No. 115.
Substantially all interest-only receivables pertain to blanket loans made to cooperative housing corporations as first mortgages. These mortgages are typically structured with prepayment lockouts followed by prepayment penalties or yield maintenance provisions through maturity. In calculating interest-only receivables, NCB discounts the cash flows through the lockout period. Cash flows beyond the lockout period are discounted only to the extent that NCB is entitled to receive the prepayment or yield maintenance penalty.
The cost of loan-servicing rights, the interest-only receivables 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 estimates made by management.
Interest-only receivables that are certificated have been included as investment securities consistent with SFAS No. 115. Interest-only receivables that are not certificated are included as other assets.
Other Assets
Foreclosed property pending disposition is carried at fair value less estimated costs to sell. Goodwill relating to the acquisition of NCBSB by NCBFC is being amortized over the estimated remaining lives of the long-term interest-bearing assets acquired. Interest-only receivables are carried at fair value with unrealized gains and losses carried as an adjustment to members' equity.
Premises and equipment are carried at cost less accumulated depreciation and include equipment owned under lease financing arrangements. Depreciation is computed using an accelerated method. Leasehold improvements are amortized on a straight-line basis over the terms of the leases.
Income Taxes
The Act Amendments of 1981 (P.L. 97-35) provide that, effective January 1, 1982, NCB shall be treated as a cooperative and subject to the provisions of Subchapter T of the Internal Revenue Code. Under Subchapter T, NCB issues its member-borrowers patronage refunds, which are tax deductible to NCB thereby reducing its taxable income. NCB has determined that all income generated by NCB and its subsidiaries, with the exception of NCBSB, qualifies as patronage income under the Internal Revenue Code, with the consequence that NCB is able to issue tax deductible patronage refunds with respect to all such income. Section 109 of the Act, as amended, provides that NCB is exempt from state and local taxes with the exception of real estate taxes. Certain NCB subsidiaries, however, are subject to federal and state income taxes.
NCB provides for income taxes under SFAS No. 109, "Accounting for Income Taxes." The asset and liability approach of SFAS No. 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts of the existing assets and liabilities and their respective tax bases.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997 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: 1997 1996
Cash in bank $ 8,082,813 $ 5,186,085 Federal funds 5,949,195 4,377,837 Overnight investments 7,657,237 7,586,612 $21,689,245 $17,150,534
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
U.S. Treasury and agency obligations $18,027,503 $140,820 $ 28,840 $18,139,483 Corporate bonds 12,169,073 129,615 8,368 12,290,320 Mutual funds 1,164,610 - 2,493 1,162,117 Money market 1,068,825 - 112,403 956,422 Interest-only receivables 28,481,697 238,401 - 28,720,098
$60,911,708 $508,836 $152,104 $61,268,440
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value
U.S. 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 Interest-only receivables 27,566,066 - - 27,566,066
$57,967,940 $162,345 $227,119 $57,903,166
Interest-only receivables substantially pertain to blanket loans to cooperative housing corporations.
The maturities of investment securities available-for-sale at December 31, 1997 are as follows:
Weighted Amortized Average Cost Yield Fair Value
Within 1 year $ 7,637,639 6.27% $ 7,523,541 After 1 year through 5 years 30,660,024 6.79% 31,080,652 After 5 years through 10 years 19,208,305 6.88% 19,255,536 After 10 years 3,405,740 6.56% 3,408,711
$60,911,708 6.74% $61,268,440
The composition of investment securities held-to-maturity at December 31 is as follows:
Gross Amortized Unrealized Fair Cost Losses Value
Mortgage-backed security $1,942,312 $ 30,707 $1,911,605
Gross Amortized Unrealized Fair Cost 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
The 1997 mortgage-backed security held-to-maturity has a weighted average yield of 9.4% and matures after ten years.
In 1997 and 1996, NCB had no sales of securities available-for-sale. In 1995, securities available-for-sale totaling $4,459,219, were sold resulting in a loss of $73,938. There were no sales of securities classified as held-to-maturity during 1997, 1996, or 1995. NCB held callable investment securities with amortized costs of $8,323,643 and $6,824,483 at December 31, 1997 and 1996, respectively. The fair values of the callable securities are $8,478,587 and $6,950,818 in the same respective periods.
4. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans at December 31, 1997 and 1996 are $1,366,353,000 and $1,194,113,000, respectively.
5. Loans and Lease Financing
Loans and leases outstanding, including loans held for sale, by category at December 31 are as follows:
1997 1996
Commercial loans Portfolio $344,849,332 $337,717,275 Loans held for sale 2,808,807 4,493,469 Real estate loans Residential 202,828,605 204,258,591 Loans held for sale 186,323,523 179,776,403 Commercial 7,025,073 8,742,343 Lease financing 29,932,983 15,106,370
$773,768,323 $750,094,451
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
1997 1996 1997 1996 By Region Northeast 21.4% 19.7% 75.6% 70.0% South Atlantic 7.0 6.7 10.2 7.9 Central 33.5 29.3 12.0 14.1 West 38.1 44.3 2.2 8.0
100.0% 100.0% 100.0% 100.0%
Percentage of Total Loan Portfolio
1997 1996 By Borrower Type Real estate Residential 50.4% 51.3% Commercial .8 1.2 Commercial Food processing and distribution 19.6 8.9 Financial services 4.4 5.5 Medical service and supplies 2.1 4.7 Hardware 6.1 4.9 Alaskan native corporations 4.4 4.9 Other 8.3 16.6 Lease financing 3.9 2.0
100.0% 100.0%
NCB originates multi-family blanket mortgages to predominantly owner-occupied housing cooperatives. A significant portion of NCB's mortgage loans is secured by real estate in New York City due to that city's extensive cooperative market. At December 31, 1997, $239 million of real estate loans are secured by real estate in New York. The collateral for almost all of the real estate loans consists of first mortgage liens on the land and improvements of cooperatively owned, multi-family residential properties and property leases. The real estate portfolio also includes loans secured by second mortgage liens and, in several rare circumstances, unsecured loans to residential cooperative corporations. The loans are repaid from operations of the real estate cooperative. NCB's exposure to credit loss in the event of nonperformance by other parties to the loans is the carrying amounts of the loans.
NCB's commercial portfolio has a concentration in the food processing and distribution industry. The loan types include lines of credit, revolving credits, and term loans. These loans are typically collateralized with general business assets (e.g., inventory, receivables, fixed assets, and leasehold interests). The loans are expected to be repaid from cash flows generated by the borrower's operating activities. NCB's exposure to credit loss in the event of nonperformance by the other parties to the loan is the carrying amounts of the loans.
The carrying amounts and respective estimated fair values of loans and leases outstanding at December 31 are as follows (amounts in thousands):
Carrying Amount Estimated Fair Value
1997 1996 1997 1996 Commercial Fixed rate loans $137,723 $157,727 $140,855 $160,979 Adjustable rate loans 207,126 179,990 207,872 180,732 Loans held for sale 2,809 4,493 2,818 4,459 Real Estate Loans held for sale 186,324 179,777 187,453 181,243 Portfolio-fixed rate 45,326 59,188 44,905 60,405 Portfolio-adjustable 164,528 153,813 170,675 152,913 Lease financing 29,932 15,106 31,426 15,570
$773,768 $750,094 $786,004 $756,301
6. Receivables Sold with Recourse
At December 31, 1997 and 1996, restricted cash of $6,884,572 and $8,348,703, respectively, is held by a trustee for the benefit of certificate holders in the event of a loss on certain loans sold with balances totaling $37,300,000 and $92,623,000 in 1993 and 1992, respectively. At December 31, 1997 and 1996, the outstanding balances of the 1993 and 1992 recourse loan sales totaled $76,636,254 and $108,755,626, respectively. 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 limited to the required restricted cash balance. To date NCB has not incurred any losses on these loan sales.
In an unrelated 1993 transaction, NCB sold loans totaling $25,924,380 of which any losses on the subordinate tranche are repaid from a security held by NCB totaling $1,942,312 and $2,746,425 at December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, the outstanding balances of the 1993 recourse loan sale totaled $14,832,919 and $19,013,777, respectively. 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 limited to the required balance of the security held. NCB is prohibited from disposing of this security until all senior holders of the security have been repaid. To date NCB has not incurred any losses on these loan sales.
7. Impaired Assets
Loans that became impaired after January 1, 1994 totaled $4,057,539 and $3,878,357 at December 31, 1997 and 1996, respectively, and averaged $4,909,000 and $3,443,000 during the same respective periods. Nonaccrual loans totaled $3,030,448 and $2,829,221 at December 31, 1997 and 1996, respectively. Restructured loans totaled $1,027,091 and $1,049,136 at December 31, 1997 and 1996, respectively. Specific allowances of $911,938 and $1,535,000 have been set aside for these loans in 1997 and 1996, respectively, as management's best estimate of their fair value is less than the recorded investment in the loans. During 1997 and 1996, the interest collected on the nonaccrual loans was applied to reduce the outstanding principal. Interest earned on the restructured loans totaled $112,000 and $109,000 during 1997 and 1996, respectively.
At December 31, 1997, there are no commitments to lend additional funds to borrowers whose loans are non-performing.
At December 31, 1997 and 1996, NCB had real estate owned of $5,114,991 and $376,708, respectively, which is classified as other assets.
8. Allowance for Loan Losses
The following is a summary of the activity in the allowance for loan losses:
1997 1996 1995
Balance at beginning of year $15,504,510 $14,554,240 $13,031,499 Provision for loan losses 3,504,000 1,950,000 1,904,500 Charge-offs (1,555,226) (1,137,229) (699,014) Recoveries of loans previously charged-off 184,852 137,499 317,255
Balance at end of year $17,638,136 $15,504,510 $14,554,240
The allowance for loan losses was 2.3%, 2.1%, and 2.5% of loans and leases outstanding at December 31, 1997, 1996, and 1995, 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, 1997, loans to affiliated cooperatives, directors, officers, and their family members have the following outstanding balances:
January 1, December 31, 1997 Additions Deductions 1997 Loans to affiliated cooperatives $60,552,761 $19,198,198 $12,160,395 $67,590,564
Loans to directors, officers, and family members 923,220 - 829,849 93,371
$61,475,981 $19,198,198 $12,990,244 $67,683,935
Percent of loans outstanding 8.2% 8.7%
During 1997, 1996, and 1995, NCB recorded interest income of $6,412,886 $3,216,776, and $2,957,590, respectively, on loans to related parties.
Included in the analysis of loans outstanding to affiliated cooperatives as of December 31, 1997, is a $30 million revolving line of credit to the Co-operative Central Bank. This line of credit is 50% participated to outside banks without recourse to NCB. At December 31, 1997, none of the loan is outstanding. The loan is secured by U.S. Government guaranteed obligations equal to 110% of the outstanding balance. The Co-operative Central Bank is an organization with which an NCB director serves as the chief executive officer.
Certain NCB affiliates, and certain directors and officers of NCB and NCBSB, have deposits with NCBSB. Such deposits aggregated $1,307,365 and $1,092,299 as of December 31, 1997 and 1996, respectively.
10. Premises and Equipment
Premises and equipment are included in other assets and consist of the following as of December 31:
1997 1996
Furniture and equipment $3,046,361 $3,366,620 Leasehold improvements 846,538 1,128,359 Other 2,461,694 2,196,400 6,354,593 6,691,379 Less: Accumulated depreciation and amortization (4,286,837) (4,434,017)
$2,067,756 $2,257,362
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 6, 1999 to July 31, 2000. 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, 1997 are as follows:
1998 $1,686,336 1999 1,471,836 2000 1,424,161 2001 1,422,516 2002 355,629
$6,360,478
Rental expense on premises and office equipment in 1997, 1996, and 1995 is $1,689,415, $1,686,788, and $1,744,329, 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, 1997 and 1996, the unamortized lease incentive is $955,892 and $1,092,627, respectively.
12. Deposits
Deposits as of December 31 are summarized as follows:
1997 1996 Weighted Weighted Average Average Balance Rate Balance Rate
Balances by type Passbook accounts $ 4,937,068 2.72% $ 5,647,482 2.71% Money market demand and NOW accounts 15,578,000 2.26% 18,260,850 2.24% Fixed-rate certificates Less than $100,000 45,397,875 5.74% 42,122,451 5.93% $100,000 or greater 17,913,036 5.51% 22,589,219 5.28%
$83,825,979 4.87% $88,620,002 4.80%
The remaining contractual maturities of certificate accounts at December 31, 1997 are as follows:
Less than $100,000 $100,000 or greater Total
Three months or less $ 5,813,377 $ 2,438,924 $ 8,252,301 Three to six months 11,048,122 4,511,613 15,559,735 Six to twelve months 12,589,617 4,371,608 16,961,225 Twelve months or longer 15,946,759 6,590,891 22,537,650
$45,397,875 $17,913,036 $63,310,911
The estimated fair value of deposits is $83,281,000 and $88,211,000 at December 31, 1997 and 1996, respectively.
13. Short-Term Borrowings
Revolving credit facilities
NCB has $320 million of revolving lines of credit, $130 million of which is committed until May 27, 2000 and $130 million of which is committed until May 27, 1998. The remaining balance of $60 million is uncommitted at December 31, 1997.
Interest expense from borrowings under the revolving line of credit facilities was $8,732,851, $6,671,725, and $5,004,701 in 1997, 1996, and 1995, respectively. The following is a summary of the borrowings under the facilities for the years ended December 31:
1997 1996
Borrowings outstanding at December 31 $206,000,000 $218,000,000 Unfunded capacity at December 31 114,000,000 33,000,000 Average line of credit borrowings outstanding during the year 186,157,083 120,576,776 Maximum borrowings during the year 227,000,000 218,000,000 Weighted average borrowing rate During the year 5.9% 5.9% At December 31 6.5% 6.6%
Borrowing rates under the revolving credit facility are indexed off the prime rate, federal funds rate or the London Interbank Offered Rate (LIBOR) and vary with the amount of borrowings outstanding. As of December 31, 1997, commitment fees for the line of credit are .15% on $130 million and .125% on $130 million. Total commitment fees paid for revolving credit facilities were $479,000 in 1997, and $340,000 in 1996 and 1995. 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 $290 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 Borrowings
In an effort to reduce NCB's cost of funds, NCB developed a program under which it borrows, on a short-term basis, from certain customers. At December 31, 1997 and 1996, the short-term borrowings outstanding totaled $12.2 million and $6.5 million, respectively. In 1997, NCB also implemented a commercial paper program to further reduce NCB's cost of funds. At December 31, 1997, commercial paper totaled $24.9 million.
During 1997 and 1996, NCB also entered into a series of reverse repurchase agreements. The average balances of reverse repurchase agreements outstanding during 1997 and 1996 were $14,364,135 and $9,288,258, respectively, and the maximum borrowings during 1997 and 1996 were $17,047,000 and $13,523,500, respectively. The weighted average rates on the reverse repurchase agreements during 1997 and 1996 were 5.73% and 5.65%, respectively. There were no reverse repurchase agreements outstanding at December 31, 1997 and 1996.
The carrying amounts of short-term borrowings at December 31 are as follows (amounts in thousands):
Carrying Amount
1997 1996
Line of credit $206,000 $218,000 Commercial paper 24,921 - Other 12,200 6,500
$243,121 $224,500
14. Long-term Debt
NCB has entered into various agreements for extension of credit with third parties. NCB has an agreement for a $30 million extension of credit with a major insurance company which expires on June 30, 1999. $10 million has been borrowed under this agreement. In January 1997, NCB received approval to issue up to $100 million under the medium term note program. As of December 31, 1997, NCB had $40 million outstanding under this program. In addition, as of December 31, 1997, NCB had outstanding $154.8 million of private placements issued to various institutional investors. The majority of the long-term debt has semi-annual interest with principal payments due on a 30/360 basis.
NCB is required under these lending agreements to, among other things, maintain $25 million of cash, cash equivalents and investments and have an effective net worth of not less than $290 million (defined as total members' equity plus subordinated debt). NCB shall not at any time permit consolidated senior debt to exceed 650% of consolidated adjusted net worth.
The following is a schedule of outstanding long-term debt at December 31, 1997:
Amount Rate Maturity
$ 47,951,623 7.45% 1998 19,979,843 5.92% 1999 31,967,749 8.51% 2000 29,969,765 7.15% 2001 74,924,412 6.75% 2002 and thereafter
$204,793,392
NCB has entered into a series of interest rate swap agreements which have a combined notional amount of $63 million. The effect of the agreements is to convert $63 million of the long-term debt from a weighted average fixed rate of 7.02% to a floating rate based on LIBOR.
The interest rate swap agreements are tied to the three and six month LIBOR rates plus a spread and reprice at different times throughout the year. At December 31, 1997 the three and six month LIBOR were 5.81% and 5.84%, respectively. These agreements expire as follows:
Maturity LIBOR Amount Date Index
$ 13,000,000 1998 Six month 20,000,000 1999 Three month 30,000,000 2001 Six month
$ 63,000,000
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 1997 and 1996, 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 totaling $4 million and $3 million, respectively, plus accrued interest at December 31, 1997 and 1996.
The Act states that the amount of NCB borrowings which may be outstanding at any time shall not exceed 10 times the paid-in capital and surplus which, as defined by the Act, includes the subordinated debt.
The annual interest payments for each tranche are determined in accordance with the following schedule which also includes the carrying amounts, excluding hedge gains, and respective estimated fair values of the subordinated debt at December 31, 1997 (in thousands): Next Carrying Estimated Index Rate Repricing Date Amount Fair Value
91-day Treasury rate 5.06% January 1, 1998 $ 53,553 $ 53,437 3-year Treasury rate 6.28% October 1, 1999 36,854 37,847 5-year Treasury rate 6.01% October 1, 2000 55,281 56,593 10-year Treasury rate 8.82% October 1, 2000 36,854 40,866
$182,542 $188,743
In addition to the $63 million of interest rate swaps on the long-term debt, NCB has entered into a series of interest rate swap agreements totaling $60 million which have the effect of converting the subordinated debt from a fixed rate of 7.42% to a floating rate based on LIBOR.
The interest rate swap agreements are tied to the one, three and six month LIBOR rates and reprice at different times throughout the year. At December 31, 1997, the one, three and six month LIBOR rates were 5.72%, 5.81% and 5.84%, respectively. The agreements, which expire in the year 2000, are described below:
Debt LIBOR Swapped Amount Index
Five year $30,000,000 Six month Ten year 10,000,000 Six month Ten year 10,000,000 Three month Ten year 10,000,000 One month
$60,000,000
16. Common Stock and Members' Equity
NCB's common stock consists of Class B stock owned by its borrowers, Class C stock owned by entities eligible to borrow from NCB, and Class D non-voting stock owned by others.
1997 1996 Class B Class Class D Class B Class C Class D
Par value per share $ 100 $ 100 $ 100 $ 100 $ 100 $ 100 Shares authorized 900,000 300,000 100,000 800,000 300,000 100,000 Shares issued and outstanding 840,045 219,004 3 786,004 217,516 3
The changes in each class of common stock are described below:
Class B Class C Class D Total
Balance, December 31, 1994 $67,823,071 $24,844,625 $300 $92,667,996 Cancellation and redemption of common stock (1,135,617) (2,408,962) - (3,544,579) 1994 patronage dividend distributed in common stock 4,746,618 211,185 - 4,957,803 Reclassification of stock surplus 915,682 (915,682) - -
Balance, December 31, 1995 72,349,754 21,731,166 300 94,081,220 Proceeds from issuance of common stock - 1,000 - 1,000 Cancellation and redemption of common stock (468,024) (190,460) - (658,484) 1995 patronage dividend distributed in common stock 6,718,686 209,878 - 6,928,564
Balance, December 31, 1996 78,600,416 21,751,584 300 100,352,300 Proceeds from issuance of common stock - 500 - 500 Cancellation and redemption of common stock (1,088,713) (45,205) - (1,133,918) 1996 patronage dividend distributed in common stock 6,492,799 197,568 - 6,690,367
Balance, December 31, 1997 $84,004,502 $21,904,447 $300 $105,909,249
Members' equity includes the three classes of common stock, and allocated and unallocated retained earnings. Allocated retained earnings have been designated for patronage dividend distribution, whereas unallocated retained earnings have not been designated for patronage dividend distribution.
17. Regulatory Capital and Retained Earnings of NCBSB
In connection with the insurance of savings accounts, NCBSB is required to maintain minimum amounts of regulatory capital. If NCBSB fails to meet its minimum required capital, the appropriate regulatory authorities may take such actions, as they deem appropriate, to protect the Savings Association Insurance Fund (SAIF), NCBSB, and its depositors and investors. Such actions may include various operating restrictions, limitations on liability growth, limitations on deposit account interest rates, and investment restrictions.
NCBSB's capital exceeds the minimum capital requirements at December 31, 1997. The following table summarizes NCBSB's capital at December 31, 1997:
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, 1997, 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 1997, 1996, and 1995 is $428,676, $362,621, and $329,471, respectively.
NCB maintains an employee thrift plan organized under Internal Revenue Code Section 401(k) and contributes up to 6% of each participant's salary. Contributions and expense for 1997, 1996, and 1995 are $359,401, $278,720, and $275,457, respectively.
Effective January 1, 1997, the Board of Directors approved the Executive Long-Term Incentive Plan (the Plan) to provide incentive compensation to certain key executives of NCB. NCB expensed $210,000 for the Plan in 1997.
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 1998, NCB anticipates that it will declare a patronage dividend for 1997 of $13,983,000. The anticipated cash portion of the 1997 patronage dividend is included in patronage dividends payable at December 31, 1997. The anticipated stock portion of the patronage dividend of 1997 earnings to be distributed has been added to allocated retained earnings at December 31, 1997. Patrons of NCB receiving such patronage dividends consent to include them in their taxable income.
The provision for income taxes consists of the following:
Year Ended December 31,
1997 1996 1995 Current tax expense Federal $1,270,100 $674,728 $665,429 State and local 143,504 148,054 19,184
Total current 1,413,604 822,782 684,613 Deferred tax expense (benefit) Federal (38,106) (25,868) (14,858) State and local - - 107,928
Total deferred (38,106) (25,868) 93,070
Total provision $1,375,498 $796,914 $777,683
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,
1997 1996 1995
Statutory U.S. tax rate $ 5,884,348 $ 4,242,158 $ 4,510,339 Patronage dividends (4,754,097) (3,567,430) (3,844,910) State and local taxes 143,504 148,054 127,112 Other 101,743 (25,868) (14,858)
Income tax provision $ 1,375,498 $ 796,914 $ 777,683
Deferred tax assets net of liabilities, included in other assets, are comprised of the following at December 31, 1997 and 1996:
1997 1996
Deferred commitment fees $ 133,609 $ 129,067 Allowance for loan losses 313,112 280,185 Other 146,925 96,455
Gross deferred tax assets 593,646 505,707
Mortgage servicing rights (60,994) - Loan bad debt expense - (56,342) Federal Home Loan Bank stock dividends (65,175) (48,697) Other (58,078) (14,412)
Gross deferred tax liabilities (184,247) (119,451)
Net deferred tax asset $ 409,399 $ 386,256
20. Income Available for Dividends on Stock
Under a existing long-term debt agreements, the aggregate amount of cash dividends on Class C or Class D Stock, together with patronage dividends payable in cash, is limited to the sum of $15,000,000 plus 50% of NCB's consolidated adjusted net income accumulation (or minus 100% of NCB's consolidated adjusted net income in case of a deficit) from January 1, 1992 through the end of the most current fiscal year ended. If the aggregate amount of cash dividends and patronage dividends payable in cash exceeds the limitation previously described, total patronage dividends payable in cash and cash dividends payable on any calendar year may not exceed 20% of NCB's taxable income for such calendar year.
Notwithstanding the above restriction, NCB is prohibited by law from paying dividends on its Class C Stock at a rate greater than the statutory interest rate payable on the subordinated debt. Those rates for 1997, 1996, and 1995 are 6.4%, 6.1% and 6.7%, respectively. Consequently, the amounts available for payment on the Class C Stock for 1997, 1996, and 1995 are $1,399,694, $1,326,847, and $1,455,988, 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
1997 1996 1997 1996 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $414,905 $184,625 $1,899 $ 435 Standby letters of credit $116,814 $100,845 $1,309 $1,157
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, and forward commitments.
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 $3.1 million representing the estimated cost of replacing, at current market rates, all outstanding swap agreements. NCB does not anticipate nonperformance by any of its counterparties. Income or expense from interest rate swaps is treated as an adjustment to interest expense/income on the hedged asset or liability.
Financial futures are contracts for delayed delivery of specific securities at a specified future date and at a specified price or yield. NCB purchases/sells these contracts to hedge the interest rate risk associated with originating mortgage loans that will be held for sale. NCB has minimal credit risk exposure on these financial instruments since changes in market value of financial futures are settled in cash on the following business day, and payment is guaranteed by the clearinghouse. Gains and losses from these contracts are deferred until the time of disposition of the asset or liability.
NCBSB and NCB enter into forward commitments to sell a portion of their production of loans to Federal National Mortgage Association (Fannie Mae) and Residential Funding Corporation. The market value of forward commitments is considered in the lower of cost or market valuation of the loan portfolio held for sale.
The contract or notional amounts and the respective estimated fair value of NCB's off-balance sheet financial instruments at December 31, are as follows: (amounts in thousands):
Contract or Notional Amounts Estimated Fair Value 1997 1996 1997 1996 Financial instruments whose notional or contract amounts exceed the amount of credit risk:
Financial futures contracts $218,200 $167,200 $217,050 $170,421 Interest rate swap agreements $123,000 $161,000 $126,144 $164,722
At December 31, 1997 and 1996, NCB had deferred gains and (losses) outstanding on financial futures contracts totaling $81,156 and ($3,688,563), $15,313 and ($1,347,082), respectively, which are included in loans held for sale.
22. Fair Value of Financial Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available for identical or comparable instruments, fair values are based on estimates using the present value of estimated cash flows using a discount rate commensurate with the risks involved or other valuation techniques. The resultant fair values are affected by the assumptions used, including the discount rate and estimates as to the amounts and timing of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of year end or that will be realized in the future.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:
Cash and cash equivalents - The carrying amount approximates fair value.
Investments - Fair values are based on quoted market prices for identical or comparable securities.
Loans and lease financing - For adjustable rate commercial loans that reprice frequently and with no significant changes in credit risk, fair values are based on carrying values. The fair market value of other adjustable rate loans is estimated by discounting the future cash flows assuming that the loans mature on the next repricing date using the rates at which similar loans would be made to borrowers with similar credit quality and the same stated maturities. The fair value of fixed rate commercial and other loans and leases, excluding loans held for sale, is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit quality and for the same remaining maturities. The fair value of loans held for sale is based on market prices for similar loans sold in the secondary market adjusted for differences in loan characteristics.
Interest-only receivables - The fair value of interest-only receivables is estimated by discounting the future cash flows using current market investor pass-through rates for similar securities and loans for which the interest-only receivable 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, 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 subordinated debt is estimated by discounting the future cash flows using the current borrowing rates at which similar types of borrowing arrangements with the same remaining maturities could be obtained by NCB.
Interest rate swap agreements - The fair value of interest rate swaps (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, 1997 and 1996. The fair value of forward contracts is based on current market prices for similar contracts.
Commitments to extend credit, standby letters of credit, and financial guarantees written - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
The estimated fair value of the Bank's financial instruments as of December 31, 1997 and 1996 are as follows (dollars in thousands):
1997 1996 Financial Assets: Carrying Fair Carrying Fair Amount Value Amount Value
Cash and cash equivalents $ 21,689 $ 21,689 $ 17,150 $ 17,150 Investments Available-for-sale 61,268 61,268 57,903 57,903 Held-to-maturity 1,942 1,912 2,946 2,294 Interest-only receivables 4,450 4,450 3,192 2,791 Loans and lease financing 773,768 786,004 750,094 756,301
Financial Liabilities: Deposits 83,826 83,281 88,620 88,211 Short-term and other borrowings 243,121 243,121 224,500 224,500 Long-term debt 204,793 207,079 202,137 204,824 Subordinated debt 182,785 189,137 182,853 188,743
Off-Balance Sheet Financial Instruments: Interest rate swap agreements 123,000 126,144 161,000 164,722 Financial futures and forward commitments 218,200 217,050 167,200 170,421 Commitments to extend credit 414,905 1,899 184,625 435 Standby letters of credit 116,814 1,309 100,845 1,157
23. New Accounting Standards
In June 1997, SFAS Nos. 130 and 131 were issued: "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information," respectively. SFAS No. 130 requires that certain financial activity typically disclosed in members' equity be reported in the financial statement as an adjustment to net income in determining comprehensive income. Items applicable to NCB would include unrealized gain/loss on securities available-for-sale. Items identified as comprehensive income should be reported in the statements of condition and the statements of changes in members' equity, under separate captions. SFAS NO. 130 is effective for NCB on January 1, 1998, including the restatement of prior periods reported consistent with this pronouncement. NCB does not anticipate any financial impact from the implementation of SFAS NO. 130.
SFAS No. 131 requires the reporting of selected segment information in quarterly and annual reports. Information from operating segments is derived from methods used by NCB's management to allocate resources and measure performance. SFAS No. 131 is effective for NCB on January 1, 1998, including the restatement of prior periods reported consistent with this pronouncement, if practical. NCB does not anticipate any material impact from the implementation of SFAS No. 131.
24. Subsequent Events
On January 15, 1998, the Board of Directors authorized the dissolution of CFC at which time NCB will assume all liabilities of CFC and receive a distribution of all assets after satisfaction of CFC's liabilities. Management expect the dissolution to occur by December 31, 1998.
In February 1998, NCB sold and securitized $130 million in real estate loans generating gains of $3 million. The gain on sale of loans will be included in the first quarter 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS, ON ACCOUNTING AND FINANCIAL DISCLOSURE
On May 13, 1997, the Registrant filed a report on Form 8-K that reported a change in the Registrant's Certifying Accountant.
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of NCB and the positions held by each are as follows:
Year First End of Position Appointed Term Age Alfred A. Plamann Chairman of the Board of Directors and Director 1995 1998 55
Charles E. Snyder President and Chief Executive Officer 1983 - 44
Leo H. Barlow Director 1993 1999 45
Harry J. Bowie Director 1991 1998 62
James L. Burns, Jr. Vice Chairman of the Board Of Directors and Director 1996 1999 59
Joseph Cabral Director 1995 1998 49
Kirby J. Erickson Director 1997 2000 57
Jackie Jenkins-Scott Director 1997 2000 48
Marilyn J. McQuaide Director 1996 1999 48
Michael J. Mercer Director 1997 1998 44
Mary Ann Rothman Director 1993 1999 55
Anthony J. Scallon Director 1995 1998 52
Sheila A. Smith Director 1995 1998 52
Peter C. Young Director 1997 2000 52
Thomas K.Zaucha Director 1997 2000 53
Year First End of Position Appointed Term Age
Caroline Blakely Managing Director, Chief Marketing Officer President, NCB Capital Corporation President and Director, NCB 1, Inc. President and Director, NCB Insurance Brokers, Inc. 1992 - 43
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 - 53
Mark W. Hiltz Managing Director, Chief Credit Risk Officer 1982 - 50
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 - 39
Thomas C. Schoettle President, NCB Savings Bank,FSB 1997 - 42
Alfred A. Plamann has been the President and Chief Executive Officer of Certified Grocers of California, Ltd. since 1994. He was the Senior Vice President and Chief Financial Officer of Certified Grocers from 1989 to 1993. He has served in an executive capacity with Atlantic Richfield Co. (ARCO) and has served on the Board of Directors of several of the cooperative's subsidiaries. Additionally, he has served on the Board of Directors of the National American Wholesale Grocers Association (NAWGA) and the California Grocer's Association (CGA), and has been a member of the Industry Relations Committee of the Food Marketing Institute (FMI).
Charles E. Snyder was named President and Chief Executive Officer of NCB in January, 1992. He had been Corporate Vice President and Chief Financial Officer of NCB from 1983 to December 1991.
Leo H. Barlow is a shareholder of Sealaska Corporation. Previously, he was President & Chief Executive Officer of Sealaska Timber Corporation from August, 1992 until August 31, 1997. Prior to that, he was President and 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.
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.
Jackie Jenkins-Scott is the President and Chief Executive Officer of the New England Hospital d/b/a Dimock Community Health Center for the past 14 years. Prior to her position with Dimock, she served as Director of the Roxbury Court Clinic and held several positions with the Commonwealth of Massachusetts, Department of Public Health from 1973 to 1977. She has been a Board Member of the Massachusetts League of Commmunity Health Centers and a member of the National Association of Community Health Centers, Inc.
Michael J. Mercer has been the President of Georgia Credit Union Affiliates since 1985 and Vice Chairman of the Association of Credit Union League Executives since 1996. He was also one of the founders of the Credit Union Service Corporation and was its former Chairman.
Mary Ann Rothman has been Executive Director of the Council of New York Cooperatives since 1980. She also serves on the executive committee of the National Association of Housing Cooperatives and is Vice Chairman of the NCBDC's Board of Directors.
Anthony J. Scallon has been Chairman of the Board of Directors, Federal Home Loan Bank of Des Moines since 1994. He also has been a Vocational Coordinator, Independent School District # 197, West St. Paul, Minnesota from 1994 to the present time. He was elected as a Minneapolis City Council Member in 1979 and served until 1993.
Sheila A. Smith has been President 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.
Peter C. Young has been the Executive Director of Area Cooperative Educational Services for almost 26 years. Currently, he is a member of the Board of Trustees and the Finance Committee of CT Hospital Association/Workers Compensation Trust. He is also the Fiscal Agent (Treasurer) and was a member of the Governing Board of the American Association of Educational Service Agencies.
Thomas K.Zaucha has been the President and Chief Executive Oficer of the National Grocers Association (NGA) since 1982. He served as President and Chief Executive Officer of the Grocers Fixtures & Equipment Company from 1978 to 1982 prior to its merger with NGA. He is also currently serving as a Board Member of NCB Retail Finance Corporation and Cooperative Development Foundation.
Caroline E. Blakely is a Managing Director and Chief Marketing Officer 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 and 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.
Mark W. Hiltz is a Managing Director and 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.
Richard L. Reed is a Managing Director and Chief Financial Officer with NCB. He was named Senior Vice President and Chief Financial Officer in 1994. Prior to that, he was Vice President and Treasurer from 1992 to 1994. He was Vice President, Treasury from 1989 to 1992.
Thomas C. Shoettle was named President and Chief Executive Officer of NCB Savings Bank, FSB in 1997. He was the Executive Vice President of the Savings Bank from 1995 to 1996. Previously, he served for eight years as Vice President, Commercial and Residential Lending and Regional Manager with Merchants National Bank and for three years as Manager, Special Assets with Farm Credit System.
Non-Incumbent Nominees for Directorships
Harold L. Citrin David A. Cox Kenneth L. Hartung Lynn M. Hoopingarner Donald E. Lien Alex N. Miller
Harold L. Citrin has been a Board Member of 1036 Park Corporation for three years. He is also a Managing Director of Bear, Stearns and Company. Prior to joining the board of 1036 Park Corporation, he was the Chairman of the Board of Appeals of the Village of Kings Point, Long Island and was a Board Member for 12 years.
David A. Cox has served as President and Treasurer of 718 Apartments, Inc. He is currently employed as Director of Economic Development in the South Bronx. Dave founded Dave's Distributing, a food distribution company in New York City. He was also a member of the High Falls Food Co-op for three years and was an ex-officio Board Member and Chairman of the Legislative and Education Committee of Bethex Federal Credit Union.
Kenneth L. Hartung has been a Vice President of FoodService Purchasing Cooperative since 1993. He also serves as President of the Cooperative's Canadian subsidiary (FoodService Purchasing of Canada) since 1994 and currently is the Chairman of the Cooperative's insurance subsidiary (Kenco Insurance Agency). He is also a Board Member of Bridgehaven, a member health provider agency.
Lynn M. Hoopingarner is the Owner/President of Hoopingarner, a business and management consulting company founded in 1992. She has been the President of White House Owners Association for the past four years and held various positions at the Association for three years. She also previously worked as a banker at Chase Manhattan Bank and Wells Fargo Bank.
Donald E. Lien has been the President and Chief Executive Officer of Panhandle Cooperative Association for two years. He is also the Vice Chairman of the North Platte Petroleum Partnership, a joint venture with twenty one other co-ops to buy and sell petroleum products. He was also a Regional Manager of Farmland Industries, Inc. for four years and a General Manager of Central Farmer Co-op for twelve years.
Alex N. Miller has been the President of G & M Management Corporation since 1974 and President and Chief Executive Officer of CAM Systems, Inc. since 1986. In 1996, he founded and now serves as the President of Share Credit Corporation which provides low cost share financing to limited equity housing cooperatives. He founded the Registered Cooperative Manager Program and serves on its Board of Governors. He also served as a member of the Board of Directors of the National Association of Housing Cooperatives for four consecutive terms.
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 athority of another committee. The members of the committee are Leo H. Barlow, Harry J. Bowie, James L. Burns, Jr., Joseph Cabral, Alfred A.Plamann(Chair), Mary Ann Rothman, and Sheila A. Smith.
The Loan and Business Development Committee is responsible for providing policy to management and for monitoring the lending, fee for service and business development efforts of NCB and its subsidiaries, consistent with the board's approved strategic plan. The members of the committee are Harry J. Bowie(Chair), James L. Burns, Jr., Jackie Jenkins-Scott, Mary Ann Rothman, Anthony J. Scallon, Sheila A. Smith and Thomas K. Zaucha.
The Finance Committee is responsible for monitoring NCB's financial planning, budgeting process, asset liability management and funding strategies. The members of the committee are Leo H. Barlow(Chair), Joseph Cabral, Kirby J. Erickson, Marilyn J. McQuaide, Michael J. Mercer, Anthony J. Scallon, Peter C. Young and Alfred A. Plamann.
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, Joseph Cabral(Chair), Kirby J. Erickson, Marilyn J. McQuiade, Michael J. Mercer and Anthony J. Scallon.
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, James L. Burns, Jr., Jackie Jenkins-Scott, Mary Ann Rothman, Sheila A. Smith(Chair), Thomas K. Zaucha and Peter C. Young.
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 Annual Compensation Compensation (a) (b) (c) (d) (e) Name and Principal Position Year Salary Bonus
Charles E. Snyder, 1997 $310,013 $103,250 $20,440 President & CEO 1996 295,000 96,670 19,380 1995 275,534 86,450 19,320
Caroline Blakely 1997 203,678 59,500 20,440 Managing Director, Chief 1996 170,627 53,375 19,267 Marketing Officer 1995 138,130 44,750 17,669
Charles H. Hackman 1997 189,387 63,591 20,440 Managing Director, Chief 1996 182,664 63,591 19,380 Credit Officer 1995 175,147 52,950 19,320
Richard L. Reed 1997 150,005 52,500 19,037 Managing Director, Chief 1996 117,500 36,575 15,010 Financial Officer 1995 102,918 20,000 13,148
Mark Hiltz 1997 145,005 48,125 18,592 Managing Director, Chief 1996 137,505 45,719 15,520 Risk Officer 1995 124,147 20,400 8,481
* The "All Other Compensation" reported for 1997 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 $9,500 $9,500 $1,440 Ms. Blakely 9,500 9,500 1,440 Mr. Hackman 9,500 9,500 1,440 Mr. Reed 9,000 9,000 1,037 Mr. Hiltz 8,700 8,700 1,192
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 1997 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, 1997.
Class B Stock Class C Stock
Name and Addresses No. of Percent No. of Percent of Shareholders Shares of Class Shares of Class
Co-op Central Bank 30,500.00 3.63% 28,281.01 12.91% 265 Franklin Street Boston, MA. 92110
Greenbelt Homes Inc. 14,424.28 1.71% 29,451.26 13.44% Hamilton Place Greenbelt, MD. 20770
Group Health, Inc (1) 11,637.75 1.38% 14,249.60 6.50% 2829 Univ. Ave., S.E. Minneapolis, MN 55414
(1) Included in the above are 2,878.79 shares and 2,769.48 shares of Class B and C stock, respectively, held of record by Central Minnesota Group Health Plan which is affiliated with GHI.
Because the Act restricts ownership of NCB's Class B and Class C stock to eligible cooperatives, NCB's officers and directors do not own any Class B or Class C stock, although cooperatives with which they are affiliated may own such stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Transactions
The following table sets forth information concerning certain transactions by which NCB and its subsidiaries have made loans or leases to organizations with which NCB directors or executive officers are affiliated. The first column lists the name of the director or executive officer who is related with the loan or lease recipient. The second column sets forth the name of the organization to which the loan or lease was made. (Loans labeled as "personal" were made to the named director or officer). The last three columns list loan balances and interest rates as of the specified dates. The text following the table further describes the nature of the transactions set forth in the table.
The following loans and leases were made in the ordinary course of NCB's business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of uncollectability or present other unfavorable features.
National Cooperative Bank Largest Interest Balance Balance as Rate as in of of 1997 12/31/97 12/31/97
Leo H. Barlow Sealaska Timber Corp $7,953,690 $6,389,603 9.18% Sealaska Corp 1,519,226 1,074,584 9.15% Sealaska Corp 5,800,000 3,816,666 8.10%
James L. Burns, Jr. Co-op Central Bank 15,00,000 0
Joseph Cabral Chatsworth Products 325,200 111,600 8.97% Chatsworth Products 411,714 411,350 8.97% Chatsworth Products 616,724 477,081 8.97% Chatsworth Products 3,824,602 3,440,471 8.97%
Kirby J. Erickson Central Minnesota Group Health 3,474,220 3,123,085 8.10% Central Minnesota Group Health 3,008,280 3,008,280 7.63%
Alfred A. Plamann Grocers Cap Revolver 1,250,000 0 Grocers Cap Revolver 1,750,000 0 Mollie Stone 7,151,227 7,102,455 9.50% K.V. Mart 1,964,244 1,964,244 9.87% Major Market 732,790 574,512 10.00% Andronico's 2,363,603 2,091,188 8.84% Andronico's 2,915,000 2,420,000 8.84% Andronico's 2,400,000 2,340,000 8.38% Superior Warehouse 9,425,130 8,450,520 9.00% Grocers Cap Program Purchase 5,815,949 4,701,140 7.25%
Mary Ann Rothman 110-118 Riverside Tenants 1,000,000 0
Largest Interest Balance Balance as Rate as in of of 1997 12/31/97 12/31/97
Peter C. Young Area Coop Education Services 670,000 670,000 9.00% Area Coop Education Services 1,291,760 1,135,310 8.75% Area Coop Education Services 145,184 93,466 8.95%
Charles H. Hackman Watergate South 0 0
Charles E. Snyder National Cooperative Business Association 400,000 0 National Cooperative Business Association 108,160 100,990 Lease
Nominees for Directorship
Harold L. Citrin 1036 Park Corporation 1,398,769 1,397,330 7.32%
David A. Cox 718 Apartments, Inc. 1,646,028 0 718 Apartments, Inc. 1,800,000 1,793,129 7.42%
Kenneth L. Hartung KFC National Purchasing Coop 3,000,000 0 Kazi HFP 1,075,556 1,002,222 7.72% Kazi/NJ 701,110 689,447 7.72% Best Mexican Foods, Inc. 332,240 297,240 8.72% Quality Foods, Inc. 380,000 340,000 8.72% Italian American Foods 225,000 175,000 8.72% KFC/Cerritos 345,833 295,833 8.97% Dinsmoor Mini Mart 741,667 725,000 8.75% Tollgate Foods, Inc. 296,429 253,571 9.00% Siegel Food Services 446,037 405,488 8.47% Ross Point KFC, Inc. 271,726 234,134 11.68% Dev. Diversified Corp 1,385,556 1,288,889 8.50% Dev. Diversified Corp 850,000 576,842 11.50% Marvin L & Phyllis White 1,079,117 1,040,658 8.50% E.A.P. Management Corp 136,000 104,000 8.20% Karbach 580,000 504,148 8.75% KFC/Southgate 15,000 13,750 9.50% KFC/Ecorse 15,500 14,208 9.50% KFC/Lincoln 13,000 11,917 9.50% KFC/River Rou 10,000 9,167 9.50% KFC/Wyandote 15,000 13,750 9.50% Easter Food 350,000 326,667 9.25% Carolina Bell 150,000 140,854 9.25%
Lynn M. Hoopingarner White House Owners Corp 200,000 189,585 9.38%
Donald E. Lien Panhandle Cooperative 2,300,000 600,000 8.50% Panhandle Cooperative 83,333 0 Panhandle Cooperative 1,075,862 827,586 8.63%
Alex N. Miller The Columns at East Hill 205,148 205,148 9.24% Tanglewood Garden Coop 872,491 864,859 9.69%
NCB Savings Bank, FSB
Charles H. Hackman Personal 113,593 93,371 7.00%
NCB has one direct loan outstanding and one participation through National Bank of Alaska outstanding to Sealaska Corporation of which Mr. Barlow is a shareholder. The proceeds of the loan were used to refinance real estate while the proceeds of the participation were used for general working purposes. In addition, NCB has a $6.4 million loan participation with National Bank of Alaska which was used to acquire timber.
NCB has a $15 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 Officer.
NCB has one term loan and two lines of credit outstanding to Chatsworth Products, Inc. of which Mr. Cabral is the President. The term loan was 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.
NCB has two outstanding commercials loans with Central Minnesota Group Health Plan, Inc. (CMGHP). Mr. Erickson is the Executive Vice President of Group Health, Inc. (GHI)/HealthPartners, Inc. HealthPartners, Inc. is GHI's parent company and GHI is the sole corporate member of CMGHP. These loans were used to fund a new healthcare center and refinance an existing term loan.
NCB has 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 three commercial loans outstanding with Area Cooperative Educational Services of which Peter C. Young is the Executive Director. 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.
NCB has a line of credit outstanding to Watergate South, Inc. of which Mr. Hackman, an officer of NCB, is the President of the Board. The purpose of the line of credit is for capital improvements to the property.
NCB has a line of credit outstanding and a lease financing to National Cooperative Business Association of which Mr. Snyder, President and CEO of NCB, is a Board Member. The line of credit is to provide working capital while the lease financing is for computer hardware and software purchased.
Board nominee Harold L. Citrin is presently a Board Member of 1036 Park Avenue Corporation. NCB has a real estate loan to 1036 Park Avenue Corporation which was used to refinance an existing mortgage and to provide capital reserves. This loan has been sold and is not reflected on NCB's books.
Board nominee David A. Cox is the President and Treasurer of 781 Apartments, Inc. NCB has a real estate loan to 781 Apartments, Inc. which was used to refinance an existing mortgage and to finance repairs and improvements. This loan has been sold and is not reflected on NCB's books.
Board nominee Kenneth L. Hartung is a Vice President of FoodService Purchasing Cooperative(FSPC). NCB has a line of credit to KFC National Purchasing Cooperative, Inc. d/b/a FoodService Purchasing Cooperative which is available for working capital purposes. NCB also has started a member finance program whereby NCB provides financing to KFC and Taco Bell retail members for store renovation, purchase of new stores and the purchase of equipment and inventory. FSPC provides guarantees for these member loans. The remaining loans listed with respect to Mr. Hartung were made under this program.
Board nominee Lynn M. Hoopingarner is the President of White House Owners Association. NCB has an outstanding real estate loan to the White House Owners which was used to finance capital improvements.
Board nominee Donald E. Lien is the President and Chief Executive Officer of Panhandle Cooperative Association. NCB has two outstanding commercial loans with Panhandle Cooperative. These loans were used to finance equipment purchases and provide operating capital.
Board nominee Alex N. Miller is the President of G & M Management Company. NCB has outstanding loans to The Columns at East Hill and Tanglewood Garden Coop. G & M provides management services for these cooperatives. The purposes of these loans were to refinance acquisition and for capital improvements. These loans have been sold and are not reflected on NCB's books.
In its normal course of business, NCB Savings Bank makes loans to employees at competitive market rates. NCB Savings Bank has issued a home mortgage to Charles Hackman.
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, 1995, 1996, and 1997. Page #
27 Report of Independent Public Accountants
28 Independent Auditors' Report
29 Consolidated Balance Sheets
30 Consolidated Statements of Income
31 Consolidated Statements of Changes in Members' Equity
32-33 Consolidated Statements of Cash Flows
34-61 Notes to the Consolidated Financial Statements
(a)(2) Not applicable
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements, or the notes thereto.
(a)(3) The following exhibits are filed as a part of this report.
Exhibit No.
(a) 3.1 National Consumer Cooperative Bank Act, as amended through 1981.
(c) 3.2 1989 Amendment to National Consumer Cooperative Bank Act.
(d) 3.3 Bylaws of NCB
(g) 4.1 Election Rules of the NCB. For other instruments defining the rights of security holders, see Exhibits 3.1 and 3.2.
(h) 4.2 Form of Assumption Agreements and Amended and Restated Senior Note Agreements
(h) 4.3 Schedule Concerning Senior Note Agreements
(l) 4.4 Financing Agreement with U.S. Treasury
(m) 4.5 Note Purchase Agreement with Lutheran Brotherhood et al.
(n) 4.6 Master Shelf Agreement with Prudential Insurance Co. of America et al.
(o) 4.7 Senior Note Agreement (Dec. 1996)
(s) 4.8 First Amendment Agreement to Master Shelf Agreement with Prudential Insurance Co. of America
(s) 4.9 First Amendment Agreements to the Assumption Agreement and Amended and Restated Note Purchase Agreements
(s) 4.10 First Amendment Agreements to the Note Purchase Agreements with Lutheran Brotherhood et al.
(p) 4.11 Form of Indenture for Debt Securities
(q) 4.12 Form of Fixed Rate Medium Term Note
(r) 4.13 Form of Floating Rate Medium Term Note
*(u) 10.1 Chief Executive Officer Incentive Plan
10.2 (No Exhibit)
*(i) 10.3 Deferred Compensation Agreement with Charles E. Snyder
*(f) 10.4 Severance Agreement with Charles E. Snyder
(t) 10.5 Third Amended and Restated Loan Agreement with Fleet Bank as Agent
*(a) 10.6 Insurance Plan for NCB Executive Officers
(b) 10.7 Subordination Agreement with Consumer Cooperative Development Corporation (now NCB Development Corporation)
(t) 10.8 Master Shelf Agreement with Prudential Insurance Co. of America et al. (June 1997)
10.11 (No Exhibit)
(d) 10.12 Lease on Headquarters of NCB
*(u) 10.13 NCB Executive Long-Term Incentive Plan
*(g) 10.14 Employment Agreement with Marlon W. Pickles
10.15 (No Exhibit)
10.16 (No Exhibit)
10.17 (No Exhibit)
(i) 10.18 Term Loan Agreement with Credit Suisse (Feb. 1996)
10.19 (No Exhibit)
(j) 10.20 Term Loan Agreement with Credit Suisse (Sept. 1996) 10.21 (No Exhibit)
10.22 (No Exhibit)
(j) 10.23 Term Loan Agreement with Comerica Bank (Dec. 1995)
10.24 (No Exhibit)
(k) 10.25 Term Loan Agreement with PNC Bank (Aug. 1997)
*(u) 10.26 Incentive Plan for NCB Executive Officers
10.27 (No Exhibit)
(s) 10.28 Amendment No. 1 to Term Loan Agreement with Credit Suisse (Feb. 1995)
(s) 10.29 Amendment No. 1 to Term Loan Agreement with Credit Suisse (Sept. 1995)
(s) 10.30 Amendment to Term Loan Agreement with Comerica Bank (Dec. 1995)
(j) 22.1 List of Subsidiaries and Affiliates of the NCB
(u) 23.1 Consent of Arthur Andersen LLP
(j) 25.1 Power of Attorney by Joseph Cabral
(h) 25.2 Power of Attorney by Leo Barlow
(u) 25.3 Power of Attorney by Kirby J. Erickson
(e) 25.4 Power of Attorney by Harry J. Bowie
(u) 25.5 Power of Attorney by Jackie Jenkins-Scott
(s) 25.6 Power of Attorney by James L. Burns, Jr.
(h) 25.7 Power of Attorney by Mary Ann Rothman
(u) 25.8 Power of Attorney by Michael J. Mercer
(u) 25.9 Power of Attorney by Peter C. Young
(u) 25.10 Power of Attorney by Thomas K.Zaucha
(j) 25.11 Power of Attorney by Alfred A. Plamann
(j) 25.12 Power of Attorney by Anthony J. Scallon
(j) 25.13 Power of Attorney by Sheila A. Smith
25.14 (No Exhibit)
(s) 25.15 Power of Attorney by Marilyn J. McQuaide
(u) 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, 1996).
(c) Incorporated by reference to the exhibit of the same number filed as part of the registrant's annual report on Form 10-K for the year ended December 31, 1989 (File No.2-99779).
(d) Incorporated by reference to the exhibit of the same number filed as part of Registration Statement No. 33-42403 (filed September 6, 1991 ).
(e) Incorporated by reference to the exhibit of the same number filed as part of the registrant's annual report on Form 10-K for the year ended December 31, 1991(File No. 2-99779).
(f) 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).
(g) Incorporated by reference to the exhibit of the same number filed as part of the registrant's annual report on Form 10-K for the year ended December 31, 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, 1993 (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, 1994 (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, 1995 (File No. 2-99779).
(k) 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).
(l) 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).
(m) 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).
(n) 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).
(o) 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).
(p) Incorporated by reference to Exhibit 4.1 filed as part of Amendment No. 1 to Registration Statement No. 333-17003 (Filed January 21, 1997).
(q) Incorporated by reference to Exhibit 4.2 filed as part of Amendment No. 1 to Registration Statement No. 333-17003( Filed January 21, 1997).
(r) Incorporated by reference to Exhibit 4 to the registrant's report on Form 8-K filed February 11, 1997 (File No. 2-99779).
(s)Incorporated by reference to the exhibit of the same number filed as part of the registrant's annual report on Form 10-K for the year ended December 31, 1996 (File No. 2-99779).
(t) Incorporated by reference to the exhibit of the same number filed as part of the registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1997 (File No. 2-99779).
(u) Filed herewith
(b) The Registrant did not file any report on Form 8-K during the last quarter of 1997.
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned, thereunto duly authorized.
NATIONAL CONSUMER COOPERATIVE BANK
DATE March 30, 1998 BY/s/Charles E. Snyder Charles E. Snyder President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates noted:
Signature Title Date */s/Alfred A. Plamann Chairman of the Board and 3/30/98 Alfred A. Plamann Director
/s/Richard L. Reed Managing Director, 3/30/98 Richard L. Reed (Principal Financial Officer)
/s/Marietta J. Orcino Vice President, Tax & 3/30/98 Marietta J. Orcino Regulatory Compliance
/s/Patricia A. Ferrick Vice President (Principal 3/30/98 Patricia A. Ferrick Accounting Officer)
*/s/Leo H. Barlow Director 3/30/98 Leo H. Barlow
*/s/Harry J. Bowie Director 3/30/98 Harry J. Bowie
*/s/James L. Burns, Jr. Director 3/30/98 James L. Burns, Jr.
*/s/Joseph Cabral Director 3/30/98 Joseph Cabral
*/s/Kirby J. Erickson Director 3/30/98 Kirby J. Erickson
*/s/Jackie Jenkins-Scott Director 3/30/98 Jackie Jenkins-Scott
Signature Title Date
*/s/Marilyn J. McQuiade Director 3/30/98 Marilyn J. McQuiade
*/s/Michael J. Mercer Director 3/30/98 Michael J. Mercer
*/s/Mary Ann Rothman Director 3/30/98 Mary Ann Rothman
*/s/Anthony J. Scallon Director 3/30/98 Anthony J. Scallon
*/s/Sheila A. Smith Director 3/30/98 Sheila A. Smith
*/s/Peter C. Young Director 3/30/98 Peter C. Young
*/s/Thomas K. Zaucha Director 3/30/98 Thomas K. Zaucha
* By /s/Richard L. Reed Richard L. Reed (Attorney-in-Fact)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
With this report, the registrant is furnishing to the Commission for its information the registrant's election materials for its 1997 annual meeting. The registrant has not yet distributed an 1997 annual report to security holders and will furnish such report to the Commission when it is sent to security holders.
INDEX TO EXHIBITS
Exhibit No. Description
10.1 Chief Executive Officer Incentive Plan
10.13 NCB Executive Long-Term Incentive Plan
10.26 Incentive Plan for NCB Executive Officers
23.1 Consent of Arthur Andersen LLP
25.3 Power of Attorney by Kirby J. Erickson
25.5 Power of Attorney by Jackie Jenkins-Scott
25.8 Power of Attorney by Michael J. Mercer
25.9 Power of Attorney by Peter C. Young
25.10 Power of Attorney by Thomas K. Zaucha
27 Financial Data Schedule
Supplemental Information Registrant's 1998 Election Materials
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NCB's financial statements and notes thereto are set forth beginning at page 25 below. NCB is not subject to any of the requirements for supplementary financial information contained in Item 302 of Regulation S-K.
Report of Independent Public Accountants
To the Board of Directors and Members of National Cooperative Bank:
We have audited the accompanying consolidated balance sheet of National Cooperative Bank and subsidiaries as of December 31, 1997, and the related consolidated statements of income, changes in members' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Cooperative Bank and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, effective January 1, 1997, the Company changed its method of accounting for loan-servicing rights and interest-only receivables.
Washington, D.C., January 28, 1998 (except with respect to the matter discussed in Note 24, as to which the date is February 13, 1998)
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 the related consolidated statements of income, changes in members' equity, and cash flows for each of the two 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 the results of their operations and their cash flows for each of the two years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
Washington, D.C. January 30, 1997
NATIONAL COOPERATIVE BANK CONSOLIDATED BALANCE SHEETS December 31,
Assets 1997 1996
Cash and cash equivalents $ 21,689,245 $ 17,150,534 Restricted cash 6,884,572 8,348,703 Investment securities Available-for-sale (amortized cost of $60,911,708 and $57,967,940 in 1997 and 1996) 61,268,440 57,903,166 Held-to-maturity (fair value of $1,911,605 and $2,294,294 in 1997 and 1996) 1,942,312 2,946,425
Loans and lease financing 584,635,993 565,824,579 Loans held for sale 189,132,330 184,269,872
Less: Allowance for loan losses (17,638,136) (15,504,510)
756,130,187 734,589,941
Other assets 21,389,059 18,396,811
Total assets $869,303,815 $839,335,580
Liabilities and Members' Equity Liabilities Deposits $ 83,825,979 $ 88,620,002 Patronage dividends payable in cash 5,872,708 4,721,600 Other liabilities 17,072,271 11,332,033 Borrowings Short-term 243,120,607 224,500,000 Long-term 204,793,392 202,137,077 447,913,999 426,637,077
Subordinated debt 182,785,385 182,853,313 Total borrowings 630,699,384 609,490,390 Total liabilities 737,470,342 714,164,025
Members' equity Common stock Class B 84,004,502 78,600,416 Class C 21,904,447 21,751,584 Class D 300 300 Retained earnings Allocated 8,109,931 5,770,844 Unallocated 17,474,132 19,113,185 Unrealized gain (loss) on investment securities available-for-sale 340,161 (64,774)
Total members' equity 131,833,473 125,171,555
Total liabilities and members' equity $869,303,815 $839,335,580
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997 1996 1995
Interest income Loans and lease financing $62,549,700 $55,671,365 $48,563,512 Investment securities 6,237,441 5,593,678 4,206,876 Total interest income 68,787,141 61,265,043 52,770,388
Interest expense Deposits 3,970,498 4,109,098 3,457,902 Short-term borrowings 11,229,046 7,851,964 6,196,456 Long-term debt, other borrowings and subordinated debt 26,744,347 23,338,194 21,098,803 Total interest expense 41,943,891 35,299,256 30,753,161
Net interest income 26,843,250 25,965,787 22,017,227
Provision for loan losses 3,504,000 1,950,000 1,904,500 Net interest income after provision for loan losses 23,339,250 24,015,787 20,112,727
Non-interest income Gain on sale of loans 7,229,368 4,578,209 6,009,720 Loan and deposit servicing fees 2,237,082 2,125,131 1,701,682 Other 5,097,382 4,283,556 4,629,503 Total non-interest income 14,563,832 10,986,906 12,340,905
Non-interest expense Compensation and employee benefits 12,658,409 10,828,385 10,406,220 Contractual services 3,808,267 4,182,131 5,808,285 Occupancy and equipment 4,016,118 4,140,589 3,060,293 Contribution to NCB Development Corporation 1,000,000 720,000 500,000 Other 2,582,435 3,135,476 2,817,915 Total non-interest expense 24,065,229 23,006,581 22,592,713
Net income before taxes 13,837,853 11,996,112 9,860,919
Provision for income taxes 1,375,498 796,914 777,683
Net income $12,462,355 $11,199,198 $ 9,083,236
Distribution for net income Patronage dividends $13,982,639 $10,492,444 $11,308,558 Retained earnings (1,520,284) 706,754 (2,225,332) $12,462,355 $11,199,198 $ 9,083,236
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 1997 1996 1995
Cash flows from operating activities Net income $ 12,462,355 $ 11,199,198 $ 9,083,236 Adjustments to reconcile net income to net cash provided by (used in) operating activities Provision for loan losses 3,504,000 1,950,000 1,904,500 Depreciation and amortization 5,212,091 5,148,255 4,950,807 Gain on sale of loans (7,229,368) (4,578,209) (6,009,720) Loans originated for sale (365,279,273) (243,114,015) (251,781,768) Proceeds from sale of loans held for sale 362,446,396 135,955,259 250,676,820 Decrease (increase) in other assets 3,441,735 (5,443,982) (1,689,307) Increase (decrease) in other liabilities 5,740,238 (2,186,480) 1,782,807 Other - - 798,211
Net cash provided by used in operating activities 20,298,174 (101,069,974) 9,715,586
Cash flows from investing activities Purchase of investment securities Available-for-sale (7,046,767) (9,435,643) (722,785) Held-to-maturity 1,464,131 - (9,155,293) Proceeds from maturities of investments Available-for-sale 5,009,306 8,006,556 4,503,907 Held-to-maturity 154,113 198,000 3,306,785 Proceeds from sales of investments Available-for-sale - - 4,385,281 Net increases in loans and lease financing (44,351,586) (84,941,273) (158,775,397) Proceeds from sale of portfolio loans 17,276,924 38,679,408 51,405,022 Purchases of premises and equipment (712,729) (1,235,856) (613,576)
Net cash used in investing activities (28,206,608) (48,728,808) (105,666,056)
Cash flows from financing activities Net (decrease) increase in deposits (4,794,023) 10,519,829 19,181,624 Net increase in short-term borrowings 18,620,607 92,000,000 41,468,884 Proceeds from issuance of long-term debt 30,916,680 47,500,000 74,500,000 Repayment on long-term debt (28,000,000) - (25,168,822) Repayment on other borrowings - - (922,176) Redemption of common stock (15,000) (68,000) (310,366) Dividends paid (4,281,119) (4,341,889) (4,056,132)
Net cash provided by financing activities 12,447,145 145,659,940 104,693,012
Increase (decrease) in cash and cash equivalents 4,538,711 (4,138,842) 8,742,542
Cash and cash equivalents, beginning of year 17,150,534 21,289,376 12,546,834
Cash and cash equivalents, end of year $ 21,689,245 $ 17,150,534 $ 21,289,376
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of investing and financing activities:
1997 1996 1995 Unrealized gain (loss) on investment available-for-sale $ 404,935 $ (318,812) $ 1,675,619 Common stock cancelled against allowance for loan losses $ 9,114 $ 21,390 $ 288,585 Contributions of excess concentration to NCBRFC $ - $ - $ 2,697,010 Interest paid $40,722,565 $34,582,531 $30,177,706 Income taxes paid $ 1,223,695 $ 670,122 $ 709,879
The accompanying notes are an integral part of these financial statements.
NATIONAL COOPERATIVE BANK
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization
National Consumer Cooperative Bank, doing business as National Cooperative Bank (NCB), is a U.S. Government-chartered corporation organized under the National Consumer Cooperative Bank Act (the Act). NCB provides loans and financial services to cooperatives. NCB Capital Corporation (NCBCC), previously named NCB Mortgage Corporation, a wholly-owned subsidiary, originates, sells and services real estate and commercial loans for cooperatives. Cooperative Funding Corporation (CFC), a wholly-owned subsidiary, is a registered broker-dealer and provides corporate financial services. NCB Investment Advisers, Inc. (NCBIA), a wholly-owned subsidiary, provides investment advisory services to cooperatives. NCB Financial Corporation (NCBFC), a wholly-owned subsidiary, is the holding company of NCB Savings Bank, FSB (NCBSB), a federally-chartered thrift institution. NCB I, Inc. (NCB 1), a wholly-owned subsidiary, is a special purpose corporation that holds credit enhancement certificates related to the securitization and sale of cooperative real estate loans. NCB Retail Finance Corporation (NCBRFC), a wholly-owned subsidiary, purchases and sells commercial loans which are then securitized into commercial paper.
The Act also provided for the formation of NCB Development Corporation (NCBDC), 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.
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
Securities are accounted for under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires, among other things, for NCB to classify and account for debt and equity securities as follows:
Available-for-sale- Securities that will be held for indefinite periods of time, including those that may be sold in response to changes in market interest rates and related changes in the security's prepayment risk, needs for liquidity and changes in the availability of and the yield of alternative investments are classified as available-for-sale. These assets are carried at fair value. Unrealized gains and losses are determined on an aggregate basis, excluded from earnings and reported as 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.
Interest Rate Futures, Forward Contracts and Interest Rate Swaps
Gains and losses on futures and forward contracts to hedge certain interest-sensitive assets and liabilities are deferred and unamortized hedging gains or losses are recognized at the time of disposition of the assets or liabilities being hedged. They 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 fixed rate debt. The interest income and expense is earned or charged based on the outstanding balances of the receivable and payable positions, respectively, applying the related market rates at which the agreements were purchased and the term outstanding during the period. The interest income and expense are treated as an adjustment to interest expense on the hedged liability.
Loans and Lease Financing
Loans are carried at their principal amounts outstanding, except for loans held for sale which are carried at the lower of cost or market as determined on an aggregate basis. NCB discontinues the accrual of interest on loans when principal or interest payments are ninety days or more in arrears or sooner when there is reason-able doubt as to collectibility. Loans may be reinstated to accrual status when all payments are brought current and, in the opinion of management, collection of the remaining balance can reasonably be expected.
Leasing operations consist principally of leasing equipment under direct financing leases expiring in various years through 2004. All lease financing transactions are full payout direct financing leases. Lease income is recorded over the term of the lease contract which provides a constant rate of return on the unrecovered investment. Lease financing is carried net of unearned income.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance which management believes to be adequate to cover estimated loan and lease financing losses in the existing portfolio. A provision for loan losses is added to the allowance and charged to expense. Loan and lease charge-offs, net of recoveries, are deducted from the allowance. When a portion of a loan is deemed uncollectible, a full or partial charge-off against the allowance for loan losses is made. The factors utilized by management in determining the adequacy of the allowance include, but are not limited to, the following: the present and prospective financial condition of the borrowers and the values of any underlying collateral; evaluation of the loan and lease financing portfolio in conjunction with historical loss experience; portfolio composition; and current and projected economic conditions. The allowance for loan losses is maintained at a level believed by management to be adequate to absorb 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 NCB 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 and direct origination costs are accounted for in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income over the contractual life of the loans. Fees relating to expired commitments are recognized as non-interest income. If a commitment is exercised during the commitment period, the fee at the time of exercise is recognized over the life of the loan as an adjustment of yield.
Servicing Assets and Interest-Only Receivables
Effective January 1, 1997, NCB adopted Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which supersedes, but generally retains, the requirements of SFAS No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 122"). Both statements require that entities that acquire servicing assets through either purchase or origination of loans and sells or securitizes those loans with servicing assets retained must allocate the total cost of the loans to the servicing assets and the loans (without the servicing assets) based on their relative fair value.
Upon NCB's adoption of SFAS No. 125, previously recognized excess spread assets were reclassified as interest-only receivables. Interest-only receivables represent rights to certain future net cash flows from securitized assets that are available after all expenses of the transaction have been paid ("residual cash flow"). Interest-only receivables are amortized using the effective yield method over the estimated lives of the underlying loans.
Servicing assets and interest-only receivables, stated net of accumulated amortization, are amortized in proportion to the remaining net servicing revenues estimated to be generated by the underlying loans using the effective yield method over the remaining lives of the underlying loans.
SFAS No. 125 requires a periodic assessment of the carrying of interest-only receivables. Because these assets can be contractually prepaid or otherwise settled such that NCB would not recover substantially all of its recorded investment, the assets are being measured like available-for-sale securities under SFAS No. 115.
Substantially all interest-only receivables pertain to blanket loans made to cooperative housing corporations as first mortgages. These mortgages are typically structured with prepayment lockouts followed by prepayment penalties or yield maintenance provisions through maturity. In calculating interest-only receivables, NCB discounts the cash flows through the lockout period. Cash flows beyond the lockout period are discounted only to the extent that NCB is entitled to receive the prepayment or yield maintenance penalty.
The cost of loan-servicing rights, the interest-only receivables 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 estimates made by management.
Interest-only receivables that are certificated have been included as investment securities consistent with SFAS No. 115. Interest-only receivables that are not certificated are included as other assets.
Other Assets
Foreclosed property pending disposition is carried at fair value less estimated costs to sell. Goodwill relating to the acquisition of NCBSB by NCBFC is being amortized over the estimated remaining lives of the long-term interest-bearing assets acquired. Interest-only receivables are carried at fair value with unrealized gains and losses carried as an adjustment to members' equity.
Premises and equipment are carried at cost less accumulated depreciation and include equipment owned under lease financing arrangements. Depreciation is computed using an accelerated method. Leasehold improvements are amortized on a straight-line basis over the terms of the leases.
Income Taxes
The Act Amendments of 1981 (P.L. 97-35) provide that, effective January 1, 1982, NCB shall be treated as a cooperative and subject to the provisions of Subchapter T of the Internal Revenue Code. Under Subchapter T, NCB issues its member-borrowers patronage refunds, which are tax deductible to NCB thereby reducing its taxable income. NCB has determined that all income generated by NCB and its subsidiaries, with the exception of NCBSB, qualifies as patronage income under the Internal Revenue Code, with the consequence that NCB is able to issue tax deductible patronage refunds with respect to all such income. Section 109 of the Act, as amended, provides that NCB is exempt from state and local taxes with the exception of real estate taxes. Certain NCB subsidiaries, however, are subject to federal and state income taxes.
NCB provides for income taxes under SFAS No. 109, "Accounting for Income Taxes." The asset and liability approach of SFAS No. 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts of the existing assets and liabilities and their respective tax bases.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997 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: 1997 1996
Cash in bank $ 8,082,813 $ 5,186,085 Federal funds 5,949,195 4,377,837 Overnight investments 7,657,237 7,586,612 $21,689,245 $17,150,534
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
U.S. Treasury and agency obligations $18,027,503 $140,820 $ 28,840 $18,139,483 Corporate bonds 12,169,073 129,615 8,368 12,290,320 Mutual funds 1,164,610 - 2,493 1,162,117 Money market 1,068,825 - 112,403 956,422 Interest-only receivables 28,481,697 238,401 - 28,720,098
$60,911,708 $508,836 $152,104 $61,268,440
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value
U.S. 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 Interest-only receivables 27,566,066 - - 27,566,066
$57,967,940 $162,345 $227,119 $57,903,166
Interest-only receivables substantially pertain to blanket loans to cooperative housing corporations.
The maturities of investment securities available-for-sale at December 31, 1997 are as follows:
Weighted Amortized Average Cost Yield Fair Value
Within 1 year $ 7,637,639 6.27% $ 7,523,541 After 1 year through 5 years 30,660,024 6.79% 31,080,652 After 5 years through 10 years 19,208,305 6.88% 19,255,536 After 10 years 3,405,740 6.56% 3,408,711
$60,911,708 6.74% $61,268,440
The composition of investment securities held-to-maturity at December 31 is as follows:
Gross Amortized Unrealized Fair Cost Losses Value
Mortgage-backed security $1,942,312 $ 30,707 $1,911,605
Gross Amortized Unrealized Fair Cost 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
The 1997 mortgage-backed security held-to-maturity has a weighted average yield of 9.4% and matures after ten years.
In 1997 and 1996, NCB had no sales of securities available-for-sale. In 1995, securities available-for-sale totaling $4,459,219, were sold resulting in a loss of $73,938. There were no sales of securities classified as held-to-maturity during 1997, 1996, or 1995. NCB held callable investment securities with amortized costs of $8,323,643 and $6,824,483 at December 31, 1997 and 1996, respectively. The fair values of the callable securities are $8,478,587 and $6,950,818 in the same respective periods.
4. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans at December 31, 1997 and 1996 are $1,366,353,000 and $1,194,113,000, respectively.
5. Loans and Lease Financing
Loans and leases outstanding, including loans held for sale, by category at December 31 are as follows:
1997 1996
Commercial loans Portfolio $344,849,332 $337,717,275 Loans held for sale 2,808,807 4,493,469 Real estate loans Residential 202,828,605 204,258,591 Loans held for sale 186,323,523 179,776,403 Commercial 7,025,073 8,742,343 Lease financing 29,932,983 15,106,370
$773,768,323 $750,094,451
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
1997 1996 1997 1996 By Region Northeast 21.4% 19.7% 75.6% 70.0% South Atlantic 7.0 6.7 10.2 7.9 Central 33.5 29.3 12.0 14.1 West 38.1 44.3 2.2 8.0
100.0% 100.0% 100.0% 100.0%
Percentage of Total Loan Portfolio
1997 1996 By Borrower Type Real estate Residential 50.4% 51.3% Commercial .8 1.2 Commercial Food processing and distribution 19.6 8.9 Financial services 4.4 5.5 Medical service and supplies 2.1 4.7 Hardware 6.1 4.9 Alaskan native corporations 4.4 4.9 Other 8.3 16.6 Lease financing 3.9 2.0
100.0% 100.0%
NCB originates multi-family blanket mortgages to predominantly owner-occupied housing cooperatives. A significant portion of NCB's mortgage loans is secured by real estate in New York City due to that city's extensive cooperative market. At December 31, 1997, $239 million of real estate loans are secured by real estate in New York. The collateral for almost all of the real estate loans consists of first mortgage liens on the land and improvements of cooperatively owned, multi-family residential properties and property leases. The real estate portfolio also includes loans secured by second mortgage liens and, in several rare circumstances, unsecured loans to residential cooperative corporations. The loans are repaid from operations of the real estate cooperative. NCB's exposure to credit loss in the event of nonperformance by other parties to the loans is the carrying amounts of the loans.
NCB's commercial portfolio has a concentration in the food processing and distribution industry. The loan types include lines of credit, revolving credits, and term loans. These loans are typically collateralized with general business assets (e.g., inventory, receivables, fixed assets, and leasehold interests). The loans are expected to be repaid from cash flows generated by the borrower's operating activities. NCB's exposure to credit loss in the event of nonperformance by the other parties to the loan is the carrying amounts of the loans.
The carrying amounts and respective estimated fair values of loans and leases outstanding at December 31 are as follows (amounts in thousands):
Carrying Amount Estimated Fair Value
1997 1996 1997 1996 Commercial Fixed rate loans $137,723 $157,727 $140,855 $160,979 Adjustable rate loans 207,126 179,990 207,872 180,732 Loans held for sale 2,809 4,493 2,818 4,459 Real Estate Loans held for sale 186,324 179,777 187,453 181,243 Portfolio-fixed rate 45,326 59,188 44,905 60,405 Portfolio-adjustable 164,528 153,813 170,675 152,913 Lease financing 29,932 15,106 31,426 15,570
$773,768 $750,094 $786,004 $756,301
6. Receivables Sold with Recourse
At December 31, 1997 and 1996, restricted cash of $6,884,572 and $8,348,703, respectively, is held by a trustee for the benefit of certificate holders in the event of a loss on certain loans sold with balances totaling $37,300,000 and $92,623,000 in 1993 and 1992, respectively. At December 31, 1997 and 1996, the outstanding balances of the 1993 and 1992 recourse loan sales totaled $76,636,254 and $108,755,626, respectively. 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 limited to the required restricted cash balance. To date NCB has not incurred any losses on these loan sales.
In an unrelated 1993 transaction, NCB sold loans totaling $25,924,380 of which any losses on the subordinate tranche are repaid from a security held by NCB totaling $1,942,312 and $2,746,425 at December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, the outstanding balances of the 1993 recourse loan sale totaled $14,832,919 and $19,013,777, respectively. 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 limited to the required balance of the security held. NCB is prohibited from disposing of this security until all senior holders of the security have been repaid. To date NCB has not incurred any losses on these loan sales.
7. Impaired Assets
Loans that became impaired after January 1, 1994 totaled $4,057,539 and $3,878,357 at December 31, 1997 and 1996, respectively, and averaged $4,909,000 and $3,443,000 during the same respective periods. Nonaccrual loans totaled $3,030,448 and $2,829,221 at December 31, 1997 and 1996, respectively. Restructured loans totaled $1,027,091 and $1,049,136 at December 31, 1997 and 1996, respectively. Specific allowances of $911,938 and $1,535,000 have been set aside for these loans in 1997 and 1996, respectively, as management's best estimate of their fair value is less than the recorded investment in the loans. During 1997 and 1996, the interest collected on the nonaccrual loans was applied to reduce the outstanding principal. Interest earned on the restructured loans totaled $112,000 and $109,000 during 1997 and 1996, respectively.
At December 31, 1997, there are no commitments to lend additional funds to borrowers whose loans are non-performing.
At December 31, 1997 and 1996, NCB had real estate owned of $5,114,991 and $376,708, respectively, which is classified as other assets.
8. Allowance for Loan Losses
The following is a summary of the activity in the allowance for loan losses:
1997 1996 1995
Balance at beginning of year $15,504,510 $14,554,240 $13,031,499 Provision for loan losses 3,504,000 1,950,000 1,904,500 Charge-offs (1,555,226) (1,137,229) (699,014) Recoveries of loans previously charged-off 184,852 137,499 317,255
Balance at end of year $17,638,136 $15,504,510 $14,554,240
The allowance for loan losses was 2.3%, 2.1%, and 2.5% of loans and leases outstanding at December 31, 1997, 1996, and 1995, 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, 1997, loans to affiliated cooperatives, directors, officers, and their family members have the following outstanding balances:
January 1, December 31, 1997 Additions Deductions 1997 Loans to affiliated cooperatives $60,552,761 $19,198,198 $12,160,395 $67,590,564
Loans to directors, officers, and family members 923,220 - 829,849 93,371
$61,475,981 $19,198,198 $12,990,244 $67,683,935
Percent of loans outstanding 8.2% 8.7%
During 1997, 1996, and 1995, NCB recorded interest income of $6,412,886 $3,216,776, and $2,957,590, respectively, on loans to related parties.
Included in the analysis of loans outstanding to affiliated cooperatives as of December 31, 1997, is a $30 million revolving line of credit to the Co-operative Central Bank. This line of credit is 50% participated to outside banks without recourse to NCB. At December 31, 1997, none of the loan is outstanding. The loan is secured by U.S. Government guaranteed obligations equal to 110% of the outstanding balance. The Co-operative Central Bank is an organization with which an NCB director serves as the chief executive officer.
Certain NCB affiliates, and certain directors and officers of NCB and NCBSB, have deposits with NCBSB. Such deposits aggregated $1,307,365 and $1,092,299 as of December 31, 1997 and 1996, respectively.
10. Premises and Equipment
Premises and equipment are included in other assets and consist of the following as of December 31:
1997 1996
Furniture and equipment $3,046,361 $3,366,620 Leasehold improvements 846,538 1,128,359 Other 2,461,694 2,196,400 6,354,593 6,691,379 Less: Accumulated depreciation and amortization (4,286,837) (4,434,017)
$2,067,756 $2,257,362
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 6, 1999 to July 31, 2000. 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, 1997 are as follows:
1998 $1,686,336 1999 1,471,836 2000 1,424,161 2001 1,422,516 2002 355,629
$6,360,478
Rental expense on premises and office equipment in 1997, 1996, and 1995 is $1,689,415, $1,686,788, and $1,744,329, 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, 1997 and 1996, the unamortized lease incentive is $955,892 and $1,092,627, respectively.
12. Deposits
Deposits as of December 31 are summarized as follows:
1997 1996 Weighted Weighted Average Average Balance Rate Balance Rate
Balances by type Passbook accounts $ 4,937,068 2.72% $ 5,647,482 2.71% Money market demand and NOW accounts 15,578,000 2.26% 18,260,850 2.24% Fixed-rate certificates Less than $100,000 45,397,875 5.74% 42,122,451 5.93% $100,000 or greater 17,913,036 5.51% 22,589,219 5.28%
$83,825,979 4.87% $88,620,002 4.80%
The remaining contractual maturities of certificate accounts at December 31, 1997 are as follows:
Less than $100,000 $100,000 or greater Total
Three months or less $ 5,813,377 $ 2,438,924 $ 8,252,301 Three to six months 11,048,122 4,511,613 15,559,735 Six to twelve months 12,589,617 4,371,608 16,961,225 Twelve months or longer 15,946,759 6,590,891 22,537,650
$45,397,875 $17,913,036 $63,310,911
The estimated fair value of deposits is $83,281,000 and $88,211,000 at December 31, 1997 and 1996, respectively.
13. Short-Term Borrowings
Revolving credit facilities
NCB has $320 million of revolving lines of credit, $130 million of which is committed until May 27, 2000 and $130 million of which is committed until May 27, 1998. The remaining balance of $60 million is uncommitted at December 31, 1997.
Interest expense from borrowings under the revolving line of credit facilities was $8,732,851, $6,671,725, and $5,004,701 in 1997, 1996, and 1995, respectively. The following is a summary of the borrowings under the facilities for the years ended December 31:
1997 1996
Borrowings outstanding at December 31 $206,000,000 $218,000,000 Unfunded capacity at December 31 114,000,000 33,000,000 Average line of credit borrowings outstanding during the year 186,157,083 120,576,776 Maximum borrowings during the year 227,000,000 218,000,000 Weighted average borrowing rate During the year 5.9% 5.9% At December 31 6.5% 6.6%
Borrowing rates under the revolving credit facility are indexed off the prime rate, federal funds rate or the London Interbank Offered Rate (LIBOR) and vary with the amount of borrowings outstanding. As of December 31, 1997, commitment fees for the line of credit are .15% on $130 million and .125% on $130 million. Total commitment fees paid for revolving credit facilities were $479,000 in 1997, and $340,000 in 1996 and 1995. 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 $290 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 Borrowings
In an effort to reduce NCB's cost of funds, NCB developed a program under which it borrows, on a short-term basis, from certain customers. At December 31, 1997 and 1996, the short-term borrowings outstanding totaled $12.2 million and $6.5 million, respectively. In 1997, NCB also implemented a commercial paper program to further reduce NCB's cost of funds. At December 31, 1997, commercial paper totaled $24.9 million.
During 1997 and 1996, NCB also entered into a series of reverse repurchase agreements. The average balances of reverse repurchase agreements outstanding during 1997 and 1996 were $14,364,135 and $9,288,258, respectively, and the maximum borrowings during 1997 and 1996 were $17,047,000 and $13,523,500, respectively. The weighted average rates on the reverse repurchase agreements during 1997 and 1996 were 5.73% and 5.65%, respectively. There were no reverse repurchase agreements outstanding at December 31, 1997 and 1996.
The carrying amounts of short-term borrowings at December 31 are as follows (amounts in thousands):
Carrying Amount
1997 1996
Line of credit $206,000 $218,000 Commercial paper 24,921 - Other 12,200 6,500
$243,121 $224,500
14. Long-term Debt
NCB has entered into various agreements for extension of credit with third parties. NCB has an agreement for a $30 million extension of credit with a major insurance company which expires on June 30, 1999. $10 million has been borrowed under this agreement. In January 1997, NCB received approval to issue up to $100 million under the medium term note program. As of December 31, 1997, NCB had $40 million outstanding under this program. In addition, as of December 31, 1997, NCB had outstanding $154.8 million of private placements issued to various institutional investors. The majority of the long-term debt has semi-annual interest with principal payments due on a 30/360 basis.
NCB is required under these lending agreements to, among other things, maintain $25 million of cash, cash equivalents and investments and have an effective net worth of not less than $290 million (defined as total members' equity plus subordinated debt). NCB shall not at any time permit consolidated senior debt to exceed 650% of consolidated adjusted net worth.
The following is a schedule of outstanding long-term debt at December 31, 1997:
Amount Rate Maturity
$ 47,951,623 7.45% 1998 19,979,843 5.92% 1999 31,967,749 8.51% 2000 29,969,765 7.15% 2001 74,924,412 6.75% 2002 and thereafter
$204,793,392
NCB has entered into a series of interest rate swap agreements which have a combined notional amount of $63 million. The effect of the agreements is to convert $63 million of the long-term debt from a weighted average fixed rate of 7.02% to a floating rate based on LIBOR.
The interest rate swap agreements are tied to the three and six month LIBOR rates plus a spread and reprice at different times throughout the year. At December 31, 1997 the three and six month LIBOR were 5.81% and 5.84%, respectively. These agreements expire as follows:
Maturity LIBOR Amount Date Index
$ 13,000,000 1998 Six month 20,000,000 1999 Three month 30,000,000 2001 Six month
$ 63,000,000
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 1997 and 1996, 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 totaling $4 million and $3 million, respectively, plus accrued interest at December 31, 1997 and 1996.
The Act states that the amount of NCB borrowings which may be outstanding at any time shall not exceed 10 times the paid-in capital and surplus which, as defined by the Act, includes the subordinated debt.
The annual interest payments for each tranche are determined in accordance with the following schedule which also includes the carrying amounts, excluding hedge gains, and respective estimated fair values of the subordinated debt at December 31, 1997 (in thousands): Next Carrying Estimated Index Rate Repricing Date Amount Fair Value
91-day Treasury rate 5.06% January 1, 1998 $ 53,553 $ 53,437 3-year Treasury rate 6.28% October 1, 1999 36,854 37,847 5-year Treasury rate 6.01% October 1, 2000 55,281 56,593 10-year Treasury rate 8.82% October 1, 2000 36,854 40,866
$182,542 $188,743
In addition to the $63 million of interest rate swaps on the long-term debt, NCB has entered into a series of interest rate swap agreements totaling $60 million which have the effect of converting the subordinated debt from a fixed rate of 7.42% to a floating rate based on LIBOR.
The interest rate swap agreements are tied to the one, three and six month LIBOR rates and reprice at different times throughout the year. At December 31, 1997, the one, three and six month LIBOR rates were 5.72%, 5.81% and 5.84%, respectively. The agreements, which expire in the year 2000, are described below:
Debt LIBOR Swapped Amount Index
Five year $30,000,000 Six month Ten year 10,000,000 Six month Ten year 10,000,000 Three month Ten year 10,000,000 One month
$60,000,000
16. Common Stock and Members' Equity
NCB's common stock consists of Class B stock owned by its borrowers, Class C stock owned by entities eligible to borrow from NCB, and Class D non-voting stock owned by others.
1997 1996 Class B Class Class D Class B Class C Class D
Par value per share $ 100 $ 100 $ 100 $ 100 $ 100 $ 100 Shares authorized 900,000 300,000 100,000 800,000 300,000 100,000 Shares issued and outstanding 840,045 219,004 3 786,004 217,516 3
The changes in each class of common stock are described below:
Class B Class C Class D Total
Balance, December 31, 1994 $67,823,071 $24,844,625 $300 $92,667,996 Cancellation and redemption of common stock (1,135,617) (2,408,962) - (3,544,579) 1994 patronage dividend distributed in common stock 4,746,618 211,185 - 4,957,803 Reclassification of stock surplus 915,682 (915,682) - -
Balance, December 31, 1995 72,349,754 21,731,166 300 94,081,220 Proceeds from issuance of common stock - 1,000 - 1,000 Cancellation and redemption of common stock (468,024) (190,460) - (658,484) 1995 patronage dividend distributed in common stock 6,718,686 209,878 - 6,928,564
Balance, December 31, 1996 78,600,416 21,751,584 300 100,352,300 Proceeds from issuance of common stock - 500 - 500 Cancellation and redemption of common stock (1,088,713) (45,205) - (1,133,918) 1996 patronage dividend distributed in common stock 6,492,799 197,568 - 6,690,367
Balance, December 31, 1997 $84,004,502 $21,904,447 $300 $105,909,249
Members' equity includes the three classes of common stock, and allocated and unallocated retained earnings. Allocated retained earnings have been designated for patronage dividend distribution, whereas unallocated retained earnings have not been designated for patronage dividend distribution.
17. Regulatory Capital and Retained Earnings of NCBSB
In connection with the insurance of savings accounts, NCBSB is required to maintain minimum amounts of regulatory capital. If NCBSB fails to meet its minimum required capital, the appropriate regulatory authorities may take such actions, as they deem appropriate, to protect the Savings Association Insurance Fund (SAIF), NCBSB, and its depositors and investors. Such actions may include various operating restrictions, limitations on liability growth, limitations on deposit account interest rates, and investment restrictions.
NCBSB's capital exceeds the minimum capital requirements at December 31, 1997. The following table summarizes NCBSB's capital at December 31, 1997:
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, 1997, 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 1997, 1996, and 1995 is $428,676, $362,621, and $329,471, respectively.
NCB maintains an employee thrift plan organized under Internal Revenue Code Section 401(k) and contributes up to 6% of each participant's salary. Contributions and expense for 1997, 1996, and 1995 are $359,401, $278,720, and $275,457, respectively.
Effective January 1, 1997, the Board of Directors approved the Executive Long-Term Incentive Plan (the Plan) to provide incentive compensation to certain key executives of NCB. NCB expensed $210,000 for the Plan in 1997.
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 1998, NCB anticipates that it will declare a patronage dividend for 1997 of $13,983,000. The anticipated cash portion of the 1997 patronage dividend is included in patronage dividends payable at December 31, 1997. The anticipated stock portion of the patronage dividend of 1997 earnings to be distributed has been added to allocated retained earnings at December 31, 1997. Patrons of NCB receiving such patronage dividends consent to include them in their taxable income.
The provision for income taxes consists of the following:
Year Ended December 31,
1997 1996 1995 Current tax expense Federal $1,270,100 $674,728 $665,429 State and local 143,504 148,054 19,184
Total current 1,413,604 822,782 684,613 Deferred tax expense (benefit) Federal (38,106) (25,868) (14,858) State and local - - 107,928
Total deferred (38,106) (25,868) 93,070
Total provision $1,375,498 $796,914 $777,683
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,
1997 1996 1995
Statutory U.S. tax rate $ 5,884,348 $ 4,242,158 $ 4,510,339 Patronage dividends (4,754,097) (3,567,430) (3,844,910) State and local taxes 143,504 148,054 127,112 Other 101,743 (25,868) (14,858)
Income tax provision $ 1,375,498 $ 796,914 $ 777,683
Deferred tax assets net of liabilities, included in other assets, are comprised of the following at December 31, 1997 and 1996:
1997 1996
Deferred commitment fees $ 133,609 $ 129,067 Allowance for loan losses 313,112 280,185 Other 146,925 96,455
Gross deferred tax assets 593,646 505,707
Mortgage servicing rights (60,994) - Loan bad debt expense - (56,342) Federal Home Loan Bank stock dividends (65,175) (48,697) Other (58,078) (14,412)
Gross deferred tax liabilities (184,247) (119,451)
Net deferred tax asset $ 409,399 $ 386,256
20. Income Available for Dividends on Stock
Under a existing long-term debt agreements, the aggregate amount of cash dividends on Class C or Class D Stock, together with patronage dividends payable in cash, is limited to the sum of $15,000,000 plus 50% of NCB's consolidated adjusted net income accumulation (or minus 100% of NCB's consolidated adjusted net income in case of a deficit) from January 1, 1992 through the end of the most current fiscal year ended. If the aggregate amount of cash dividends and patronage dividends payable in cash exceeds the limitation previously described, total patronage dividends payable in cash and cash dividends payable on any calendar year may not exceed 20% of NCB's taxable income for such calendar year.
Notwithstanding the above restriction, NCB is prohibited by law from paying dividends on its Class C Stock at a rate greater than the statutory interest rate payable on the subordinated debt. Those rates for 1997, 1996, and 1995 are 6.4%, 6.1% and 6.7%, respectively. Consequently, the amounts available for payment on the Class C Stock for 1997, 1996, and 1995 are $1,399,694, $1,326,847, and $1,455,988, 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
1997 1996 1997 1996 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $414,905 $184,625 $1,899 $ 435 Standby letters of credit $116,814 $100,845 $1,309 $1,157
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, and forward commitments.
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 $3.1 million representing the estimated cost of replacing, at current market rates, all outstanding swap agreements. NCB does not anticipate nonperformance by any of its counterparties. Income or expense from interest rate swaps is treated as an adjustment to interest expense/income on the hedged asset or liability.
Financial futures are contracts for delayed delivery of specific securities at a specified future date and at a specified price or yield. NCB purchases/sells these contracts to hedge the interest rate risk associated with originating mortgage loans that will be held for sale. NCB has minimal credit risk exposure on these financial instruments since changes in market value of financial futures are settled in cash on the following business day, and payment is guaranteed by the clearinghouse. Gains and losses from these contracts are deferred until the time of disposition of the asset or liability.
NCBSB and NCB enter into forward commitments to sell a portion of their production of loans to Federal National Mortgage Association (Fannie Mae) and Residential Funding Corporation. The market value of forward commitments is considered in the lower of cost or market valuation of the loan portfolio held for sale.
The contract or notional amounts and the respective estimated fair value of NCB's off-balance sheet financial instruments at December 31, are as follows: (amounts in thousands):
Contract or Notional Amounts Estimated Fair Value 1997 1996 1997 1996 Financial instruments whose notional or contract amounts exceed the amount of credit risk:
Financial futures contracts $218,200 $167,200 $217,050 $170,421 Interest rate swap agreements $123,000 $161,000 $126,144 $164,722
At December 31, 1997 and 1996, NCB had deferred gains and (losses) outstanding on financial futures contracts totaling $81,156 and ($3,688,563), $15,313 and ($1,347,082), respectively, which are included in loans held for sale.
22. Fair Value of Financial Instruments
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available for identical or comparable instruments, fair values are based on estimates using the present value of estimated cash flows using a discount rate commensurate with the risks involved or other valuation techniques. The resultant fair values are affected by the assumptions used, including the discount rate and estimates as to the amounts and timing of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of year end or that will be realized in the future.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:
Cash and cash equivalents - The carrying amount approximates fair value.
Investments - Fair values are based on quoted market prices for identical or comparable securities.
Loans and lease financing - For adjustable rate commercial loans that reprice frequently and with no significant changes in credit risk, fair values are based on carrying values. The fair market value of other adjustable rate loans is estimated by discounting the future cash flows assuming that the loans mature on the next repricing date using the rates at which similar loans would be made to borrowers with similar credit quality and the same stated maturities. The fair value of fixed rate commercial and other loans and leases, excluding loans held for sale, is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit quality and for the same remaining maturities. The fair value of loans held for sale is based on market prices for similar loans sold in the secondary market adjusted for differences in loan characteristics.
Interest-only receivables - The fair value of interest-only receivables is estimated by discounting the future cash flows using current market investor pass-through rates for similar securities and loans for which the interest-only receivable 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, 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 subordinated debt is estimated by discounting the future cash flows using the current borrowing rates at which similar types of borrowing arrangements with the same remaining maturities could be obtained by NCB.
Interest rate swap agreements - The fair value of interest rate swaps (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, 1997 and 1996. The fair value of forward contracts is based on current market prices for similar contracts.
Commitments to extend credit, standby letters of credit, and financial guarantees written - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
The estimated fair value of the Bank's financial instruments as of December 31, 1997 and 1996 are as follows (dollars in thousands):
1997 1996 Financial Assets: Carrying Fair Carrying Fair Amount Value Amount Value
Cash and cash equivalents $ 21,689 $ 21,689 $ 17,150 $ 17,150 Investments Available-for-sale 61,268 61,268 57,903 57,903 Held-to-maturity 1,942 1,912 2,946 2,294 Interest-only receivables 4,450 4,450 3,192 2,791 Loans and lease financing 773,768 786,004 750,094 756,301
Financial Liabilities: Deposits 83,826 83,281 88,620 88,211 Short-term and other borrowings 243,121 243,121 224,500 224,500 Long-term debt 204,793 207,079 202,137 204,824 Subordinated debt 182,785 189,137 182,853 188,743
Off-Balance Sheet Financial Instruments: Interest rate swap agreements 123,000 126,144 161,000 164,722 Financial futures and forward commitments 218,200 217,050 167,200 170,421 Commitments to extend credit 414,905 1,899 184,625 435 Standby letters of credit 116,814 1,309 100,845 1,157
23. New Accounting Standards
In June 1997, SFAS Nos. 130 and 131 were issued: "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information," respectively. SFAS No. 130 requires that certain financial activity typically disclosed in members' equity be reported in the financial statement as an adjustment to net income in determining comprehensive income. Items applicable to NCB would include unrealized gain/loss on securities available-for-sale. Items identified as comprehensive income should be reported in the statements of condition and the statements of changes in members' equity, under separate captions. SFAS NO. 130 is effective for NCB on January 1, 1998, including the restatement of prior periods reported consistent with this pronouncement. NCB does not anticipate any financial impact from the implementation of SFAS NO. 130.
SFAS No. 131 requires the reporting of selected segment information in quarterly and annual reports. Information from operating segments is derived from methods used by NCB's management to allocate resources and measure performance. SFAS No. 131 is effective for NCB on January 1, 1998, including the restatement of prior periods reported consistent with this pronouncement, if practical. NCB does not anticipate any material impact from the implementation of SFAS No. 131.
24. Subsequent Events
On January 15, 1998, the Board of Directors authorized the dissolution of CFC at which time NCB will assume all liabilities of CFC and receive a distribution of all assets after satisfaction of CFC's liabilities. Management expect the dissolution to occur by December 31, 1998.
In February 1998, NCB sold and securitized $130 million in real estate loans generating gains of $3 million. The gain on sale of loans will be included in the first quarter 1998.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS, ON ACCOUNTING AND FINANCIAL DISCLOSURE
On May 13, 1997, the Registrant filed a report on Form 8-K that reported a change in the Registrant's Certifying Accountant.
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 Alfred A. Plamann Chairman of the Board of Directors and Director 1995 1998 55
Charles E. Snyder President and Chief Executive Officer 1983 - 44
Leo H. Barlow Director 1993 1999 45
Harry J. Bowie Director 1991 1998 62
James L. Burns, Jr. Vice Chairman of the Board Of Directors and Director 1996 1999 59
Joseph Cabral Director 1995 1998 49
Kirby J. Erickson Director 1997 2000 57
Jackie Jenkins-Scott Director 1997 2000 48
Marilyn J. McQuaide Director 1996 1999 48
Michael J. Mercer Director 1997 1998 44
Mary Ann Rothman Director 1993 1999 55
Anthony J. Scallon Director 1995 1998 52
Sheila A. Smith Director 1995 1998 52
Peter C. Young Director 1997 2000 52
Thomas K.Zaucha Director 1997 2000 53
Year First End of Position Appointed Term Age
Caroline Blakely Managing Director, Chief Marketing Officer President, NCB Capital Corporation President and Director, NCB 1, Inc. President and Director, NCB Insurance Brokers, Inc. 1992 - 43
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 - 53
Mark W. Hiltz Managing Director, Chief Credit Risk Officer 1982 - 50
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 - 39
Thomas C. Schoettle President, NCB Savings Bank,FSB 1997 - 42
Alfred A. Plamann has been the President and Chief Executive Officer of Certified Grocers of California, Ltd. since 1994. He was the Senior Vice President and Chief Financial Officer of Certified Grocers from 1989 to 1993. He has served in an executive capacity with Atlantic Richfield Co. (ARCO) and has served on the Board of Directors of several of the cooperative's subsidiaries. Additionally, he has served on the Board of Directors of the National American Wholesale Grocers Association (NAWGA) and the California Grocer's Association (CGA), and has been a member of the Industry Relations Committee of the Food Marketing Institute (FMI).
Charles E. Snyder was named President and Chief Executive Officer of NCB in January, 1992. He had been Corporate Vice President and Chief Financial Officer of NCB from 1983 to December 1991.
Leo H. Barlow is a shareholder of Sealaska Corporation. Previously, he was President & Chief Executive Officer of Sealaska Timber Corporation from August, 1992 until August 31, 1997. Prior to that, he was President and 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.
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.
Jackie Jenkins-Scott is the President and Chief Executive Officer of the New England Hospital d/b/a Dimock Community Health Center for the past 14 years. Prior to her position with Dimock, she served as Director of the Roxbury Court Clinic and held several positions with the Commonwealth of Massachusetts, Department of Public Health from 1973 to 1977. She has been a Board Member of the Massachusetts League of Commmunity Health Centers and a member of the National Association of Community Health Centers, Inc.
Michael J. Mercer has been the President of Georgia Credit Union Affiliates since 1985 and Vice Chairman of the Association of Credit Union League Executives since 1996. He was also one of the founders of the Credit Union Service Corporation and was its former Chairman.
Mary Ann Rothman has been Executive Director of the Council of New York Cooperatives since 1980. She also serves on the executive committee of the National Association of Housing Cooperatives and is Vice Chairman of the NCBDC's Board of Directors.
Anthony J. Scallon has been Chairman of the Board of Directors, Federal Home Loan Bank of Des Moines since 1994. He also has been a Vocational Coordinator, Independent School District # 197, West St. Paul, Minnesota from 1994 to the present time. He was elected as a Minneapolis City Council Member in 1979 and served until 1993.
Sheila A. Smith has been President 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.
Peter C. Young has been the Executive Director of Area Cooperative Educational Services for almost 26 years. Currently, he is a member of the Board of Trustees and the Finance Committee of CT Hospital Association/Workers Compensation Trust. He is also the Fiscal Agent (Treasurer) and was a member of the Governing Board of the American Association of Educational Service Agencies.
Thomas K.Zaucha has been the President and Chief Executive Oficer of the National Grocers Association (NGA) since 1982. He served as President and Chief Executive Officer of the Grocers Fixtures & Equipment Company from 1978 to 1982 prior to its merger with NGA. He is also currently serving as a Board Member of NCB Retail Finance Corporation and Cooperative Development Foundation.
Caroline E. Blakely is a Managing Director and Chief Marketing Officer 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 and 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.
Mark W. Hiltz is a Managing Director and 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.
Richard L. Reed is a Managing Director and Chief Financial Officer with NCB. He was named Senior Vice President and Chief Financial Officer in 1994. Prior to that, he was Vice President and Treasurer from 1992 to 1994. He was Vice President, Treasury from 1989 to 1992.
Thomas C. Shoettle was named President and Chief Executive Officer of NCB Savings Bank, FSB in 1997. He was the Executive Vice President of the Savings Bank from 1995 to 1996. Previously, he served for eight years as Vice President, Commercial and Residential Lending and Regional Manager with Merchants National Bank and for three years as Manager, Special Assets with Farm Credit System.
Non-Incumbent Nominees for Directorships
Harold L. Citrin David A. Cox Kenneth L. Hartung Lynn M. Hoopingarner Donald E. Lien Alex N. Miller
Harold L. Citrin has been a Board Member of 1036 Park Corporation for three years. He is also a Managing Director of Bear, Stearns and Company. Prior to joining the board of 1036 Park Corporation, he was the Chairman of the Board of Appeals of the Village of Kings Point, Long Island and was a Board Member for 12 years.
David A. Cox has served as President and Treasurer of 718 Apartments, Inc. He is currently employed as Director of Economic Development in the South Bronx. Dave founded Dave's Distributing, a food distribution company in New York City. He was also a member of the High Falls Food Co-op for three years and was an ex-officio Board Member and Chairman of the Legislative and Education Committee of Bethex Federal Credit Union.
Kenneth L. Hartung has been a Vice President of FoodService Purchasing Cooperative since 1993. He also serves as President of the Cooperative's Canadian subsidiary (FoodService Purchasing of Canada) since 1994 and currently is the Chairman of the Cooperative's insurance subsidiary (Kenco Insurance Agency). He is also a Board Member of Bridgehaven, a member health provider agency.
Lynn M. Hoopingarner is the Owner/President of Hoopingarner, a business and management consulting company founded in 1992. She has been the President of White House Owners Association for the past four years and held various positions at the Association for three years. She also previously worked as a banker at Chase Manhattan Bank and Wells Fargo Bank.
Donald E. Lien has been the President and Chief Executive Officer of Panhandle Cooperative Association for two years. He is also the Vice Chairman of the North Platte Petroleum Partnership, a joint venture with twenty one other co-ops to buy and sell petroleum products. He was also a Regional Manager of Farmland Industries, Inc. for four years and a General Manager of Central Farmer Co-op for twelve years.
Alex N. Miller has been the President of G & M Management Corporation since 1974 and President and Chief Executive Officer of CAM Systems, Inc. since 1986. In 1996, he founded and now serves as the President of Share Credit Corporation which provides low cost share financing to limited equity housing cooperatives. He founded the Registered Cooperative Manager Program and serves on its Board of Governors. He also served as a member of the Board of Directors of the National Association of Housing Cooperatives for four consecutive terms.
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 athority of another committee. The members of the committee are Leo H. Barlow, Harry J. Bowie, James L. Burns, Jr., Joseph Cabral, Alfred A.Plamann(Chair), Mary Ann Rothman, and Sheila A. Smith.
The Loan and Business Development Committee is responsible for providing policy to management and for monitoring the lending, fee for service and business development efforts of NCB and its subsidiaries, consistent with the board's approved strategic plan. The members of the committee are Harry J. Bowie(Chair), James L. Burns, Jr., Jackie Jenkins-Scott, Mary Ann Rothman, Anthony J. Scallon, Sheila A. Smith and Thomas K. Zaucha.
The Finance Committee is responsible for monitoring NCB's financial planning, budgeting process, asset liability management and funding strategies. The members of the committee are Leo H. Barlow(Chair), Joseph Cabral, Kirby J. Erickson, Marilyn J. McQuaide, Michael J. Mercer, Anthony J. Scallon, Peter C. Young and Alfred A. Plamann.
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, Joseph Cabral(Chair), Kirby J. Erickson, Marilyn J. McQuiade, Michael J. Mercer and Anthony J. Scallon.
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, James L. Burns, Jr., Jackie Jenkins-Scott, Mary Ann Rothman, Sheila A. Smith(Chair), Thomas K. Zaucha and Peter C. Young.
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 Annual Compensation Compensation (a) (b) (c) (d) (e) Name and Principal Position Year Salary Bonus
Charles E. Snyder, 1997 $310,013 $103,250 $20,440 President & CEO 1996 295,000 96,670 19,380 1995 275,534 86,450 19,320
Caroline Blakely 1997 203,678 59,500 20,440 Managing Director, Chief 1996 170,627 53,375 19,267 Marketing Officer 1995 138,130 44,750 17,669
Charles H. Hackman 1997 189,387 63,591 20,440 Managing Director, Chief 1996 182,664 63,591 19,380 Credit Officer 1995 175,147 52,950 19,320
Richard L. Reed 1997 150,005 52,500 19,037 Managing Director, Chief 1996 117,500 36,575 15,010 Financial Officer 1995 102,918 20,000 13,148
Mark Hiltz 1997 145,005 48,125 18,592 Managing Director, Chief 1996 137,505 45,719 15,520 Risk Officer 1995 124,147 20,400 8,481
* The "All Other Compensation" reported for 1997 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 $9,500 $9,500 $1,440 Ms. Blakely 9,500 9,500 1,440 Mr. Hackman 9,500 9,500 1,440 Mr. Reed 9,000 9,000 1,037 Mr. Hiltz 8,700 8,700 1,192
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 1997 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, 1997.
Class B Stock Class C Stock
Name and Addresses No. of Percent No. of Percent of Shareholders Shares of Class Shares of Class
Co-op Central Bank 30,500.00 3.63% 28,281.01 12.91% 265 Franklin Street Boston, MA. 92110
Greenbelt Homes Inc. 14,424.28 1.71% 29,451.26 13.44% Hamilton Place Greenbelt, MD. 20770
Group Health, Inc (1) 11,637.75 1.38% 14,249.60 6.50% 2829 Univ. Ave., S.E. Minneapolis, MN 55414
(1) Included in the above are 2,878.79 shares and 2,769.48 shares of Class B and C stock, respectively, held of record by Central Minnesota Group Health Plan which is affiliated with GHI.
Because the Act restricts ownership of NCB's Class B and Class C stock to eligible cooperatives, NCB's officers and directors do not own any Class B or Class C stock, although cooperatives with which they are affiliated may own such stock.
ITEM 13.
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 1997 12/31/97 12/31/97
Leo H. Barlow Sealaska Timber Corp $7,953,690 $6,389,603 9.18% Sealaska Corp 1,519,226 1,074,584 9.15% Sealaska Corp 5,800,000 3,816,666 8.10%
James L. Burns, Jr. Co-op Central Bank 15,00,000 0
Joseph Cabral Chatsworth Products 325,200 111,600 8.97% Chatsworth Products 411,714 411,350 8.97% Chatsworth Products 616,724 477,081 8.97% Chatsworth Products 3,824,602 3,440,471 8.97%
Kirby J. Erickson Central Minnesota Group Health 3,474,220 3,123,085 8.10% Central Minnesota Group Health 3,008,280 3,008,280 7.63%
Alfred A. Plamann Grocers Cap Revolver 1,250,000 0 Grocers Cap Revolver 1,750,000 0 Mollie Stone 7,151,227 7,102,455 9.50% K.V. Mart 1,964,244 1,964,244 9.87% Major Market 732,790 574,512 10.00% Andronico's 2,363,603 2,091,188 8.84% Andronico's 2,915,000 2,420,000 8.84% Andronico's 2,400,000 2,340,000 8.38% Superior Warehouse 9,425,130 8,450,520 9.00% Grocers Cap Program Purchase 5,815,949 4,701,140 7.25%
Mary Ann Rothman 110-118 Riverside Tenants 1,000,000 0
Largest Interest Balance Balance as Rate as in of of 1997 12/31/97 12/31/97
Peter C. Young Area Coop Education Services 670,000 670,000 9.00% Area Coop Education Services 1,291,760 1,135,310 8.75% Area Coop Education Services 145,184 93,466 8.95%
Charles H. Hackman Watergate South 0 0
Charles E. Snyder National Cooperative Business Association 400,000 0 National Cooperative Business Association 108,160 100,990 Lease
Nominees for Directorship
Harold L. Citrin 1036 Park Corporation 1,398,769 1,397,330 7.32%
David A. Cox 718 Apartments, Inc. 1,646,028 0 718 Apartments, Inc. 1,800,000 1,793,129 7.42%
Kenneth L. Hartung KFC National Purchasing Coop 3,000,000 0 Kazi HFP 1,075,556 1,002,222 7.72% Kazi/NJ 701,110 689,447 7.72% Best Mexican Foods, Inc. 332,240 297,240 8.72% Quality Foods, Inc. 380,000 340,000 8.72% Italian American Foods 225,000 175,000 8.72% KFC/Cerritos 345,833 295,833 8.97% Dinsmoor Mini Mart 741,667 725,000 8.75% Tollgate Foods, Inc. 296,429 253,571 9.00% Siegel Food Services 446,037 405,488 8.47% Ross Point KFC, Inc. 271,726 234,134 11.68% Dev. Diversified Corp 1,385,556 1,288,889 8.50% Dev. Diversified Corp 850,000 576,842 11.50% Marvin L & Phyllis White 1,079,117 1,040,658 8.50% E.A.P. Management Corp 136,000 104,000 8.20% Karbach 580,000 504,148 8.75% KFC/Southgate 15,000 13,750 9.50% KFC/Ecorse 15,500 14,208 9.50% KFC/Lincoln 13,000 11,917 9.50% KFC/River Rou 10,000 9,167 9.50% KFC/Wyandote 15,000 13,750 9.50% Easter Food 350,000 326,667 9.25% Carolina Bell 150,000 140,854 9.25%
Lynn M. Hoopingarner White House Owners Corp 200,000 189,585 9.38%
Donald E. Lien Panhandle Cooperative 2,300,000 600,000 8.50% Panhandle Cooperative 83,333 0 Panhandle Cooperative 1,075,862 827,586 8.63%
Alex N. Miller The Columns at East Hill 205,148 205,148 9.24% Tanglewood Garden Coop 872,491 864,859 9.69%
NCB Savings Bank, FSB
Charles H. Hackman Personal 113,593 93,371 7.00%
NCB has one direct loan outstanding and one participation through National Bank of Alaska outstanding to Sealaska Corporation of which Mr. Barlow is a shareholder. The proceeds of the loan were used to refinance real estate while the proceeds of the participation were used for general working purposes. In addition, NCB has a $6.4 million loan participation with National Bank of Alaska which was used to acquire timber.
NCB has a $15 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 Officer.
NCB has one term loan and two lines of credit outstanding to Chatsworth Products, Inc. of which Mr. Cabral is the President. The term loan was 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.
NCB has two outstanding commercials loans with Central Minnesota Group Health Plan, Inc. (CMGHP). Mr. Erickson is the Executive Vice President of Group Health, Inc. (GHI)/HealthPartners, Inc. HealthPartners, Inc. is GHI's parent company and GHI is the sole corporate member of CMGHP. These loans were used to fund a new healthcare center and refinance an existing term loan.
NCB has 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 three commercial loans outstanding with Area Cooperative Educational Services of which Peter C. Young is the Executive Director. 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.
NCB has a line of credit outstanding to Watergate South, Inc. of which Mr. Hackman, an officer of NCB, is the President of the Board. The purpose of the line of credit is for capital improvements to the property.
NCB has a line of credit outstanding and a lease financing to National Cooperative Business Association of which Mr. Snyder, President and CEO of NCB, is a Board Member. The line of credit is to provide working capital while the lease financing is for computer hardware and software purchased.
Board nominee Harold L. Citrin is presently a Board Member of 1036 Park Avenue Corporation. NCB has a real estate loan to 1036 Park Avenue Corporation which was used to refinance an existing mortgage and to provide capital reserves. This loan has been sold and is not reflected on NCB's books.
Board nominee David A. Cox is the President and Treasurer of 781 Apartments, Inc. NCB has a real estate loan to 781 Apartments, Inc. which was used to refinance an existing mortgage and to finance repairs and improvements. This loan has been sold and is not reflected on NCB's books.
Board nominee Kenneth L. Hartung is a Vice President of FoodService Purchasing Cooperative(FSPC). NCB has a line of credit to KFC National Purchasing Cooperative, Inc. d/b/a FoodService Purchasing Cooperative which is available for working capital purposes. NCB also has started a member finance program whereby NCB provides financing to KFC and Taco Bell retail members for store renovation, purchase of new stores and the purchase of equipment and inventory. FSPC provides guarantees for these member loans. The remaining loans listed with respect to Mr. Hartung were made under this program.
Board nominee Lynn M. Hoopingarner is the President of White House Owners Association. NCB has an outstanding real estate loan to the White House Owners which was used to finance capital improvements.
Board nominee Donald E. Lien is the President and Chief Executive Officer of Panhandle Cooperative Association. NCB has two outstanding commercial loans with Panhandle Cooperative. These loans were used to finance equipment purchases and provide operating capital.
Board nominee Alex N. Miller is the President of G & M Management Company. NCB has outstanding loans to The Columns at East Hill and Tanglewood Garden Coop. G & M provides management services for these cooperatives. The purposes of these loans were to refinance acquisition and for capital improvements. These loans have been sold and are not reflected on NCB's books.
In its normal course of business, NCB Savings Bank makes loans to employees at competitive market rates. NCB Savings Bank has issued a home mortgage to Charles Hackman.
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, 1995, 1996, and 1997. Page #
27 Report of Independent Public Accountants
28 Independent Auditors' Report
29 Consolidated Balance Sheets
30 Consolidated Statements of Income
31 Consolidated Statements of Changes in Members' Equity
32-33 Consolidated Statements of Cash Flows
34-61 Notes to the Consolidated Financial Statements
(a)(2) Not applicable
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements, or the notes thereto.
(a)(3) The following exhibits are filed as a part of this report.
Exhibit No.
(a) 3.1 National Consumer Cooperative Bank Act, as amended through 1981.
(c) 3.2 1989 Amendment to National Consumer Cooperative Bank Act.
(d) 3.3 Bylaws of NCB
(g) 4.1 Election Rules of the NCB. For other instruments defining the rights of security holders, see Exhibits 3.1 and 3.2.
(h) 4.2 Form of Assumption Agreements and Amended and Restated Senior Note Agreements
(h) 4.3 Schedule Concerning Senior Note Agreements
(l) 4.4 Financing Agreement with U.S. Treasury
(m) 4.5 Note Purchase Agreement with Lutheran Brotherhood et al.
(n) 4.6 Master Shelf Agreement with Prudential Insurance Co. of America et al.
(o) 4.7 Senior Note Agreement (Dec. 1996)
(s) 4.8 First Amendment Agreement to Master Shelf Agreement with Prudential Insurance Co. of America
(s) 4.9 First Amendment Agreements to the Assumption Agreement and Amended and Restated Note Purchase Agreements
(s) 4.10 First Amendment Agreements to the Note Purchase Agreements with Lutheran Brotherhood et al.
(p) 4.11 Form of Indenture for Debt Securities
(q) 4.12 Form of Fixed Rate Medium Term Note
(r) 4.13 Form of Floating Rate Medium Term Note
*(u) 10.1 Chief Executive Officer Incentive Plan
10.2 (No Exhibit)
*(i) 10.3 Deferred Compensation Agreement with Charles E. Snyder
*(f) 10.4 Severance Agreement with Charles E. Snyder
(t) 10.5 Third Amended and Restated Loan Agreement with Fleet Bank as Agent
*(a) 10.6 Insurance Plan for NCB Executive Officers
(b) 10.7 Subordination Agreement with Consumer Cooperative Development Corporation (now NCB Development Corporation)
(t) 10.8 Master Shelf Agreement with Prudential Insurance Co. of America et al. (June 1997)
10.11 (No Exhibit)
(d) 10.12 Lease on Headquarters of NCB
*(u) 10.13 NCB Executive Long-Term Incentive Plan
*(g) 10.14 Employment Agreement with Marlon W. Pickles
10.15 (No Exhibit)
10.16 (No Exhibit)
10.17 (No Exhibit)
(i) 10.18 Term Loan Agreement with Credit Suisse (Feb. 1996)
10.19 (No Exhibit)
(j) 10.20 Term Loan Agreement with Credit Suisse (Sept. 1996) 10.21 (No Exhibit)
10.22 (No Exhibit)
(j) 10.23 Term Loan Agreement with Comerica Bank (Dec. 1995)
10.24 (No Exhibit)
(k) 10.25 Term Loan Agreement with PNC Bank (Aug. 1997)
*(u) 10.26 Incentive Plan for NCB Executive Officers
10.27 (No Exhibit)
(s) 10.28 Amendment No. 1 to Term Loan Agreement with Credit Suisse (Feb. 1995)
(s) 10.29 Amendment No. 1 to Term Loan Agreement with Credit Suisse (Sept. 1995)
(s) 10.30 Amendment to Term Loan Agreement with Comerica Bank (Dec. 1995)
(j) 22.1 List of Subsidiaries and Affiliates of the NCB
(u) 23.1 Consent of Arthur Andersen LLP
(j) 25.1 Power of Attorney by Joseph Cabral
(h) 25.2 Power of Attorney by Leo Barlow
(u) 25.3 Power of Attorney by Kirby J. Erickson
(e) 25.4 Power of Attorney by Harry J. Bowie
(u) 25.5 Power of Attorney by Jackie Jenkins-Scott
(s) 25.6 Power of Attorney by James L. Burns, Jr.
(h) 25.7 Power of Attorney by Mary Ann Rothman
(u) 25.8 Power of Attorney by Michael J. Mercer
(u) 25.9 Power of Attorney by Peter C. Young
(u) 25.10 Power of Attorney by Thomas K.Zaucha
(j) 25.11 Power of Attorney by Alfred A. Plamann
(j) 25.12 Power of Attorney by Anthony J. Scallon
(j) 25.13 Power of Attorney by Sheila A. Smith
25.14 (No Exhibit)
(s) 25.15 Power of Attorney by Marilyn J. McQuaide
(u) 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, 1996).
(c) Incorporated by reference to the exhibit of the same number filed as part of the registrant's annual report on Form 10-K for the year ended December 31, 1989 (File No.2-99779).
(d) Incorporated by reference to the exhibit of the same number filed as part of Registration Statement No. 33-42403 (filed September 6, 1991 ).
(e) Incorporated by reference to the exhibit of the same number filed as part of the registrant's annual report on Form 10-K for the year ended December 31, 1991(File No. 2-99779).
(f) 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).
(g) Incorporated by reference to the exhibit of the same number filed as part of the registrant's annual report on Form 10-K for the year ended December 31, 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, 1993 (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, 1994 (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, 1995 (File No. 2-99779).
(k) 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).
(l) 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).
(m) 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).
(n) 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).
(o) 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).
(p) Incorporated by reference to Exhibit 4.1 filed as part of Amendment No. 1 to Registration Statement No. 333-17003 (Filed January 21, 1997).
(q) Incorporated by reference to Exhibit 4.2 filed as part of Amendment No. 1 to Registration Statement No. 333-17003( Filed January 21, 1997).
(r) Incorporated by reference to Exhibit 4 to the registrant's report on Form 8-K filed February 11, 1997 (File No. 2-99779).
(s)Incorporated by reference to the exhibit of the same number filed as part of the registrant's annual report on Form 10-K for the year ended December 31, 1996 (File No. 2-99779).
(t) Incorporated by reference to the exhibit of the same number filed as part of the registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1997 (File No. 2-99779).
(u) Filed herewith
(b) The Registrant did not file any report on Form 8-K during the last quarter of 1997.
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned, thereunto duly authorized.
NATIONAL CONSUMER COOPERATIVE BANK
DATE March 30, 1998 BY/s/Charles E. Snyder Charles E. Snyder President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates noted:
Signature Title Date */s/Alfred A. Plamann Chairman of the Board and 3/30/98 Alfred A. Plamann Director
/s/Richard L. Reed Managing Director, 3/30/98 Richard L. Reed (Principal Financial Officer)
/s/Marietta J. Orcino Vice President, Tax & 3/30/98 Marietta J. Orcino Regulatory Compliance
/s/Patricia A. Ferrick Vice President (Principal 3/30/98 Patricia A. Ferrick Accounting Officer)
*/s/Leo H. Barlow Director 3/30/98 Leo H. Barlow
*/s/Harry J. Bowie Director 3/30/98 Harry J. Bowie
*/s/James L. Burns, Jr. Director 3/30/98 James L. Burns, Jr.
*/s/Joseph Cabral Director 3/30/98 Joseph Cabral
*/s/Kirby J. Erickson Director 3/30/98 Kirby J. Erickson
*/s/Jackie Jenkins-Scott Director 3/30/98 Jackie Jenkins-Scott
Signature Title Date
*/s/Marilyn J. McQuiade Director 3/30/98 Marilyn J. McQuiade
*/s/Michael J. Mercer Director 3/30/98 Michael J. Mercer
*/s/Mary Ann Rothman Director 3/30/98 Mary Ann Rothman
*/s/Anthony J. Scallon Director 3/30/98 Anthony J. Scallon
*/s/Sheila A. Smith Director 3/30/98 Sheila A. Smith
*/s/Peter C. Young Director 3/30/98 Peter C. Young
*/s/Thomas K. Zaucha Director 3/30/98 Thomas K. Zaucha
* By /s/Richard L. Reed Richard L. Reed (Attorney-in-Fact)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
With this report, the registrant is furnishing to the Commission for its information the registrant's election materials for its 1997 annual meeting. The registrant has not yet distributed an 1997 annual report to security holders and will furnish such report to the Commission when it is sent to security holders.
INDEX TO EXHIBITS
Exhibit No. Description
10.1 Chief Executive Officer Incentive Plan
10.13 NCB Executive Long-Term Incentive Plan
10.26 Incentive Plan for NCB Executive Officers
23.1 Consent of Arthur Andersen LLP
25.3 Power of Attorney by Kirby J. Erickson
25.5 Power of Attorney by Jackie Jenkins-Scott
25.8 Power of Attorney by Michael J. Mercer
25.9 Power of Attorney by Peter C. Young
25.10 Power of Attorney by Thomas K. Zaucha
27 Financial Data Schedule
Supplemental Information Registrant's 1998 Election Materials