SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1993 Commission file number 2-99779
National Consumer Cooperative Bank
(Exact name of registrant as specified in its charter)
United States of America
(12 U.S.C. Section 3001 et. seq.) 52-1157795
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1401 Eye Street N.W., Suite 700 Washington, D.C. 20005
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (202) 336-7700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements of the past 90 days. Yes X No_____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: the registrant's voting stock is not traded on any market.
Subsidiaries of the registrant hold 3.2% of its Class B stock. All registrant's
Class C and Class D stock is held by non-affiliates.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Outstanding at December 31, 1993
Class C
(Common stock, $100.00 par value) 205,738
Class B
(Common stock, $100.00 par value) 596,711
Class D
(Common stock, $100.00 par value) 3
INDEX
PART I
Item 1 Business............................................. 1
Item 2 Properties........................................... 7
Item 3 Legal Proceedings.................................... 8
Item 4 Submission of Matters to a Vote
of Security Holders................................ 8
PART II
Item 5 Market for the Registrant's Common Stock and Related
Stockholder Matters................................ 9
Item 6 Selected Financial Data.............................. 10
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 11
Item 8 Financial Statements and Supplementary Data.......... 18
Item 9 Changes in and Disagreements with Accountants,
on Accounting and Financial Disclosure............. 47
PART III
Item 10 Directors and Executive Officers of the Registrant... 47
Item 11 Executive Compensation............................... 52
Item 12 Security Ownership of Certain
Beneficial Owners and Management................... 54
Item 13 Certain Relationships and Related Transactions....... 55
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K............................ 57
PART I
Item 1. BUSINESS
General
The National Consumer Cooperative Bank, which does business as the National
Cooperative Bank ("NCB"), is a financial institution organized under the laws of
the United States. NCB provides financial and technical assistance to eligible
cooperative enterprises or enterprises controlled by eligible cooperatives. A
cooperative enterprise is an organization which is owned by its members and
which is engaged in producing or furnishing goods, services, or facilities for
the benefit of its members or voting stockholders who are the ultimate consumers
or primary producers of such goods, services, or facilities. NCB is structured
as a cooperative institution whose voting stock can only be owned by its patrons
or those eligible to become its patrons.
In the legislation chartering NCB (the National Consumer Cooperative Bank
Act or the "Act"), Congress stated its finding that cooperatives have proven to
be an effective means of minimizing the impact of inflation and economic hard-
ship on members/owners by narrowing producer-to-consumer margins and price
spreads, broadening ownership and control of economic organizations to a larger
base of consumers, raising the quality of goods and services available in the
marketplace and strengthening the nation's economy as a whole. To further the
development of cooperative businesses, the Congress specifically directed NCB
(1) to encourage the development of new and existing cooperatives eligible for
its assistance by providing specialized credit and technical assistance; (2) to
maintain broad-based control of NCB by its voting shareholders; (3) to encourage
a broad-based ownership, control and active participation by members in eligible
cooperatives; (4) to assist in improving the quality and availability of goods
and services to consumers; and (5) to encourage ownership of its equity
securities by cooperatives and others.
NCB has attempted to fulfill its statutory obligations in two fashions.
First, NCB makes loans and offers other financing arrangements which afford
cooperative businesses substantially the same financing opportunities currently
available for traditional enterprises. Second, NCB provides financial and other
assistance to the NCB Development Corporation ("NCB Development") a non-profit
corporation without capital stock organized in 1982 which makes loans and
provides assistance to developmental cooperatives.
The Act was passed on August 20, 1978, and NCB commenced lending operations
on March 21, 1980. In 1981, Congress amended the Act (the "Act Amendments") to
convert the Class A Preferred Stock of NCB previously held by the United States
to Class A Notes as of December 31, 1981 (the "Final Government Equity Redemp-
tion Date"). Since the Final Government Equity Redemption Date, NCB's capital
stock, except for three shares of non-voting Class D stock, has been owned
exclusively by cooperatives. NCB maintains its executive offices at 1401 Eye
Street, N.W., Washington, D.C. 20005. The telephone number of its executive
offices is (202) 336-7700. NCB also maintains regional offices in Minneapolis,
New York, and Alaska.
LOAN REQUIREMENTS, RESTRICTIONS AND POLICIES
Eligibility Requirements. Cooperatives and legally chartered entities
primarily owned and controlled by cooperatives are eligible to borrow from NCB
if they are operated on a cooperative basis and are engaged in producing or
furnishing goods, services or facilities primarily for the benefit of their
members or voting stockholders who are the ultimate consumers of such goods,
services or facilities. In addition, to be eligible to borrow from NCB, the
borrower must, among other things, (1) be controlled by its members or voting
stockholders on a democratic basis; (2) agree not to pay dividends on voting
stock or membership capital in excess of such percentage per annum as may be
approved by NCB; (3) provide that its net savings shall be allocated or
distributed to all members or patrons, in proportion to their patronage, or
retain such savings for the actual or potential expansion of its services or the
reduction of its charges to the patrons, and (4) make membership available on a
voluntary basis, without any social, political, racial or religious
discrimination and without any discrimination on the basis of age, sex, or
marital status to all persons who can make use of its services and are willing
to accept the responsibilities of membership. NCB may also purchase obligations
issued by members of eligible cooperatives. In addition, organizations applying
for loans must comply with other technical requirements imposed by NCB.
Lending Authorities. The Board of Directors of NCB establishes its
policies governing its lending operations in compliance with the Act. The
policies adopted by the Board are carried out by the management of NCB pursuant
to written loan policies adopted by the Board. The management in turn adopts
and implements guidelines and procedures consistent with stated Board
directives. Lending policies and guidelines are reviewed regularly by the
Board of Directors and management to make needed changes and amendments.
The management of NCB may approve individual loan amounts of up to 75% of
the single borrower lending limit which is equal to 15% of NCB's capital (using
the definition of capital for national banks as set forth by the Office of the
Comptroller of the Currency) without prior approval of the Board. The President
of NCB may delegate authorities up to this limit to such committees and
individual officers as he may deem appropriate.
A loan committee has been established which consists of the President of
NCB and such other officers as the President may from time to time designate.
The loan committee makes loans and loan commitments, establishes the terms and
conditions for loans and commitments, approves waivers and modifications to loan
agreements and enters into loan participations and guarantees.
LENDING LIMITS
Single Borrower
The total amount of loans, letters of credit, leases and other financing
that may be made available to any one borrower may not exceed 15% of NCB's
capital. The approval of any loan to a single borrower which has a combined
total of financing from NCB in excess of 75% of the 15% limit is subject to the
prior approval of the Loan and Business Development Committee of the Board.
Cooperatives of Primary Producers
The total dollar value of loans to cooperatives that produce, market and
furnish goods, services and facilities on behalf of their members as primary
producers may not exceed 10% of the gross assets of NCB. The total dollar
volume of loans NCB will allow to be outstanding to any producer cooperative
may not exceed 20% of the amount available for loans to all producer
cooperatives.
INTEREST RATES
Generally
NCB charges interest rates approximately equal to the market rates charged
by other lending institutions for comparable types of loans. NCB seeks to price
its loans to yield a reasonable return on its portfolio in order to build and
maintain the financial viability of NCB and to encourage the development of new
and existing cooperatives. In addition, to ensure that NCB will have access to
additional sources of capital in order to sustain its growth, NCB seeks to
maintain a portfolio that is competitively priced and of sound quality.
Interest Rates for Real Estate Loans
Real estate loans are priced under rate guidelines issued by NCB's Real
Estate Lending Group for specific types of loans with specific maturities. NCB
takes the following factors into consideration in pricing its real estate loans:
loan-to-value ratios, lien position, cooperative payment history, reserves,
occupancy level and cash flow. NCB fixes rates based on a basis point spread
over U.S. Treasury securities with yields adjusted to constant maturity of one,
three, five or ten years. The index established by NCB conforms to the
adjustment period fixed; the interest rate for the initial period may be fixed
at the time of commitment for a commitment period of up to 60 days.
Interest Rates on Commercial Loans
NCB normally makes commercial loans at variable interest rates, except in
those transactions for which fixed rate loans are deemed to be more beneficial
to NCB. Loans are priced based on market conditions and to achieve overall
income and portfolio objectives. Rates are tied to specific loan products
offered by NCB with specific maturities. Typically, commercial loan repayment
schedules are structured by NCB with flat monthly principal reduction plus
interest on the outstanding balance.
Fees
NCB typically assesses fees to cover the costs to NCB of its consideration
of and handling of loan transactions, and to compensate NCB for setting aside
funds for future draws under a commitment. The legal fees paid to outside legal
counsel retained by NCB for loan transactions are charged to the borrower.
Evaluation Criteria
In evaluating applications for financing, NCB determines whether a loan
applicant has or will have a sound organizational and financial structure,
income in excess of its operating costs and assets in excess of its obligations,
and a reasonable expectation of a continuing demand for its production, goods,
commodities, or services, or the use of its facilities, so that the loan will be
fully repayable in accordance with its terms and conditions.
NCB seeks to identify cooperatives which have favorable operating and
financial potential and managements of established integrity and competence.
Loans are made in sufficient amounts to accomplish the purposes for which they
are intended.
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.
Repayment
NCB seeks to fix terms and conditions which will reasonably assure
repayment while maintaining or improving the borrower's financial position. NCB
requires that loans be supported by sufficient borrower equity and/or collateral
to afford NCB reasonable protection against loss. Except for loans with final
due dates not longer than five years from the date of the loan, loans are
amortized as to principal and interest.
Loans Benefiting Low-Income Persons
Under the Act, the Board of Directors must use its best efforts to insure
that at the end of each NCB fiscal year at least 35 percent of its outstanding
loans are to (1)cooperatives whose members are predominantly low-income persons,
as defined by NCB, and (2) other cooperatives that propose to undertake to
provide specialized goods, services, or facilities to serve the needs of
predominantly low-income persons. NCB defines a "low-income person," for these
purposes, as an individual whose family's income does not exceed 80% of the
median family income, adjusted for family size for the area where the
cooperative is located, as determined by the Department of Housing and Urban
Development.
Loans for Residential Purposes
Commencing on October 1, 1985, the Act prohibited NCB from making loans for
financing, construction, ownership, acquisition or improvement of any structure
used primarily for residential purposes if, after giving effect to such loan,
the aggregate amount of all loans outstanding for such purposes will exceed 30
percent of the gross assets of NCB.
To date, the 30% cap on residential real estate loans has not restricted
NCB's ability to provide financial services to residential borrowers. NCB has
been able to maintain its position in the residential real estate market without
increased real estate portfolio exposure by selling real estate loans to
secondary market purchasers of such loans. Since October 1, 1985, the
preponderance of NCB real estate volume has been predicated upon sale to
secondary market purchasers. There can, however, be no assurance that NCB's
future lending for residential purposes will not be impaired by the statutory
limit. As of December 31, 1993, approximately 23.1% of NCB's total assets
consisted of loans made for residential purposes.
Operations of Subsidiaries
NCB also attempts to fulfill its statutory mission by providing financing
opportunities to cooperatives through several subsidiaries.
NCB Business Credit Corporation ("NCBBCC") is a wholly-owned subsidiary
of NCB that offers cooperatives leasing arrangements for plant and capital
equipment comparable to those available to traditional, for-profit enterprises.
Cooperative Funding Corporation ("CFC") is a wholly-owned subsidiary of NCB
Business Credit Corporation. CFC provides fee compensated corporate financial
services for customers of NCB and for other corporations which may be members of
cooperatives, or which sponsor employee stock ownership plans. CFC is
registered as a broker-dealer with the Securities and Exchange Commission
and is a member of the National Association of Securities Dealers.
NCB Investment Advisers, Inc. ("NCBIA") has been organized to provide
investment advisory services to cooperatives. It is registered as an investment
adviser with the Securities and Exchange Commission.
NCB Financial Corporation ("NCBFC") is a Delaware chartered, wholly-owned,
S&L holding company whose sole subsidiary is NCB Savings Bank, FSB.
NCB Savings Bank, FSB ("NCBSB") is a federally chartered, federally insured
savings and loan with offices located in Hillsboro, Ohio.
NCB Mortgage Corporation ("NCBMC") is a majority-owned subsidiary of NCB
that originates and services loans to cooperatives.
NCB Insurance Brokers, Inc. ( "NCBIB") is engaged in the business of
brokering housing- related insurance to cooperatives.
NCB I, Inc. ("NCB I") is a wholly-owned, special purpose corporation that
holds credit enhancement certificates related to the securitization and sale of
cooperative real estate loans. NCB and NCB I are parties to an agreement under
which each agrees not to commingle the assets of NCB I with those of NCB.
COMPETITION
The Congress created and capitalized NCB because it found that existing
financial institutions were not making adequate financial services available to
cooperative, non-profit business enterprises. NCB's experience confirms that
far more cooperatives desire to utilize financial services than are being
provided to them by traditional commercial lending institutions. However, NCB
experiences considerable competition in lending to the most credit worthy
cooperative enterprises.
REGULATION
NCB is organized under the laws of the United States. NCB is examined
annually by the Farm Credit Administration and the General Accounting Office is
authorized to audit NCB. Reports of such examinations and audits are to be
forwarded to the Congress, which has the sole authority to amend or revoke NCB's
charter. NCB Savings Bank, FSB is regulated by the Federal Office of Thrift
Supervision.
TAXES
The Act Amendments provide that NCB shall be treated as a cooperative and
subject to the provisions of Subchapter T of the Internal Revenue Code. Section
1381 (a)(2)(Subchapter T) of the Internal Revenue Code provides for the federal
income tax requirements for a corporation operating on a cooperative basis. As
such, 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, of 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, and this has effectively reduced NCB's federal income tax
liability to insignificant amounts.
Section 109 of the Act, as amended, provides that NCB, including its
franchise, capital, reserves, surplus, mortgages or other security holding and
income, is exempt from taxation by any state, county, municipality or local
taxing authority, except that any real property held by NCB is subject to any
state, county, municipal or local taxation to the same extent according to its
value as other real property is taxed.
NCB's subsidiaries are subject to Federal and state income taxes.
AGREEMENT CONCERNING CLASS A NOTES
The Act, as amended, provided that the interest rate payable to the United
States on NCB's Class A notes was limited until October 1, 1990 to 25% of NCB's
net income. Following a 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 issued to the U.S
Treasury four replacement Class A notes. As of December 31,1993, the amounts and
current maturities of the outstanding replacement notes were as follows:
<TABLE>
Current
Replacement Maturity
Note Date Amount Maturity
<S> <C> <C>
1 1/1/94 $53,867,950 3 months
2 10/1/96 $36,854,000 36 months
3 10/1/95 $55,281,000 60 months
4 10/1/00 $36,854,000 120 months
</TABLE>
When each note matures NCB has the right to borrow again from the Treasury
the maturing amount under the same terms and conditions. NCB intends to avail
itself of this right. Thus, until the final redemption of the Class A notes,
NCB will have outstanding to the U.S. Treasury four tranches of Class A notes in
the maturities stated above. 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.
FURTHER INFORMATION
For further information concerning the development of NCB's business in
1993, please see the response to Item 7.
Item 2. Properties
NCB leases space for its Washington, D.C. headquarters and for three
regional offices located in Minneapolis, New York City, and Alaska. NCB
Financial Corporation and NCB I, maintain offices in Wilmington, Delaware.
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,
1993 was $1,258,814 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 new 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:
<TABLE>
Year Headquarters Other Offices
<S> <C> <C>
1994 1,209,172 147,358
1995 1,233,356 120,904
1996 1,258,023 120,904
1997 1,283,183 120,904
1998 1,308,847 120,904
After 1998 4,434,657
</TABLE>
Item 3. Legal Proceedings
NCB is not involved in any pending legal proceeding, other than ordinary
routine litigation incidental to its business.
Item 4. Submission of Matters to a Vote of Security Holders
NCB did not submit any matters to a vote of its security holders during the
fourth quarter of 1993.
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
There is no established public trading market for any class of NCB's common
equity. NCB's capital stock consists of Class B stock which may be held only by
borrowers from NCB; Class C stock which may be held only by NCB's borrowers or
organizations eligible to borrow from NCB; and Class D stock which may be held
by the public. NCB is authorized by the Act to create other classes of non-
voting capital stock with such rights, powers, privileges and preferences as the
Board of Directors may decide without the approval of the holders of Class C
stock (or of any other class of stock), subject to restrictions on distribution
rights so long as the Class A notes are outstanding.
As of December 31, 1993, there were 838 holders of Class B stock, 331
holders of Class C stock, and 3 holders of Class D stock.
Under the Act and its bylaws, NCB may not pay dividends on its Class B
stock, but it may pay dividends on its Class C stock. NCB has not paid any
dividends on any class of its stock to date and it has no intention of declaring
any dividends on Class C stock, or any other class of stock,at the present time.
Under the Act, so long as any Class A notes are outstanding, NCB may not pay
dividends on any class of its stock at a rate greater than the statutory
interest rate payable on the Class A notes, which was 6.7% during 1993.
Under the Act, NCB must make patronage dividends to its patrons. NCB's
stockholders, as such, are not entitled to any patronage dividends. They are
entitled to patronage dividends only in years when they have patronized NCB, and
the amount of their patronage dividend does not depend on the amount of their
stockholding. Such patronage dividends may be paid only from net earnings and
in the form of cash, Class B or Class C stock, or an allocated surplus.
In October, 1990, the NCB Board of Directors approved a new patronage
refund policy which became effective with the payment of refunds for patronage
during the calendar year 1991. Under the new policy, NCB will no longer issue
Class B or Class C stock as part of the patronage refund, but will instead make
the refund in the form of cash and allocated surplus. 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, 1993,
of approximately $7.0 million of which $3.15 million will be distributed in cash
and $3.85 million in allocated surplus.
NCB adopted in April 1992 a further change in its capitalization policy.
The Act requires borrowers from NCB to own NCB Class B stock in an amount whose
par value is no less than 1% of the amount of the loan from NCB. Until 1992,
borrowers generally satisfied this requirement by purchasing Class B stock from
NCB at its par value, and NCB generally agreed to repurchase such Class B stock
at its par value once the borrower paid off its loan. Under the new policy,
borrowers are no longer required to purchase any required holdings of Class B
stock from NCB but instead may purchase them at par value from existing holders
of Class B stock; NCB no longer agrees to repurchase such holding of Class B
stock once a borrower's loan is paid off but will honor any repurchase
commitments made prior to May 1992.
In connection with the adoption of the above policy, the Board also
determined to defer consideration of payment of dividends on, or redemption of,
any class of NCB stock until such actions might be appropriate in light of NCB's
income.
The Board of Directors of NCB appointed in November 1993 an ad hoc
committee to consider a revised patronage refund policy to be placed in effect
by 1995. The committee has not yet decided what changes, if any, to recommend
in the patronage refund policy.
Item 6. Selected Financial Data
<TABLE>
SELECTED FINANCIAL DATA
( dollars in thousands )
<CAPTION>
At December 31, 1993 1992 1991 1990 1989
- ------------------------- ------- ------ -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Loans and leases outstanding $457,713 $457,551 $447,484 $441,070 $373,567
Total assets 535,767 527,861 517,175 488,672 429,546
Total capital* 292,581 287,521 287,407 283,286 274,993
Subordinated Class A notes 182,542 182,857 184,270 184,270 184,270
Members' equity 110,039 104,664 103,137 99,016 90,723
Other borrowed funds
including deposits 230,868 228,512 217,929 191,373 143,045
For the years ended December 31,
Total interest income $ 38,997 $44,063 $45,997 $46,992 $40,876
Net interest income 18,334 20,145 19,178 27,196 27,283
Net income 8,616 6,060 5,864 12,687 14,438
Ratios
Capital to assets 54.6% 54.5% 55.6% 58.1% 64.0%
Return on average assets 1.6% 1.2% 1.2% 2.8% 3.8%
Return on average
members' equity 8.0% 5.8% 5.8% 13.1% 16.9%
Net yield on yield on interest
earning assets 3.7% 3.9% 4.0% 6.2% 7.2%
Average members' equity as a
percent of:
Average total assets 20.4% 19.8% 20.7% 21.6% 22.2%
Average total loans and lease
financing 24.3% 22.6% 23.9% 24.7% 26.2%
Net average loans and lease financing
to average total assets 81.9% 85.7% 84.8% 86.1% 83.5%
Net average earning assets to
average total assets 93.2% 96.5% 96.4% 97.6% 97.3%
Allowance for loan losses
to loans outstanding 2.7% 2.3% 1.9% 1.9% 1.5%
Provision for loan losses
to average loans outstanding 0.3% 0.5% 0.6% 0.5% 0.2%
<FN>
* - Capital includes members' equity and subordinated Class A notes
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial summary
Net income of $8.6 million in 1993 increased from $6.1 million in 1992.
The 1993 results reflected substantial increases in non-interest income
including gains from sales of real estate loans and increases in income from
new lines of business. The impact of increases in non-interest income in 1993
was partially offset by increases in non-interest expenses such as contractual
services and the contribution to NCB's non-profit affiliate, NCB Development
Corporation ("NCBDC").
Credit quality in NCB's lending portfolio remained strong even as the
national economy lurched forward from the effects of an economic recession. For
the third continuous year, the provision for loan losses as a percentage of
average loans and leases has decreased from .5% and .6% in 1992 and 1991,
respectively, to .3% in 1993. In this same period, the allowance for loan
losses as a percentage of loans and leases has increased from 1.9% and 2.3% in
1992 and 1991, respectively, to 2.7% in 1993.
Net interest income decreased $1.8 million from 1992 due to the effect of
declining interest rates on NCB's portfolio and to the effect of real estate
loan sales which reduced the amount of higher yielding real estate assets in the
portfolio.
The return on average assets increased to 1.64% in 1993 from 1.15% in 1992.
The return on average equity increased to 8.04% in 1993 from 5.8% in 1992.
Total assets increased $7.9 million to $535.8 million as of December 31,
1993 from $527.9 million at year end 1992 due to growth in NCB's commercial loan
portfolio and growth in excess servicing fee receivables which resulted from
real estate loan sales. Loan originations of commercial and residential real
estate loans were ahead of last year.
Net interest income
Net interest income decreased $1.8 million or 10.0% in 1993 primarily as
a result of decreases in the average rates on the lending portfolio. The net
yield on interest earning assets has shown a steady decline since 1991 due to
decreasing interest rates. The net yield on interest earning-assets declined to
3.7% in 1993 from 3.9% in 1992 and 4.0% in 1991.
Total interest income declined in 1993 due primarily to lower market
interest rates. The average rate on earning assets declined 70 basis points
from 8.5% to 7.8%. As shown in Table 1, declining rates accounted for a
decrease of $3.4 million in total interest income in 1993 compared with 1992.
Average interest-earning assets have decreased 3.7% from the prior year as a
result of real estate loan sales and declines in the average commercial
portfolio.
The average yield on the real estate loan portfolio was 8.8% in 1993
compared with 9.4% in 1992 due to sales of real estate loans and tighter spreads
on new originations. The average yield for commercial loans and leases was 7.8%
compared with 8.4% in 1992 due to repricing of variable rate commercial assets
that are tied to short term interest rates.
Total interest expense decreased to $20.7 million in 1993 from $23.9
million in 1992. Average cost of funds declined from 5.8% in 1992 to 5.2% in
1993 due to lower short term interest rates in 1993. Nearly 40.2% of NCB's
interest bearing liabilities, including deposits held by NCB Savings Bank,
reprice within one year.
<TABLE>
Table1
CHANGES IN NET INTEREST INCOME
(dollars in thousands)
<CAPTION>
1993 Compared to 1992 1992 Compared to 1991
Increase (decrease) due to Increase (decrease) due to
change in: change in:
Average Average Average Average
For the years ended December 31, Volume* Rate Net** Volume* Rate Net**
--------- --------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Cash equivalents and
Investment Securities $ 115 $ (520) $ (405) $ 22 $ (1,104) $ (1,082)
Commercial loans and leases (1,249) (1,420) (2,669) (389) (3,243) (3,632)
Real estate loans (519) (1,473) (1,992) 3,895 (1,115) 2,780
---------- ---------- ----------- ---------- ---------- ------------
Total interest income (1,653) (3,413) (5,066) 3,528 (5,462) (1,934)
---------- ---------- ----------- ---------- ---------- ------------
Interest Expense
Deposits 388 (519) (131) 421 (845) (424)
Notes payable (1,709) (296) (2,005) 1,597 (1,931) (334)
Subordinated Class A notes (21) (1,098) (1,119) (94) (2,050) (2,144)
---------- ---------- ----------- ---------- ---------- ------------
Total interest expense (1,342) (1,913) (3,255) 1,924 (4,826) (2,902)
---------- ---------- ----------- ---------- ---------- ------------
Net interest income $ (311) $ (1,500) $ (1,811) $ 1,604 $ (636) $ 968
========== ========== =========== ========== ========== ============
<FN>
* Average monthly balances
** Changes in interest income and interest expense due to changes in rate and volume
have been allocated to "change in average volume" and "change in average rate "
in proportion to the absolute dollar amounts in each.
</TABLE>
<TABLE>
Table 2
Rate Related Assets and Liabilities
(dollars in thousands)
<CAPTION>
For the years ended December 31,
|------------- 1993----------| |--------------1992-------------| |------------1991---------|
Average Average Average
Average Income/ Rate/ Average Income/ Rate/ Average Income/ Rate/
Balance* Expense Yield Balance* Expense Yield Balance* Expense Yield
-------- ------- ------- -------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest earning assets
Real estate loans $229,541 $ 20,134 8.77% $235,568 $ 22,126 9.39% $194,600 $ 19,347 9.94%
Commercial loans and leases 210,732 16,353 7.76% 226,139 19,022 8.41% 230,149 22,652 9.84%
-------- -------- -------- -------- -------- --------
Total loans and leases 440,273 36,487 8.29% 461,707 41,148 8.91% 424,749 41,999 9.89%
Investment securities and
cash equivalents 59,465 2,510 4.22% 57,127 2,915 5.10% 56,819 3,997 7.03%
-------- -------- -------- -------- -------- --------
Total interest earning assets 499,738 38,997 7.80% 518,834 44,063 8.49% 481,568 45,996 9.55%
-------- -------- -------- -------- -------- --------
Allowance for possible loan losses (11,217) (9,843) (8,565)
Non-interest earning assets
Cash 5,380 3,093 2,843
Other assets 29,985 15,142 14,752
-------- -------- --------
Total non-interest earning assets 35,365 18,235 17,595
-------- -------- --------
Total assets $523,886 $527,226 $490,598
======== ======== ========
Liabilities and members' equity
Interest bearing liabilities
Subordinated Class A notes $183,073 $ 9,822 5.37% $183,424 $ 10,941 5.96% $184,770 $ 13,085 7.08%
Notes payable 162,062 8,876 5.48% 180,154 10,880 6.04% 152,335 11,213 7.36%
Deposits 55,163 1,965 3.56% 45,692 2,097 4.59% 38,427 2,521 6.56%
-------- ------- -------- -------- -------- ------
Total interest bearing
liabilities 400,298 20,663 5.16% 409,270 23,918 5.84% 375,532 26,819 7.14%
------- -------- -------
Other liabilities 16,514 13,504 13,961
Members' equity 107,074 104,452 101,105
--------- -------- --------
Total liabilities and members'
equity $523,886 $527,226 $490,598
========= ======== ========
Net interest earning assets $ 99,440 $109,564 $106,036
Net interest revenues and spread $ 18,334 2.64% $ 20,145 2.65% $ 19,177 2.41%
Net yield on interest earning assets 3.67% 3.88% 3.98%
<FN>
* Based on monthly balances. Average loan balances include non-accrual loans
</TABLE>
Credit quality
Credit quality, as measured by levels of non-performing assets and
delinquencies, improved in 1993 compared with 1992.
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 to eliminate undue
credit risk on the balance sheet. They include a multilevel approval process
and ongoing assessment of the portfolio's credit condition. In addition, the
risk rating system is designed to classify each loan according to the risks
unique to the loan. In turn, NCB's risk rating system and historical analysis
allow management to determine a risk-weighted allowance for loan losses.
To manage credit risk over a wide geographic area, NCB uses a centralized
credit approval process to ensure the consistency and quality of lending
decisions. Financial analyses of the industries and regions serviced are
regularly performed to keep abreast of economic events throughout the U.S.
Loans classified by NCB as unacceptable are assigned to the Special Assets
Division. The Division determines, on a case-by-case basis, the best course of
action necessary to restore a credit to an acceptable risk rating or to minimize
potential losses to NCB.
The allowance for loan losses seeks to protect NCB's capital against the
risk of losses inherent in the credit extension process. The allowance is
increased by the provision for possible credit losses and decreased by the
amount of charge-offs, net of recoveries. The adequacy of the allowance for
loan losses is determined based on risk ratings, current and projected economic
conditions, concentrations, diversification, and portfolio size, among other
relevant factors.
The provision for loan losses decreased 19.0% to $1.7 million in 1993. The
provision as a percentage of average loans and leases outstanding decreased to
.3% in 1993 from .5% in 1992. The lower provision for loan losses reflects
decreases in classified assets held by NCB.
The allowance for loan losses increased 18.3% to $12.3 million in 1993.
The allowance as a percentage of loans and leases outstanding increased to 2.7%
at December 31, 1993 from 2.3% at December 31, 1992. The allowance, as a
percentage of non-performing loans ( renegotiated and non-accruing loans ),
increased to 384.4% in 1993 compared with 136% in the prior year. Net
recoveries of $.2 million in 1993 improved compared to net charge-offs of $.4
million in 1992.
Total non-performing assets ( non-performing loans, real estate owned (REO)
and in-substance foreclosures ) decreased 67% to $3.2 million at December 31,
1993 from $10.0 million at year-end 1992. Non-performing assets as a percentage
of loans and leases outstanding plus REO and in-substance foreclosures decreased
to .7% in 1993 from 2.3% in 1992. The decrease resulted from the sale of a
foreclosed asset. Non-performing assets as a percentage of total capital were
.3% in 1993 compared with 3.6% in 1992.
<TABLE>
Table 3
Summary of Allowance for Loan Losses
(dollars in thousands)
<CAPTION>
For the years ended December 31, 1993 1992 1991 1990 1989
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance, at beginning of year $10,419 $ 8,706 $ 8,272 $ 5,641 $ 5,091
Charge-offs
Commercial 159 416 2,095 794 214
Real estate- construction 0 0 0 0 0
Real estate- residential 93 0 9 430 26
-------- ------- ------- -------- --------
Total charge-offs 252 416 2,104 1,224 240
-------- ------- ------- -------- --------
Recoveries
Commercial 356 30 152 76 90
Real estate- construction 0 0 0 0 0
Real estate- residential 82 0 23 1,718 150
------- ------ ------- -------- --------
Total recoveries 438 30 175 1,794 240
------- ------ ------- -------- --------
Net charge-offs 186 (386) (1,929) 570 0
Provision for possible loan
losses 1,704 2,099 2,363 2,061 644
Valuation adjustments to the
allowance 0 0 0 0 (94)
------- -------- -------- -------- --------
Balance at end of year $12,309 $10,419 $ 8,706 $ 8,272 $ 5,641
======= ======== ======== ======== ========
</TABLE>
Non-accruing loans, as a percentage of loans and leases, improved to .2%
at year-end 1993 from .9% at year-end 1992. The reduction reflected movements
of non-accrual loans to accrual status. Interest lost on non-accrual and
restructured loans decreased to $.2 million from $.6 million, thereby lowering
the average yields on loans and leases by 5 basis points in 1993 compared with
a decrease of 13 basis points in 1992.
Renegotiated loans decreased to $2.3 million in 1993 compared with $3.4
million in 1992. The decrease was due to collections of principal on the
renegotiated accounts. As of year end, all renegotiated loans were current.
An additional sign of NCB's improving credit picture is the trend of
delinquencies within its portfolio. Total delinquencies greater than 30 days
have decreased from $6.4 million in 1992 to $2.7 million in 1993. Total
delinquencies as a percentage of the lending portfolio have improved from 1.4%
in 1992 to .6% in 1993.
The majority of NCB's loans are to cooperatives in basic industries such
as owner-occupied and multifamily residential housing, food distribution, health
care, and financial services. NCB bases credit decisions on the cash flows of
its customers and views collateral as a secondary source of repayment.
The real estate portfolio contains a concentration of loans in the New
York City area. However, property value deterioration has not adversely affect-
ed NCB's portfolio because the majority of loans are to seasoned housing
cooperatives with low loan-to-value ratios. All real estate loans in the New
York City area are contractually current at December 31, 1993. NCB also has
minimal credit exposure to highly leveraged transactions,commercial real estate,
and construction loans. NCB has no foreign loan exposure.
<TABLE>
Table 4
Allocation of Allowance for Loan Losses
(dollars in thousands)
<CAPTION>
At December 31, 1993 1992 1991 1990 1989*
---------------- ----------------- ----------------- ----------------- ------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------- -------- ------- -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans and lease financing
Commercial $223,682 48.8% $199,442 43.5% $222,788 49.8% $238,771 54.2% $233,667 62.5%
Real estate- construction 5,779 1.3 5,080 1.1 5,101 1.1 1,451 0.3 777 0.2
Real estate- residential 210,846 46.1 236,379 51.5 200,103 44.7 178,240 40.4 120,147 32.3
Real estate- commercial 10,577 2.3 10,933 2.4 11,436 2.6 11,685 2.6 9,870 2.6
Lease financing 6,829 1.5 6,722 1.5 8,056 1.8 10,923 2.5 9,106 2.4
-------- ---- -------- ---- -------- ---- -------- ----- -------- ----
Total loans and lease
financing $457,713 100.0% $458,556 100.0% $447,484 100.0% $441,070 100.0% $373,567 100.0%
======== ===== ======== ====== ======== ===== ======== ===== ======== ======
Allocation of allowance for
loan losses
Commercial 0 0.0 0 0.0 0 0.0 0 0.0% 0 0.0%
Real estate- construction 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
Real estate- residential 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
Real estate- commercial 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
Lease financing 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0
Unallocated 12,309 100.0% 10,419 100.0% 8,706 100.0% 8,272 100.0% 5,641 100.0%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total allowance for loan
losses $ 12,309 100.0% $ 10,419 100.0% $ 8,706 100.0% $ 8,272 100.0% $ 5,641 100.0%
======== ====== ======== ======= ======== ====== ======== ====== ======== ======
<FN>
* Amounts have been reclassified for comparative purposes
</TABLE>
<TABLE>
Table 5
Nonperforming assets
(dollars in thousands)
<CAPTION>
At December 31, 1993 1992 1991 1990 1989
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
In-substance foreclosures/
REO $ 172 $ 2,360 $ 4,297 $ 865 $ 989
======= ======= ======= ======= ========
Non- accruing $ 886 $ 4,207 $ 4,888 $ 7,143 $ 4,188
======= ======= ======= ======= =======
Restructured $ 2,283 $ 3,428 $ 2,491 $ 1,996 $ 8,021
======= ======= ======= ======= =======
</TABLE>
Non-interest income
Non-interest income increased 195.1% to $12.1 million in 1993. Non-
interest income is composed of gains from sales of blanket mortgages and share
loans to secondary market investors, servicing fees, origination fees, and
advisory fees. Gains on asset sales, net of hedging expenses, were $6.3 million
in 1993 which represented 52.1% of non-interest income. NCB realized gains
primarily from the increased spreads between coupon rates on mortgage pools and
secondary mortgage market rates for its mortgage-backed securities. NCB
maintains a conservative interest rate risk policy; as such,
warehoused loans were fully hedged in 1993.
Servicing income remained a stable source of non-interest income for NCB
in 1992. NCB earned servicing fee income of $1.4 million in 1993 compared with
$1.1 million in 1992. As of December 31, 1993, NCB serviced $845.5 million in
single and multifamily real estate loans for outside investors compared with
$638.2 million one year earlier.
Non-interest expenses
Non-interest expenses increased 24.5% from $15.5 million to $19.3 million.
Non-interest expenses as a percentage of average assets increased 3.0% in 1992
to 3.7 in 1993. Salaries and benefits, the single largest component of non-
interest expenses, increased 13.5% as a result of incentive bonuses offered to
NCB's personnel. Employees are eligible to receive maximum incentive awards of
20% of salaries when NCB reaches certain corporate benchmarks. Salaries and
employee benefits accounted for 43.5% of non-interest expenses in 1993 and 47.4%
of non-interest expenses in 1992 compared with 45.8% in 1991. As of December
31, 1992, NCB and its consolidated subsidiaries employed 129 employees compared
with 126 employees one year earlier.
Contractual services increased 39.3% from the prior year to $3.9 million.
The increase is due primarily to loan management fees paid to NCBDC and to
acceleration of certain expenses related to former consulting commitments.
Under the provisions of the National Consumer Cooperative Bank Act ( the
Act ), NCB makes tax deductible, voluntary contributions to the NCB Development
Corporation. These contributions are normally calculated based on NCB's net
income. The contribution to NCB Development Corporation was $2.0 million in
1993 compared with $.7 million in 1992. The increase in the NCBDC contribution
reflects the growth in NCB's income in 1993 compared with 1992 as well as an
acceleration of the 1994 contribution to 1993. Non-interest expenses as a
percentage of average assets, adjusted for the contribution to NCBDC, would have
increased slightly to 3.3% in 1993 compared with 2.8% in 1992.
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 Reve-
nue 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 primarily generated by certain subsidiaries, NCB
Mortgage Corporation, NCB Business Credit Corporation, Cooperative Funding
Corporation and NCB Savings Bank, FSB. 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.
1992 vs 1991
Net income of $6.1 million in 1992 increased slightly from $5.9 million in
1991. Credit related expenses, such as the write- down of real estate owned and
an increased provision for loan losses, were a principal reason for the limited
earnings growth.
Net interest income increased $1.0 million or 5.0% in 1992 primarily as a
result of increased real estate loan volume in conjunction with wider spreads
between short and long-term rates. The net yield on interest earning-assets
declined to 3.9% in 1992 from 4.0% in 1991.
The provision for loan losses decreased 11.2% to $2.1 million in 1992. The
provision as a percentage of average loans and leases outstanding decreased to
.45% in 1992 from .56% in 1991.
Non-interest income decreased 19.1% to $4.1 million in 1992. Gains on
asset sales, net of hedging expenses, were $2.6 million in 1992 which
represented 26% of non-interest income. NCB earned servicing income of $1.1
million on a servicing portfolio of $638.2 million.
Non-interest expenses decreased less than 1% from $15.6 million to $15.5
million. Salaries and benefits increased 3.1% as a result of merit salary
increases. Contractual services decreased .6% from the prior year to $2.8
million. Most of the decrease resulted from lower loan workout fees in
connection with problem accounts. Occupancy and equipment expenses decreased
9.8% to $2.8 million primarily due to a decrease in lease rental expense as a
result of a new office lease for NCB's corporate headquarters.
Fourth quarter results
Net income for the fourth quarter of 1993 was $1.2 million compared with
$1.5 million in the fourth quarter of 1992. The decrease was due primarily to
decreases in net interest income due to declining interest rates.
The provision for loan losses increased from $.4 million in 1992 to $.6
million in 1993. This was due primarily to adjustments in 1993 to increase the
allowance for loan losses.
Non-interest income for the quarter increased from $1.2 million in 1992 to
$3.8 million in 1993 due primarily to $1.5 million gains and dividends from the
liquidation of a long term investment held by NCBMC, a subsidiary of NCB.
Non-interest expenses for the quarter increased from $3.9 million in 1992
to $5.5 million in 1993 due primarily to salary and benefit and contractual
service expenses. Salary and benefit expenses increased by $.8 million from the
previous quarter due to increases related to year end incentive bonuses.
Contractual services increased by $.3 million due to growth in legal and
advertising fees.
<TABLE>
Table 6
Consolidated Quarterly Financial Information(Unaudited)
(dollars in thousands)
<CAPTION>
For the Three Months Ended Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30* June 30* March 31*
---------- ---------- --------- ---------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 9,403 $ 10,067 $ 9,469 $ 10,058 $ 10,524 $ 10,927 $ 11,507 $ 11,105
Interest expense 4,970 5,155 5,046 5,492 5,876 5,905 6,060 6,077
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income 4,433 4,912 4,423 4,566 4,648 5,022 5,447 5,028
Provision for loan losses 625 464 316 299 380 482 575 662
-------- -------- -------- -------- -------- -------- -------- --------
Income after provision for
loan losses 3,808 4,448 4,107 4,267 4,268 4,540 4,872 4,366
Non-interest income 2,810 4,826 2,400 2,092 1,219 840 1,024 998
-------- -------- -------- -------- -------- -------- -------- ---------
Net revenue 6,618 9,274 6,507 6,359 5,487 5,380 5,896 5,364
Non-interest expenses 5,506 5,461 4,346 3,983 3,857 3,773 3,777 4,088
-------- -------- -------- -------- -------- -------- -------- ---------
Income before income taxes and
cumulative effect of change
in accounting principle 1,112 3,813 2,161 2,376 1,630 1,607 2,119 1,276
Provision for income taxes (66) 500 140 272 162 159 227 114
-------- -------- -------- -------- -------- -------- -------- ---------
Income before cumulative effect
of change in accounting
principle 1,178 3,313 2,021 2,104 1,468 1,448 1,892 1,162
Cumulative effect of change in
accounting principle 0 0 0 0 0 0 0 90
-------- -------- -------- -------- -------- -------- -------- ---------
Net income $ 1,178 $ 3,313 $ 2,021 $ 2,104 $ 1,468 $ 1,448 $ 1,892 $ 1,252
======== ======== ======== ======== ======== ======== ======== =========
<FN>
* Quarterly results for the first three quarters of 1992 have been restated to reflect the
adoption in the fourth quarter effective January 1, 1992 of SFAS 109.
</TABLE>
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 $180.0 million,
and the outstanding balance at December 31, 1993 was $31.5 million compared to
an outstanding balance of $26.0 million at December 31, 1992. Usage, as measured
by average outstanding balances during the year, decreased from $48.1 million in
1992 to $20.9 million in 1993 due to capital provided by other financing
opportunities.
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 1993, NCB sold $214.1 million of
cooperative real estate loans.
Deposits
At NCB's wholly owned subsidiary, NCB Savings Bank, FSB, ( NCBSB ) deposits
increased in 1993 from $52.2 million to $66.9 million. The increase reflects
NCBSB's deposit solicitation efforts in the local community and with NCB
members. NCBSB does not solicit brokered deposits. The weighted average
rate on deposits declined from 3.8% in 1992 to 2.9% in 1993. Although NCB
relies heavily on funds raised through the capital markets, deposits continue to
account for an increasing portion of interest bearing liabilities-- 16.2% in
1993 compared with 12.7% in 1992. Management anticipates that deposits will
represent an increasing portion of its capital structure.
Uses of funds
Loans and leases
Loans and leases outstanding decreased .1% from $458.6 million at year-end
1992 to $457.7 million. The majority of the decline occurred in NCB's real
estate warehouse which decreased from $70.0 million to $40.3 million. The
decline is the result of loan sales that occurred within the last quarter of
1993 for $46.2 million. NCB's residential loan portfolio increased slightly
from $166.4 million in 1992 to $170.6 million. The real estate portfolio was
substantially composed of multifamily blanket mortgages. NCB does not invest in
speculative commercial real estate transactions. Residential real estate loans
accounted for 95.3% of the real estate loan portfolio at year end 1993 compared
to 93.6% of the real estate portfolio at year-end 1992.
The commercial loan and lease portfolio increased from $206.2 million to
$230.5 million in 1993. As business activity moved forward during 1993, NCB's
commercial lending portfolio expanded with new business opportunities. The
growth in the commercial loan portfolio reflects increased lending in the retail
and wholesale food industries and increased lending as part of NCB's commercial
member loan program.
Cash, Cash Equivalents, Investments, and Trading Account Securities
In 1993, NCB adopted SFAS 115 which required that NCB re-evaluate its
investment portfolios based on management's future investment strategy. The
result of this implementation is to transfer trading account securities to
investments held for sale and to investments held to maturity. Cash, cash
equivalents, investments and trading account securities increased $3.1 million
to $61.1 million in 1993. This is consistent with management's strategy to
maintain sufficient liquidity for current operations without diluting its
earning asset base. Cash, cash equivalents, investments, and trading account
securities represent 11.8% of interest earning assets in 1993 compared with
11.2% in 1992.
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 Asset and Liability Committee ("ALCO"), which meets
monthly. The purpose of the ALCO is to develop and implement strategies,
including the buying and selling of off-balance sheet instruments such as swaps
and financial futures contracts, to ensure sufficient reward for known and
controlled risk.
Overall, NCB's ALCO 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, 1993, NCB held $22.9 million in cash and cash
equivalents compared with $23.9 million in cash and cash equivalents for 1992.
These funds are normally used to fund business operations.
NCB's $29.7 million investment portfolio is a second source of asset
liquidity. The portfolio consists of high-grade corporate and government
obligations. The average maturity increased from 2.0 years at year end 1992 to
3.3 years at year-end 1993 in an effort to increase the yields of the portfolio.
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 $180 million of revolving lines of credit, $120 million of
which is committed until December 1996. Average outstanding balances were $20.9
million in 1993 compared to $48.1 million in 1992. The decline in average usage
is due primarily to paydowns on the line of credit in the first and second
quarter with proceeds from loan sales. NCB utilizes its short-term funding
facility to finance the temporary build-up of investment-grade, saleable
mortgages.
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. In 1993, deposits increased from $52.2 million to $66.9 million.
The bulk of the growth relates to increased deposits raised from cooperatives.
NCB Savings Bank, FSB, uses cooperative deposits to fund co-originations of
blanket mortgages with NCB.
<TABLE>
Table 7
Maturity Schedule of Loans
(dollars in thousands)
<CAPTION>
One Year
One Year Through Over
or Less Five Years Five Years Total
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Commercial $ 37,958 $ 58,594 $127,131 $223,683
Real estate- construction 0 5,778 0 5,778
Real estate- residential 12,156 51,837 $146,853 210,846
Real estate- commercial 0 1,895 8,682 10,577
Leases 217 5,629 983 6,829
--------- ---------- -------- --------
Total loans and leases $ 50,331 $123,733 $283,649 $457,713
========= ========= ======== ========
Fixed interest rate loans $ 36,983 $ 77,128
Variable interest rate loans 86,750 206,521
-------- --------
$123,733 $283,649
======== ==========
</TABLE>
Interest Sensitivity
Interest Rate Risk (IRR) is the sensitivity of earnings and capital to
changes in market rates of interest. It arises through differences in the
repricing characteristics of both assets and liabilities.
To measure its risk, NCB utilizes a computer simulation model to forecast
its earnings and the market value of its portfolio equity under different rate
scenarios. The model incorporates the dynamics of balance sheet and interest
rate changes as well as embedded options. ALCO reviews the simulation output
and makes decisions accordingly.
Table 8 represents NCB's static interest-rate gap position at December 31,
1993. The gap, adjusted for derivative instruments activity, represents only a
one day snapshot of the amounts contractually scheduled to reprice or mature
(whichever comes first). Consequently, a static gap analysis, considered alone,
is not a complete indication of IRR. Generally speaking though, in a declining
rate environment, it is advantageous to be liability sensitive ("a negative
gap"). Conversely, in an increasing rate environment, it is advantageous to be
asset sensitive ("a positive gap").
<TABLE>
Table 8
Interest Rate Sensitivity (dollars in thousands)
December 31, 1993
<CAPTION>
Over 12
Interest Interest Interest Interest Interest Months and
-Sensitive -Sensitive -Sensitive -Sensitive -Sensitive Non-Interest
30 day 3 month 6 month 12 month Total Sensitive Total
---------- ---------- ----------- ---------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Cash and cash equivalents $ 31,300 $ 0 $ 0 $ 0 $ 31,300 $ 0 $ 31,300
Investment securities 3,252 630 3,095 2,390 9,367 20,420 29,787
Loans and leases 195,197 7,281 12,051 23,962 238,491 219,222 457,713
--------- -------- ---------- --------- --------- -------- ---------
Total interest-earning
assets 229,749 7,911 15,146 26,352 279,158 239,642 518,800
-------- -------- -------- --------- --------- -------- ---------
Interest-bearing liabilities:
Deposits 3,540 7,080 9,336 9,822 29,778 37,153 66,931
Short-term borrowings 31,541 0 0 0 31,541 0 31,541
Long-term debt 0 25,000 0 30,000 55,000 75,354 130,354
Subordinated Class A notes 53,553 0 0 0 53,553 129,436 182,989
-------- ------- -------- -------- --------- -------- ---------
Total interest-bearing
liabilities 88,634 32,080 9,336 39,822 169,872 241,943 411,815
-------- ------- -------- -------- --------- ------- ---------
Other:
Other net interest-bearing
assets 0 0 0 0 0 106,985 106,985
Effect of interest rate swaps
and financial futures (41,200) 75,000 61,000 (30,000) 64,800 (64,800) 0
--------- -------- -------- -------- --------- -------- ---------
Total 47,434 107,080 70,336 9,822 234,672 284,128 518,800
--------- -------- -------- -------- --------- -------- =========
Repricing difference $ 182,315 $(99,169) $(55,190) $ 16,530 $ 44,486 $(44,486)
========= ======== ======== ======== ========= =========
Cumulative gap $ 182,315 $ 83,146 $ 27,956 $ 44,486
========= ======== ======== ========
Cumulative gap as % of
total assets 35.14% 16.03% 5.39% 8.57%
========= ======== ======== =======
</TABLE>
It is clear from the Table that NCB had a 8.57% gap (as a percentage of
total assets) and a 5.39% gap at the one year and 180 day time horizons,
respectively. Consequently, NCB has little IRR over the one year horizon.
NCB is exposed to a tightening of the Prime/LIBOR ( London Interbank
Offered Rate ) spread relationship because much of its floating-rate assets
adjusts to Prime, while much of its floating rate obligations adjusts to one,
three and six month LIBOR.
Capital
NCB's strong capital position supports growth, ensures continuing access
to financial markets, and allows for greater flexibility during difficult
economic periods.
Historically, NCB has maintained a strong capital structure. NCB's equity
to average assets was 20.4% in 1993 compared with 19.8% and 20.7% in 1992 and
1991, respectively. When including NCB's subordinated Class A notes, NCB's
average total capital to average assets was 55.4% compared with 54.6% and 58.5%
during 1992 and 1991, respectively. The Bank Act limits NCB's outstanding debt
to ten times its capital and surplus (including the subordinated Class A notes).
As of December 31, 1993, NCB Savings Bank, FSB, had a risk based capital ratio
of 15.6%, well in excess of regulatory requirements.
Patronage policy
Each year, NCB declares patronage refunds approximately equal to its
taxable net income thereby reducing its Federal income tax liability to minimal
amounts. In April 1993, NCB distributed $6.6 million to its active member-
borrowers. Of this total, approximately $3.0 million was distributed in cash.
Item 8. Financial Statements and Supplementary Data
The registrant's financial statements and notes thereto are set
fourth
beginning at page 19 below. The registrant is not subject to any of the
requirements for supplementary financial information contained in Item 302 of
Regulation S-K.
<TABLE>
NATIONAL CONSUMER COOPERATIVE BANK
CONSOLIDATED BALANCE SHEETS
December 31,
Assets 1993 1992
------------ -----------
<S> <C> <C>
Cash and cash equivalents $ 22,938,795 $23,888,148
Restricted cash 8,361,519 6,503,725
Investment securities
Trading account 26,556,146
Available-for sale 26,406,171
Held-to-maturity 3,380,698
Loans and lease financing 417,438,593 388,536,377
Loans held for sale 40,274,829 70,019,625
Less: Allowance for loan losses (12,309,359) (10,418,687)
------------ ------------
445,404,063 448,137,315
------------ ------------
Excess servicing fees receivable 20,722,861 9,697,436
Premises and equipment,net 2,028,044 2,434,631
Other assets 6,524,825 9,643,959
------------ ------------
Total assets $535,766,976 $527,861,360
============ ============
Liabilities and Members' Equity
Liabilities
Deposits $ 66,931,434 $ 52,231,416
Patronage dividends payable in cash 3,147,860 2,970,925
Other liabilities 8,722,495 8,418,351
Borrowings
Short-term 31,541,577 26,051,848
Long-term 130,354,889 147,522,987
Other 2,040,406 2,705,474
------------ -------------
163,936,872 176,280,309
Subordinated Class A notes 182,989,162 183,296,223
------------ ------------
Total borrowings 346,926,034 359,576,532
------------ ------------
Total liabilities 425,727,823 423,197,224
------------ ------------
Members' Equity
Common stock
Class B 59,671,095 59,894,353
Class C 20,573,753 20,577,597
Class D 300 300
Retained earnings
Allocated 12,844,968 9,140,950
Unallocated 16,949,037 15,050,936
------------ ------------
Total members' equity 110,039,153 104,664,136
------------ ------------
Total liabilities and members' equity $535,766,976 $527,861,360
============ =============
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
NATIONAL CONSUMER COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1993 1992 1991
----------- ------------ -----------
<S> <C> <C> <C>
Interest income
Loans and lease financing $36,487,048 $41,148,157 $41,999,862
Investment securities 2,510,185 2,914,735 3,996,702
----------- ----------- -----------
Total interest income 38,997,233 44,062,892 45,996,564
----------- ----------- -----------
Interest expense
Deposits 1,965,347 2,096,747 2,515,106
Short-term borrowings 1,309,956 2,992,857 4,716,974
Long-term debt, other borrowings
and subordinated Class A notes 17,387,865 18,828,081 19,586,941
---------- ---------- ----------
Total interest expense 20,663,168 23,917,685 26,819,021
---------- ---------- ----------
Net interest income 18,334,065 20,145,207 19,177,543
Provision for loan losses 1,703,907 2,098,986 2,362,616
---------- ---------- ----------
Net interest income after
provision for loan losses 16,630,158 18,046,221 16,814,927
---------- ---------- ----------
Non-interest income
Gain on sale of loans 6,292,956 2,570,297 1,615,162
Loan and deposit servicing fees 1,351,390 1,097,743 1,137,477
Other 4,483,383 413,197 2,292,305
---------- --------- ---------
Total non-interest income 12,127,729 4,081,237 5,044,944
---------- --------- ---------
Non-interest expenses
Compensation and employee benefits 8,398,715 7,352,879 7,129,935
Contractual services 3,892,031 2,764,191 2,918,119
Occupancy and equipment 2,833,457 2,772,456 3,073,017
Contribution to NCB
Development corporation 2,000,000 673,286 651,950
Other 2,171,707 1,932,950 1,793,214
---------- ---------- ----------
Total non-interest expenses 19,295,910 15,495,762 15,566,235
---------- ---------- ----------
Income before income taxes and
cumulative effect of change
in accounting principle 9,461,977 6,631,696 6,293,636
Provision for income taxes 845,998 662,144 429,678
--------- --------- ---------
Income before cumulative effect of
change in accounting principle 8,615,979 5,969,552 5,863,958
Cumulative effect of change in
accounting principle 90,025
---------- ----------- -----------
Net income $ 8,615,979 $ 6,059,577 $ 5,863,958
=========== =========== ===========
Distribution of net income
Patronage dividends $ 6,995,245 $ 6,602,055 $ 5,986,631
Retained earnings 1,620,734 (542,478) (122,673)
----------- ------------ ------------
$ 8,615,979 $ 6,059,577 $ 5,863,958
=========== ============ ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
NATIONAL CONSUMER COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
For the years ended December 31, 1993, 1992 and 1991
Retained Retained Total
Common Earnings Earnings Members'
Stock Allocated Unallocated Equity
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1991 $69,346,003 $15,689,008 $13,981,066 $ 99,016,077
Net income - - 5,863,958 5,863,958
Proceeds from issuance of
common stock 1,139,894 - - 1,139,894
Cancellation and redemption
of stock (1,272,335) - 1,088,254 (184,081)
1990 patronage dividends
Stock portion 13,094,333 (13,414,891) 320,558 -
1990 patronage dividends
Distributed in cash - - (2,698,407) (2,698,407)
Retained in form of equity - 3,298,049 (3,298,049) -
---------- ---------- ----------- -----------
Balance, December 31, 1991 82,307,895 5,572,166 15,257,380 103,137,441
Net income - - 6,059,577 6,059,577
Proceeds from issuance of
common stock 114,934 - - 114,934
Cancellation and redemption
of stock (1,950,579) - 336,034 (1,614,545)
1991 patronage dividends
Allocated surplus - (62,346) - (62,346)
1992 patronage dividends
Distributed in cash - - (2,970,925) (2,970,925)
Retained in form of
equity - 3,631,130 (3,631,130) - (3,6
---------- --------- ----------- -----------
Balance, December 31, 1992 80,472,250 9,140,950 15,050,936 104,664,136
Net income - - 8,615,979 8,615,979
Cancellation and redemption
of stock (227,102) - 277,367 50,265 2
1992 patronage dividends
Allocated surplus - (143,367) - (143,367)
1993 patronage dividends
To be distributed in cash - - (3,147,860) (3,147,860)
To be retained in form of
equity - 3,847,385 (3,847,385) -
----------- ----------- ----------- ------------
Balance, December 31, 1993 $80,245,148 $12,844,968 $16,949,037 $110,039,153
=========== =========== =========== ============
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
NATIONAL CONSUMER COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1993 1992 1991
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Interest received $ 39,135,779 $ 46,536,824 $46,815,291
Commitment charges and other fees received 7,358,454 3,616,509 3,145,452
Proceeds from sales of loans held for sale 195,761,211 141,241,719 67,704,928
Loans originated for sale (170,405,348) (128,197,791) (75,631,140)
Gain (loss) on hedges of loans held for sale 473,677 (317,646) (770,168)
Increase in trading account securities, net - (3,858,228) (405,054)
Interest paid (21,821,079) (24,555,284) (27,342,540)
Transfer to restricted cash account (1,857,794) (6,503,725) -
Cash paid to suppliers and employees (22,528,798) (16,254,252) ( 2,178,890)
------------ ----------- ------------
Net cash used in investing activities 26,116,102 11,708,126 ( 2,178,890)
------------ ----------- ------------
Cash flows from investing activities
Proceeds from sales of investments available
for sale 10,217,820 - 42,185,001
Purchase of investments available for sale (9,155,694) - 3,000,000
Purchase of investments held to maturity (3,380,698) - (44,296,076)
Proceeds from sales of portfolio loans 23,114,212 11,318,144 7,125,147
Net increases in loans and lease financing (46,824,663) (39,927,688) (14,119,112)
Capital expenditures (166,838) (1,428,758) ( 564,022)
------------ ------------ ------------
Net cash used in investing activities (26,195,861) (30,038,302) ( 6,669,062)
------------ ------------ ------------
Cash flows from financing activities
Net increase in deposits 14,705,334 11,058,920 6,643,864
Net increase (decrease) in short-term
borrowings 5,489,729 (48,009,948) ( 9,081,649)
Proceeds from issuance of long-term debt - 50,000,000 35,000,000
Repayment on long-term debt (17,000,000) - ( 6,250,000)
Repayment on subordinated Class A notes (314,622) (1,413,050) -
Other borrowings - - 1,982,738
Repayment on other borrowings (665,068) (2,821,421) (1,896,250)
Gain on liability hedge - 482,342 203,343
Proceeds from issuance of common stock 15,545 114,934 1,139,894
Redemption of common stock (129,587) (261,900) (150,871) (
Patronage dividends paid (2,970,925) (2,698,407) (3,350,668)
------------ ----------- -----------
Net cash (used in) provided by
financing activities (869,594) 6,451,470 24,240,401
------------ ----------- -----------
(Decrease) increase in cash and cash
equivalents (949,353) (11,878,706) 15,392,449
Cash and cash equivalents, beginning of year 23,888,148 35,766,854 20,374,405
----------- ----------- -----------
Cash and cash equivalents, end of year $22,938,795 $23,888,148 $35,766,854
=========== =========== ===========
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
NATIONAL CONSUMER COOPERATIVE BANK
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
For the years ended December 31, 1993 1992 1991
----------- ----------- ----------
<S> <C> <C> <C>
Net income $ 8,615,979 $ 6,059,577 $ 5,863,958
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities
Increase in restricted cash account (1,857,794) (6,503,725)
Decrease (increase) in accrued
interest receivable 229,080 (110,878) 372,631
Net trading account activity (3,858,228) (405,054)
Decrease (increase) in loans held
for sale 25,355,863 13,043,928 (7,926,212)
Increase (decrease) in other assets,
net of real estate owned (4,068,396) 210,286 706,441
Increase (decrease) in accounts payable
and other accrued expenses 1,554,415 (709,986) (1,473,259)
Decrease in accrued interest payable (992,058) (471,979) (442,270)
(Decrease) increase in deferred income (53,292) 937,632 436,212
Provision for loan losses 1,703,907 2,098,986 2,362,616
Depreciation and amortization, net 2,917,286 2,577,868 1,101,541
Gain on sale of assets, net (7,975,854) (2,162,729) (2,510,695)
Increase (decrease) on hedges of loans
held for sale 473,677 (317,646) (770,168)
Other, net 213,289 915,020 505,369
----------- ----------- ------------
Net cash provided by (used in) operating
activities $26,116,102 $11,708,126 $(2,178,890)
=========== ============ ============
<FN>
See notes to consolidated financial statements. <PAGE>
</TABLE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization
National Consumer Cooperative Bank, doing business as National
Cooperative Bank (NCB), is a U.S. Government-chartered corporation organized
under the National Consumer Cooperative Bank Act (the Act). NCB provides loans
and financial services to cooperatives. NCB Mortgage Corporation, a majority-
owned subsidiary, originates, sells and services real estate and commercial
loans for cooperatives. NCB Capital Corporation (NCBCC), a wholly-owned
subsidiary until it was dissolved and its assets and liabilities were assumed by
NCB on December 15, 1993, borrowed funds in the capital markets. NCB Financial
Corporation, a wholly-owned subsidiary, is the holding company of NCB Savings
Bank, FSB (NCBSB), a federally-chartered thrift institution. NCB Business Credit
Corporation (NCBBCC), a wholly-owned subsidiary, provides equipment lease
financing and financial services to cooperatives. Cooperative Funding
Corporation, a wholly-owned subsidiary of NCBBCC, is a registered broker-dealer
and provides corporate financial services. NCB Investment Advisers, Inc., a
wholly-owned subsidiary of NCBBCC, provides investment advisory services to
cooperatives. NCB I, Inc., a wholly-owned subsidiary of NCB, is a special
purpose corporation that holds credit enhancement certificates related to the
securitization and sale of cooperative real estate loans.
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.
Investments
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" was issued in
May 1993 by the Financial Accounting Standards Board. At December 31, 1993, NCB
adopted the requirements of SFAS 115 to classify and account for debt and equity
securities as follows:
Trading Securities - Securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading
securities and reported at market value. Unrealized gains and losses are
included in non-interest income.
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 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.
Supplemental Cash Flow Information
NCB recorded a non-cash adjustment at December 31, 1993 which
resulted in a decrease of trading account securities and an increase in
investments available for sale of $27,556,146.
Interest Rate Futures and Forward Contracts
Gains and losses on futures and forward contracts and interest rate
agreements used to hedge certain interest-sensitive assets and liabilities are
deferred. Gains or losses are recognized at the time of disposition of the
assets or liabilities being hedged, or are amortized over the life of the hedged
asset or liability as an adjustment to interest income or interest expense.
Loans and Lease Financing
Loans are carried at their principal amounts outstanding, except for
loans held for sale which are carried at the lower of cost or market as
determined on an aggregate basis. NCB discontinues the accrual of interest on
loans when principal or interest payments are ninety days or more in arrears or
sooner when there is reasonable doubt as to collectibility. Loans may be
reinstated to accrual status when all payments are brought current and, in the
opinion of management, collection of the remaining balance can reasonably be
expected.
Leasing operations consist principally of leasing equipment under
direct financing leases expiring in various years through 1998. All lease
financing transactions are full payout direct financing leases. Lease income is
recorded over the term of the lease contract which provides a constant rate of
return on the unrecovered investment. Lease financing is carried net of
unearned income.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance which
management believes to be adequate to cover anticipated loan and lease financing
losses in the existing portfolio. A provision for loan losses is added to the
allowance and charged to expense. Loan and lease charge-offs,net of recoveries,
are deducted from the allowance. 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. Changes in economic
conditions and economic prospects of borrowers can occur quickly and, as a
result, impact the estimates made by management.
Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan", was issued in May 1993 by
the Financial Accounting Standards Board. SFAS 114 requires creditors to
evaluate the collectibility of both contractual interest and contractual
principal of all loans when assessing the need for a loss accrual. When a loan
is impaired, a creditor shall measure 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. The creditor shall
recognize an impairment by creating a valuation allowance. A loan is impaired
when, based on current information, it is probable that a creditor will be
unable to collect all amounts due to the contractual terms of the loan.
The Company adopted SFAS 114 as of January 1, 1993. In management's
judgement the allowance for loan losses at December 31, 1993 is adequate and
that the adoption of SFAS 114 does not have a significant impact on its
financial condition and results of operations.
Loan-Origination Fees, Commitment fees, and Related Costs
Loan fees received are accounted for in accordance with Financial
Accounting Standards Board Statement No. 91, Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases. Loan fees and certain direct loan origination costs are
deferred, and the net fee or cost is recognized as an adjustment to interest
income over the contractual life of the loans. Fees relating to expired
commitments are recognized as non-interest income. If a commitment is exercised
during the commitment period, the fee at the time of exercise is recognized over
the life of the loan as an adjustment of yield.
Loan-Servicing Rights
The cost of loan-servicing rights acquired is amortized in proportion
to, and over the period of, estimated net servicing revenues. When participating
interest in loans sold have an average contractual interest rate, adjusted for
normal servicing fees, that differs from the agreed yield to the purchaser,gains
or losses are recognized equal to the present value of such differential over
the estimated remaining life of such loans. The resulting "excess servicing
fees receivable" is amortized over the estimated life using a method
approximating the level-yield method.
The cost of loan-servicing rights purchased, the excess servicing
fees receivable, and the amortization thereon is 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.
Receivables Sold With Recourse
NCB is obligated under various recourse provisions related to the
sales of residential mortgages. Management has accrued a liability for estimated
probable losses to these recourse provisions. Management believes the recourse
provisions do not subject NCB to any material risk of loss other than that
provided for in other accrued expenses.
Premises and Equipment
Premises and equipment are carried at cost less accumulated
depreciation and include equipment owned under lease financing arrangements.
Depreciation is computed using an accelerated method. Leasehold improvements are
amortized on a straight-line basis over the terms of the leases.
Other Assets
Foreclosed property pending disposition is carried at fair value less
estimated costs to sell. Goodwill relating to the acquisition of NCBSB by NCB
Financial Corporation is being amortized over the estimated remaining lives of
the long-term interest-bearing assets acquired.
Income Taxes
The National Consumer Cooperative Bank Act Amendments of 1981 (P.L. 97-35)
provide that, effective January 1, 1982, NCB shall be treated as a cooperative
and subject to the provisions of Subchapter T of the Internal Revenue
Code. Under Subchapter T, NCB issues its member-borrowers patronage dividends,
which are tax deductible to NCB thereby reducing its taxable 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 has adopted Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes" as of January 1, 1992 and has elected not
to apply the provisions retroactively. The adoption of SFAS 109 changes NCB's
method of accounting for income taxes from the deferred method to an asset and
liability approach. Previously, NCB deferred the past tax effects of timing
differences between financial reporting and taxable income. The asset and
liability approach requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amounts and the tax bases of assets and liabilities that have been
recognized in NCB's financial statements or tax returns. The cumulative effect
of the adoption of SFAS 109 was to increase net income for the year ended
December 31, 1992 by $90,025.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosure about Fair Value of Financial Instruments," requires disclosure of
fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available for identical or comparable
instruments, fair values are based on estimates using the present value of
estimated cash flows using a discount rate commensurate with the risks involved
or other valuation techniques. The resultant fair values are affected by the
assumptions used,including the discount rate and estimates as to the amounts and
timing of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, accordingly,
the fair values may not represent actual values of the financial instruments
that could have been realized as of year end or that will be realized in the
future.
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable to
estimate that value:
Cash and cash equivalents
The carrying amount approximates fair value.
Investments
Fair values are based on quoted market prices for identical or
comparable securities.
Loans and lease financing
For adjustable rate commercial loans that reprice frequently and with
no significant changes in credit risk, fair values are based on carrying values.
The fair market value of other adjustable rate loans is estimated by discounting
the future cash flows assuming that the loans mature on the next repricing date
using the rates at which similar loans would be made to borrowers with similar
credit quality and the same stated maturities. The fair value of fixed rate
commercial and of other loans and leases, excluding loans held for sale, is
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit quality and for the
same remaining maturities. The fair value of loans held for sale is based on
market prices for similar loans sold in the secondary market adjusted for
differences in loan characteristics.
Deposit liabilities
The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates of deposits of similar remaining maturities.
Short-term and other borrowings
The carrying amounts of the revolving line of credit balances,
advances from the Federal Home Loan Bank and other borrowings approximate fair
value.
Long-term debt
The fair value of long-term debt, including the subordinated Class
A notes, 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.
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.
2. Financial Instruments with Off-Balance Sheet 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 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.
NCBSB enters into forward commitments to sell a portion of its
production of loans to Federal National Mortgage Association. The market value
of forward commitments is considered in the lower of cost or market valuation of
the loan portfolio held for sale.
Financial futures are contracts for delayed delivery of securities
at a specified future date of a specified instrument, at a specified price or
yield. These contracts are entered into to hedge the interest rate risk
associated with loans held for sale. Risks arise from movements in securities'
values and interest rates. NCB has minimal credit risk exposure on the
financial futures due to potential nonperformance of counterparties since
changes in the market value of financial futures on any given business day are
settled in cash on the following business day and payment is guaranteed by the
clearing house.
NCB has entered into a variety of interest rate swap agreements in
managing its interest rate exposure. Interest rate swap transactions generally
involve the exchange of fixed- and floating-rate interest payment obligations
without the responsibility for the underlying principal amounts. Entering into
interest rate swap agreements involves not only the risk of default by
counterparties but also the interest rate risk associated with unmatched
positions. The amounts potentially subject to credit risk are much smaller than
the notional amounts of the agreements. At December 31, 1993, NCB is exposed to
credit loss in the event of nonperformance by its counterparties in an aggregate
amount of $13,588,572, representing the estimated cost of replacing, at current
market rates, all those outstanding swaps for which NCB would incur a loss in
replacing the contracts. NCB does not anticipate nonperformance by any of its
counterparties. NCB requires that all counterparties maintain long-term debt
ratings of at least A- or be rated acceptable under NCB's credit risk system.
NCB also imposes maximum exposure limitations on any single counterparty.
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):
<TABLE>
Contract or
Notional Amounts Estimated Fair Value
1993 1992 1993 1992
<S> <C> <C> <C> <C>
Financial instruments whose notional
or contract amounts exceed the
amount of credit risk:
Forward commitments $ 7,485 $ 4,961 $ 7,485 $ 4,961
Financial futures contracts 41,200 70,800 41,235 75,700
Interest rate swap agreements:
In a net receivable position 136,000 136,000 150,809 148,901
In a net payable position (136,000) (136,000) 136,044) (136,065)
Financial instruments whose contract
amounts represent credit risk:
Commitment to extend credit $128,960 $154,483 $ 744 $ 956
Standby letters of credit 24,174 9,927 132 111
</TABLE>
3. 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:
1993 1992
Cash in bank $15,562,652 $ 3,186,979
Securities
Federal funds 4,559,252 15,717,835
Money market securities 177,049 177,560
Commercial paper 500,000 500,000
Certificates of deposit, mutual funds
and repurchase agreements 2,139,842 4,305,774
----------- -----------
$22,938,795 $23,888,148
=========== ===========
At December 31, 1993 and 1992, restricted cash of $8,361,519 and
$6,503,725 is held by a trustee for the benefit of certificate holders in the
event of a loss on certain loans sold of $37,300,000 and $92,623,000 in 1993
and 1992, respectively. The restricted cash will become available to NCB I,
Inc. as the principal balance of the respective loans decreases. The loans sold
have original maturities of ten to fifteen years.
4. Investment Securities
At December 31, 1993, NCB transferred $26,406,171 of securities
designated as trading to the available-for-sale category in order to reflect
management's future investment strategies and policies in accordance with SFAS
115. The securities consisted of $16,513,223 in corporate bonds and $9,892,948
in US Treasury and Agency obligations.
The maturities of investment securities available-for-sale at
December 31, 1993 are as follows:
Amortized Fair
Cost Value
Within 1 year $ 1,382,170 $ 1,303,335
After 1 year through 5 years 21,073,628 21,315,691
After 5 years through 10 years 2,780,812 2,788,395
After 10 years 998,750 998,750
$26,235,360 26,406,171
The composition of investment securities held-to-maturity at
December 31, 1993 is as follows:
<TABLE>
Held-to-Maturity
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
US Treasury and Agency
Obligations $1,986,393 $1,222 $ - $1,987,615
Other investments 1,394,305 1,394,305
---------- ------ -------- ----------
$3,380,698 $1,222 $ - $3,381,920
========== ====== ======== ===========
</TABLE>
At December 31, 1993, all securities held-to-maturity were due within
one year. There were no sales of securities classified as available-for-sale or
held-to-maturity during 1993, 1992, and 1991. The change in net unrealized
holding gain or (loss) on trading securities that has been included in earnings
for 1993, 1992, and 1991 are $170,813, $(18,827), and $311,632, respectively.
NCB held no investment securities at December 31, 1993 that were callable.
5. 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, 1993 and 1992 are $845,499,672 and $638,244,536,
respectively.
6. Loans and Lease Financing
Loans and leases outstanding by category at December 31 are as
follows:
1993 1992
Commercial loans $223,682,372 $199,441,908
Real estate loans
Construction 5,778,923 5,079,688
Residential 170,570,593 166,360,156
Loans held for sale 40,274,829 70,019,625
Commercial 10,577,263 10,933,115
Lease financing 6,829,442 6,721,510
------------ ------------
$457,713,422 $458,556,002
============ ============
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:
<TABLE>
Commercial Loans Real Estate Loans
---------------- -----------------
1993 1992 1993 1992
------ ------ ----- ------
<S> <C> <C> <C> <C>
By Region
Northeast 38.0% 41.5% 53.0% 58.1%
South Atlantic 11.0 14.9 21.4 18.2
Central 28.6 25.0 19.2 18.3
West 22.4 18.6 6.4 5.4
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
Percentage of Total
Loan Portfolio
1993 1992
By Borrower Type
Real estate
Construction 1.3% 1.1%
Residential 46.0 51.4
Commercial 2.3 2.4
Commercial
Food processing and distribution 22.9 19.7
Financial services 6.4 5.8
Medical service and supplies 5.1 4.8
Other 16.0 14.8
------ ------
100.0% 100.0%
====== =======
NCB originates multifamily blanket mortgages to predominantly owner-
occupied housing cooperatives. A significant portion of NCB's mortgage loans are
located within New York City due to that city's extensive cooperative market.
The blanket mortgages are collateralized by the building and proprietary leases
of the housing cooperative. The loans are repaid from operations of the real
estate cooperative.
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.
The carrying amounts and respective estimated fair values of loans
and leases outstanding at December 31 are as follows (amounts in thousands):
<TABLE>
Carrying Amount Estimated Fair Value
----------------------- ---------------------
1993 1992 1993 1992
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Commercial
Fixed rate loans $ 46,415 $ 63,670 $ 47,017 $ 63,488
Adjustable rate loans 177,267 135,772 201,410 136,519
Real Estate
Loans held for sale 40,275 70,020 43,256 72,134
Portfolio-fixed rate 25,637 19,180 25,982 18,889
Portfolio-adjustable 161,289 163,192 165,045 166,691
Lease financing 6,830 6,722 7,328 7,123
-------- -------- -------- --------
$457,713 $458,556 $490,038 $464,844
======== ======== ======== ========
</TABLE>
7. Nonperforming Assets
The loan portfolio includes loans on which NCB is not currently
accruing interest income. The total outstanding principal of these loans at
December 31, 1993, 1992, and 1991, and the effect on interest income for the
years then ended, are as follows:
1993 1992 1991
---------- ---------- ----------
Principal outstanding $ 886,313 $4,207,350 $4,887,613
========== ========== ==========
Gross amount of interest
that would have been
recorded at original rates $ 118,145 $ 597,623 $ 634,998
Less interest received 26,040 164,259 243,305
---------- ---------- ----------
Interest income not recorded $ 92,105 $ 433,364 $ 391,693
========== ========== ==========
The loan portfolio includes loans that have been renegotiated with
a reduced interest rate, or with an extension of payment of principal and
interest. The total outstanding principal of these loans at December 31,1993,
1992 and 1991, and the effect on income for the years then ended are as follows:
1993 1992 1991
---------- ---------- ----------
Principal outstanding $2,283,149 $3,428,208 $2,490,775
========== ========== ==========
Gross amount of interest
that would have been
recorded at original rates $ 296,697 $ 413,492 $ 268,808
Less interest received 178,491 259,672 53,444
---------- ---------- ----------
Interest income not recorded $ 118,206 $ 153,820 $ 215,364
========== ========== ==========
At December 31, 1993, there are no commitments to lend additional
funds to borrowers whose loans are non-performing.
At December 31, 1993 and 1992, NCB has real estate owned through
foreclosure and in-substance foreclosures of $171,663 and $2,405,943,
respectively, which are classified as other assets.
8. 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 represent cooperative
organizations that currently hold 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, 1993 loans to affiliated
cooperatives, directors, officers, and their family members have the following
outstanding balances:
January 1, December 31,
1993 Additions Deductions 1993
----------- ----------- ----------- -----------
Loans to affiliated
cooperatives $26,539,598 $28,882,444 $15,955,227 $39,466,815
Loans to directors,
officers, and family
members 607,394 389,520 310,419 686,495
----------- ----------- ----------- -----------
$27,146,992 $29,271,964 $16,265,646 $40,153,310
=========== =========== =========== ===========
Percent of loans
outstanding 5.93% 8.8%
============ ============
There are additions of $9,584,806 in loans related to new
affiliations in 1993 and $7,014,125 of the deductions relate to affiliations
ceased in 1993. None of the related party loans outstanding at December 31,
1993 are on non-accrual status.
During 1993 and 1992, NCB recorded interest income of $4,009,647 and
$3,227,699, respectively on loans to related parties.
Included in the loans outstanding to affiliated cooperatives as of
December 31, 1993 is a $50 million loan to the Co-operative Central Bank. This
loan is serviced by NCB Mortgage Corporation and is 80% participated to outside
banks without recourse to NCB. NCB has adequately reserved for the $10 million
exposure associated with the 20% share it retained. The loan is secured by US
Government guaranteed obligations equal to 110% of the outstanding balance. The
Co-operative Central Bank is an organization with which the chairman of NCB's
Board of Directors is affiliated. The chairman will retire from NCB's Board
upon the expiration of his term in April 1994.
In 1984, the Community Enterprise Development Corporation of Alaska
(CEDC) entered into a contract to provide NCB with services related to loan
origination and servicing of loans within the State of Alaska. CEDC is an
organization with which a retired NCB director is affiliated. Fees paid by NCB
under this contract for the years ended December 31, 1993, 1992, and 1991,
totalled $267,000, $184,000, and $155,000, respectively. This contract expired
in 1993. The director retired from NCB's Board upon expiration of his term in
April, 1993.
Certain NCB affiliates, and certain directors and officers of NCB and
NCBSB have deposits with NCBSB. Such deposits, aggregated $1,293,422, and
$10,380,280 as of December 31, 1993 and 1992, respectively.
9. Allowance for loan Losses
The following is a summary of the activity in the allowance for loan
losses:
1993 1992 1991
----------- ---------- ----------
Balance at beginning of year $10,418,687 $8,706,011 $8,272,185
Provision for loan losses 1,703,907 2,098,986 2,362,616
Charge-offs (252,384) (416,269) (2,103,782)
Recoveries of loans previously
charged off 439,149 29,959 174,992
----------- ----------- ----------
Balance at end of year $12,309,359 $10,418,687 $8,706,011
=========== =========== ==========
The allowance for loan losses is 2.7%, 2.3%, and 1.9% of loans and
lease financings at December 31, 1993, 1992, and 1991, respectively.
10. Premises and Equipment
Premises and equipment as of December 31 consist of the following:
1993 1992
-------- ---------
Furniture and equipment $1,969,052 $1,904,241
Leasehold improvements 1,502,976 1,488,708
Other 1,237,262 1,188,734
---------- ----------
4,702,290 4,581,683
Less: Accumulated depreciation (2,681,246) (2,147,052)
and amortization ----------- -----------
$2,028,044 $2,434,631
=========== ===========
11. Leases
NCB leases its headquarters in Washington, D.C. through April 1,
2002. NCB also leases premises for its regional offices with expiration dates
between January 31, 1994 to January 6, 1999. These leases are all
non-cancelable operating leases.
Minimum future rental payments under non-cancelable operating leases
having remaining terms in excess of one year as of December 31, 1993 are as
follows:
1994 1,400,330
1995 1,372,189
1996 1,393,336
1997 1,417,968
1998 1,429,751
Thereafter 4,434,657
-----------
$11,448,231
===========
Rental expense in 1993, 1992, and 1991 is $1,669,165, $1,560,633, and
$1,600,497, 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, 1993 and 1992, the unamortized lease
incentive is $1,524,243 and $1,605,859, respectively.
12. Deposits
Deposits as of December 31 are summarized as follows:
<TABLE>
1993 1992
Weighted Weighted
Average Average
Balance Rate Balance Rate
----------- ---- ----------- -----
<S> <C> <C> <C> <C>
Balances by type
Passbook accounts $ 5,739,247 3.40% $ 6,074,481 3.42%
Money market demand and
NOW accounts 33,656,940 2.37 18,020,255 2.60
Fixed-rate certificates
Less than $100,000 17,007,650 4.08 21,680,264 4.81
More than $100,000 10,527,597 4.05 6,456,416 4.12
----------- -----------
$66,931,434 2.92% $52,231,416 3.78%
=========== ===========
The contractual maturity of certificate accounts at December 31 is
as follows:
Year Ending December 31 Amount
1994 $18,455,632
1995 5,461,778
1996 1,793,754
1997 841,319
1998 and thereafter 982,764
-----------
$27,535,247
===========
The estimated fair value of deposits is $66,901,000 and $52,291,000
at December 31, 1993 and 1992, respectively.
13. Short-Term Borrowings
Revolving credit facilities
NCB has $180,000,000 revolving lines of credit, $120,000,000 of which
is committed until December 31, 1996.
Interest expense from borrowings under the revolving line of credit
facilities is $774,657, $2,302,708, and $3,934,980, in 1993, 1992, and 1991,
respectively. The following is a summary of the borrowings under the facility
for the years ended December 31:
1993 1992
------------ ------------
Borrowings outstanding
at December 31 $ 31,500,000 $ 26,000,000
Available capacity
at December 31 148,500,000 144,000,000
Average line of credit borrowings
outstanding during the year 20,856,575 48,076,923
Maximum borrowings during the year 88,000,000 110,000,000
Weighted average borrowing rate
During the year 3.7% 4.8%
At December 31 3.6% 3.8%
Borrowing rates under the revolving credit facility are indexed off
the prime rate, Federal funds rate, certificate of deposit rates or the London
Interbank Offered Rate (LIBOR) and vary with the amount of borrowings
outstanding. Commitment fees for the line of credit are 5/16 of 1% on the total
facility. Total commitment fees paid for revolving credit facilities are
$538,630, $571,875, and $523,959 in 1993, 1992, and 1991, respectively. All
borrowings under the facility which are outstanding at expiration of the
facility are due at that time.
NCB is required under these revolving line 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 $265 million (defined as
total members' equity plus subordinated Class A notes). NCB shall not at any
time permit consolidated senior debt to exceed 650% of consolidated adjusted net
worth.
Estimated fair value
The carrying amounts and respective estimated fair values of short
term borrowings at December 31, 1993 and 1992 are as follows (amounts in
thousands):
</TABLE>
<TABLE>
Carrying Amount Estimated Fair Value
-------------------- ---------------------
1993 1992 1993 1992
------- ------- ------- -------
<S> <C> <C> <C> <C>
Line of Credit $31,532 $26,042 $31,492 $26,037
Advances from Federal Home
Loan Bank 10 10 10 10
Other 2,040 2,705 2,040 2,705
------- ------- ------- -------
$33,582 $28,757 $33,542 $28,752
======= ======= ======= =======
</TABLE>
14. Long-term Debt
The following is a schedule of outstanding long-term debt at December
31, 1993:
Amount Rate Maturity
$30,000,000 9.28 1994
25,000,000 9.00 1994
25,000,000 10.15 1995
19,000,000 8.18 1997
18,000,000 8.32 1997
13,000,000 8.44 1998
NCB has entered into a series of interest rate swap agreements which
have a combined notional amount of $96.0 million. The effect of the agreements
is to convert $96.0 million of the term debt from a weighted average fixed rate
of 8.21% to a floating rate based on LIBOR. The agreements expire in varying
amounts through 1998.
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 $265 million (defined as total members'
equity plus subordinated Class A notes). NCB shall not at any time permit
consolidated senior debt to exceed 650% of consolidated adjusted net worth.
The carrying amount and respective estimated fair value of long-term
borrowings at December 31, 1993 and 1993 are as follows ( amounts in thousands):
Carrying Amount Estimated Fair Value
------------------- ---------------------
1993 1992 1993 1992
-------- -------- -------- --------
Long-term debt $130,000 $147,000 $135,232 $152,191
15. Subordinated Class A Notes
On December 31, 1981, NCB issued unsecured subordinated Class A notes
to the U.S. Treasury (holder) 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 Class A
notes.
The notes require that proceeds from the sale of Classes B and C
Stock be applied annually toward the repayment of the notes. In 1993 and 1992,
$314,622 and $1,413,050 respectively were applied toward repayment of these
notes. These notes mature on October 31, 2020.
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 Class A notes.
The annual interest payments for each tranche are determined in
accordance with the following schedule which also includes the carrying amounts
and respective estimated fair values of the subordinated Class A notes at
December 31, 1993 (in thousands):
Next Carrying Estimated
Index Rate Repricing Date Amount Fair Value
91-day Treasury rate 2.98% January 1, 1994 $ 53,553 $ 53,547
3-year Treasury rate 4.24 October 1, 1996 36,903 36,596
5-year Treasury rate 8.47 October 1, 1995 55,281 58,322
10-year Treasury rate 8.82 October 1, 2000 37,252 44,227
-------- --------
$182,989 $192,692
======== ========
16. Common Stock and Members' Equity
NCB's common stock consists of Class B Stock owned by its borrowers,
Class C Stock owned by cooperatives eligible to borrow from NCB, and Class D
non-voting Stock owned by others.
1993 1992
---------------------------- ---------------------------
Class B Class C Class D Class B Class C Class D
---------------------------- ---------------------------
Par value per share $100 $100 $100 $100 $100 $100
Shares authorized 700,000 300,000 100,000 700,000 300,000 100,000
Shares issued and
outstanding 596,711 205,738 3 598,944 205,776 3
17. Regulatory Capital of NCBSB
Under Office of Thrift Supervision (OTS) regulatory capital
regulations and agreements, NCBSB must have : (i) core capital equal to at least
5% of adjusted total assets, (ii) tangible capital equal to at least 1.5% of
adjusted total assets, and (iii) total capital equal to at least 8% of risk-
weighted assets. In measuring a savings association's compliance with all three
FIRREA capital standards, savings associations must deduct from their capital
(with several exceptions primarily supervisory goodwill and certain non-
qualifying purchased loan servicing rights) their investments in, and advances
to, subsidiaries engaged (as principal) in activities not permissible for
national banks. Supervisory goodwill, as defined, is permitted to be included
in core capital and risk-based capital, not to exceed 1.5% of the savings
association's tangible assets and decreasing to zero during a phase-out period
ending December 31, 1994.
NCBSB's capital exceeds the minimum capital requirements at December
31, 1993. the following table summarized NCBSB's capital at December 31, 1993:
Tangible Core Risk-Based
Capital Capital Capital
----------- ----------- -----------
NCBSB's regulatory capital $ 7,449,787 $ 8,010,209 $ 8,427,195
regulatory capital
required 1,120,843 3,736,144 4,311,099
----------- ----------- -----------
NCBSB's regulatory capital
in excess of minimum
requirement $ 6,328,944 $ 4,274,065 $ 4,116,096
=========== =========== ===========
NCBSB's regulatory capital
as a percent of assets 9.97% 10.6% 15.6%
============ ============ ============
Minimum regulatory capital
required as a percent of assets 1.5% 5.0% 8.0%
============ ============ ============
Asset base used for capital
purposes $74,722,876 $74,722,876 $53,888,737
=========== =========== ===========
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 have most of their
loans, could adversely affect future earnings and, consequently, the ability of
NCBSB to meet its future minimum capital requirements.
In August 1993, the OTS issued final regulations, effective January
1, 1994, adding an interest rate risk component to its risk-based capital
standards. Management believes NCBSB will continue to meet its risk-based
capital requirements under these new regulations.
OTS regulations impose certain restrictions on NCBSB's payment of
dividends. At December 31, 1993, retained earnings available for cash dividends
were approximately $2,239,000.
18. Employee Benefits
Substantially all employees are covered by a non-contributory,
defined contribution retirement plan. Total expense for the retirement plan for
1993, 1992, and 1991 is $241,309, $280,401, and $290,135, respectively.
NCB maintains an employee thrift plan organized under IRS Code
Section 401(k) and contributes up to 6% of each participant's salary.
Contributions and expense for 1993, 1992, and 1991 are $234,246, $248,417, and
$235,697, respectively.
19. Income Taxes
Each year under the Act, NCB must declare tax deductible patronage
dividends in the form of cash and stock which effectively reduce NCB's Federal
income tax to insignificant amounts. In 1993, NCB paid cash and issued allocated
surplus in lieu of stock. In 1994, NCB will declare a patronage dividend for
1993 of $6,995,245. The anticipated cash portion of the patronage dividend in
1994 of 1993 earnings is shown as dividends payable. The anticipated allocated
surplus portion of the patronage dividend in 1994 of 1993 earnings has been
added to allocated retained earnings at December 31, 1993. Patrons of NCB
receiving such patronage dividends consent to include them in their income.
At December 31, 1993, NCB has available for Federal income tax
purposes net operating loss (NOL) carryforwards of approximately $2,800,000
which expire in varying amounts through 1995. These net operating loss
carryforwards can only be used to offset future patronage sourced income and
thus do not create a deferred tax asset.
The provision for income taxes consists of the following:
Year Ended December 31
------------------------------------------
1993 1992 1991
------------------------------------------
Current tax expense
U.S. Federal $1,129,171 $ 669,453 $364,133
State and local 56,234 262,630 65,545
---------- --------- --------
Total current 1,185,405 932,083 429,678
---------- --------- --------
Deferred tax expense
U.S. Federal (351,602) (261,020)
State and local 12,195 (8,919)
---------- ----------
Total deferred (339,407) (269,939)
---------- ----------
Total provision $ 845,998 $ 662,144 $429,678
=========== ========== ========
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
--------------------------------------
1993 1992 1991
--------------------------------------
Statutory U.S. tax rate $3,217,072 $2,254,777 $2,139,836
Patronage dividends (1,970,383) (1,632,001) (1,993,623)
FAS 96 adjustment for NCBSB's NOL 241,780
NOL carryforward (408,000) (272,000)
State and local taxes 45,163 169,614 65,545
State income tax deduction (22,285)
Other (37,854) 141,754 (1,575)
----------- --------- -----------
Income tax provision $ 845,998 $ 662,144 $ 429,678
=========== ========= ===========
Deferred tax assets and liabilities are comprised of the following
at December 31, 1993 and 1992 are as follows:
Year Ended December 31
----------------------
1993 1992
-------- -------
Deferred commitment fees $148,963 $190,195
Write-down of other assets 163,383
Allowance for loan losses 507,528 135,150
Other 62,276 29,102
Gross deferred tax assets 718,767 517,830
Valuation allowance (157,788)
--------- -------
Net deferred tax assets 560,979 517,830
--------- ---------
Gain on sale of loans (30,995) (157,866)
--------- ---------
Gross deferred tax liabilities (30,995) (157,866)
--------- ---------
$529,984 $359,964
========= =========
Management expects that all deferred tax assets will be realized
based on NCB's history of earnings and management's expectations that NCB will
generate taxable income in future years to offset the reversal of temporary
differences.
20. Income Available for Dividends on Class C Stock
Under an existing long-term debt agreement, the aggregate amount of
cash dividends on Class C 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 subordinated Class A notes. Those rates for 1993, 1992,
and 1991 are 5.4%, 6.0%, and 7.1%, respectively. Consequently, the amounts
available for payment on the Class C Stock for 1993, 1992, and 1991 are
$1,110,983, $1,234,656, and $1,505,294, respectively.
Independent Auditors' Report
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, 1993, 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. The financial statements of the
Company for the years ended December 31, 1992 and 1991 were audited by other
auditors whose report, dated January 29, 1993, expressed an unqualified opinion
on those statements.
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 1993 consolidated financial statements present fairly, in
all material respects, the consolidated financial position of National
Cooperative Bank and subsidiaries as of December 31, 1993, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1992, the Company changed its method of accounting for income taxes
to conform with Statement of Financial Accounting Standards No.109.
/s/DELOITTE & TOUCHE
Washington, D.C.
January 27, 1994
Item 9. Changes in and Disagreements with Accountants, on
Accounting and Financial Disclosure
The registrant has previously reported the information required by
Item 304 of Regulation S-K concerning a change of Accountants in a current
report on Form 8-K dated February 5, 1993 and Amendment No.1 thereto filed on
March 12, 1993.
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:
<TABLE>
Position Year First End of
Appointed Term Age
<S> <C> <C> <C> <C>
Jeremiah J. Foley Chairman of the Board of
Directors and Director 1988 1994 53
Charles E. Snyder President and Chief Executive
Officer 1983 - 40
Leo H. Barlow Director 1993 1996 41
Richard G. Biernacki Director 1988 1994 59
Harry J. Bowie Director 1991 1995 58
Jerry W. Davis Director 1990 1993 54
Edward J. Dirkswager,Jr. Director and
Vice Chairman of the Board 1990 1993 55
Thomas D. Henrion Director 1991 1994 50
Gordon E. Lindquist Director 1988 1994 64
Terry Lewis Director 1991 1994 46
Mary Ann Rothman Director 1993 1996 51
Wally Smith Director 1990 1994 46
Frank B. Sollars Director 1980 1993 72
John K. Stewart Director 1988 1993 59
Dr. Robert L.
Thompson Director 1989 1994 59
Margaret A. Cheap Corporate Vice President,
Executive Director, NCB
Development Corp. 1980 - 42
Charles H. Hackman Chief Financial Officer,
President, NCB Financial Corp.
President, NCB Savings Bank 1984 - 49
Grace A Huebscher Corporate Vice President,
Real Estate Division
President, NCB Mortgage Corp. 1984 - 34
Bradford T. Nordholm Corporate Vice President,
Corporate Banking Division
President, NCB Business
Credit Corporation
President, Cooperative
Funding Corporation
Marlon W. Pickles Corporate Vice President,
Special Assets 1985 - 62
Barry W. Silver Corporate Vice President,
Credit Policy 1992 - 47
Terry D. Simonette President, NCB Development Corp. 1991 - 44
</TABLE>
Nominees For Directorships
Richard C. Koven
Ralph Paige
Jeremiah J. Foley has been Vice President of Co-operative Central Bank and
Vice President of Co-operative Bank Investment Fund since 1984.
Charles E. Snyder was named President and Chief Executive Officer of NCB
in January 1992. He had been Corporate Vice President and Chief Financial
Officer of NCB since 1983, and President and Chief Executive Officer of NCB
Capital Corporation since 1987.
Leo H. Barlow has been President & Chief Executive Officer of Sealaska
Corporation since August 1, 1992. Previously, he served as President & Chief
Executive Officer of Sealaska Timber Corporation.
Richard G. Biernacki has served as President, Chief Executive Officer, and
Chairman of the Board of Fastener Industries, Inc. since 1980. Prior to 1980 he
was Treasurer of Fastener Industries, and has served on its Board of Directors
since 1972.
Harry J. Bowie is the President and Chief Executive Officer of Delta
Foundation, Inc. a community development corporation located in Greenville,
Mississippi. 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.
Jerry W. Davis has been President and Chief Operating Officer of Affiliated
Foods Stores, Inc., Little Rock and Van Buren, Arkansas, since 1986. In 1988,
he became Chairman of the Board of Shurfine-Central Corporation and President of
the Retailer Owned Food Distributors Assn.
Edward J. Dirkswager, Jr. is Chief Executive Officer of LAMAT, Inc.
Thomas D. Henrion has been President and Chief Operating Officer of KFC
National Purchasing Cooperative, Inc., Louisville, Kentucky since 1980. He also
serves as President and Chief Executive Officer of KFC Mutual Insurance Company,
Ltd., Hamilton, Bermuda.
Terry Lewis has been President and Chief Executive Officer of the National
Association of Housing Cooperatives since 1987.
Gordon Lindquist served as President and Chief Executive Officer of Mutual
Service Insurance Companies from 1983 to 1989.
Mary Ann Rothman is Executive Director of the Council of New York
Cooperatives and also serves on the executive committee of the National
Association of Housing Cooperatives.
Wally Smith is President and Chief Executive Officer and member of the
Board of Directors of Recreational Equipment, Inc., Seattle, Washington. He also
serves as Chairman of the Board of Independent Colleges of Washington.
Frank B. Sollars is an Ohio farmer. He is a retired director and former
chairman of the board of Nationwide Mutual Casualty Insurance Company and
affiliates, and a director of the Fifth Third Bank of Columbus.
John K. Stewart has been President of the John Stewart Company for the past
ten years. Previously, he was an officer in a TRW-owned subsidiary corporation
which developed public and HUD-assisted and insured housing.
Dr. Robert L. Thompson is President and Chief Executive Office of Winrock
International. Previously, he was Dean of Agriculture, Purdue University,
Assistant Secretary for Economics of the U. S. Department of Agriculture, a
senior staff economist at the President's Council of Economic Advisors, and a
professor of agricultural economics at Purdue University.
Margaret A. Cheap has been Executive Director of NCB Development Corporation
since 1991. From 1986 to 1991, she was President of NCB Development Corporation.
Previously, Ms. Cheap, who has been with NCB since 1980, was in charge of
regional operations and then in charge of business development for NCB.
Charles H. Hackman became Corporate Vice President and Chief Financial
Officer in 1992. He was Corporate Vice President, Credit Policy, of NCB since
1984, and President of NCB Financial Corporation since its inception in 1988.
Previously, he was Vice President, Credit Administration of Equitable Bank,
N.A., Baltimore.
Grace A. Huebscher became Corporate Vice President, Real Estate Division
in 1992. She had been Senior Vice President, Banking Division since 1989 and
President of NCB Mortgage Corporation since 1990. Ms. Huebscher previously was
Vice President in charge of NCB's Eastern Region Office in New York.
Bradford T. Nordholm has been Corporate Vice President, Corporate Banking
Division, since 1988 and President of NCB Business Credit Corporation since
1990. Prior to that he was Senior Vice President of NCB from 1985 to 1988 and
was a Vice President from 1984 to 1985. In addition, Mr. Nordholm was named
President of NCB Mortgage Corporation in 1987. Previously, he was Manager,
Corporate Finance, of Interregional Service Corporation.
Marlon W. Pickles has been Corporate Vice President, Special Assets, of NCB
since 1985. Previously, he was a self employed management consultant to
financial institutions, primarily in the area of loan workouts.
Barry W. Silver has been Corporate Vice President, Credit Policy, of NCB
since January, 1993 and Senior Vice President, Credit Policy of NCB since
January, 1992. Previously, he served as a senior lending officer for NCB since
1980.
Terry D. Simonette has been the President and Chief Operating Officer of
NCB Development Corporation since 1992. From 1984 to 1991, he served as Vice
President of NCB Development Corporation.
Ralph C. Koven is a Senior Vice President of Amalgamated Life Insurance
Company. He also serves on the Board of Directors of the National Cooperative
Business Association, Cooperative Development Fund, National Leadership
Coalition Hare Care Reform, and the National Coalition of Health Care
Cooperatives.
Ralph Paige has been Executive Director of the Federation of Southern
Cooperatives/Land Assistance Fund since 1985.
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. Frank B. Sollars 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. John K. Stewart 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.
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, and
Strategic Planning Committees.
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.
<TABLE>
Annual Compensation All Other
Compensation*
-------------------------------------------
(a) (b) (c) (d) (i)
Name and
Principal Position Year Salary Bonus
($) ($)
- ----------------------------- ----- ------- ------ -------
<S> <C> <C> <C> <C>
Charles E. Snyder, Pres & CEO 1993 212,500 64,530 25,557
1992 210,230 40,500 27,750
1991 168,431 38,000 29,593
Bradford T. Nordholm
CVP, Banking 1993 165,000 55,660 22,627
1992 164,328 31,300 24,784
1991 162,635 36,350 26,359
Charles H. Hackman,
Chief Financial Officer 1993 168,000 51,180 22,320
1992 158,010 36,750 24,379
1991 140,373 31,750 27,331
Grace, A. Huebscher,
CVP, Real Estate 1993 140,000 44,820 19,920
1992 138,807 27,500 22,722
1991 128,366 29,000 24,498
Margaret A. Cheap,
CVP/ Exec. Director,
NCBDC 1993 140,000 44,820 19,282
1992 130,609 29,500 18,970
1991 134,446 29,000 26,360
<FN>
* The " All Other Compensation" reported for 1993 consists of NCB's
contributions to the defined contribution retirement plan accounts of the name
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:
</TABLE>
<TABLE>
Retirement Plan Matching 401(k) Term Insurance
Contribution Contribution Premiums
--------------- ------------- ------------
<S> <C> <C> <C>
Mr. Snyder $12,750 $9,687 $3,120
Mr. Nordholm 9,900 9,607 3,120
Mr. Hackman 9,600 9,600 3,120
Ms. Huebscher 8,400 8,400 3,120
Ms. Cheap 8,400 7,762 3,120
</TABLE>
NCB has entered into a severance agreement with Charles E. Snyder, which
provides for certain payments to Mr. Snyder if his employment as NCB's President
and Chief Executive Officer terminates other than for cause or as a result of
his unilateral voluntary resignation. The agreement provides that, for 90 days
after NCB gives notice of Mr. Snyder's termination, he is to receive his full
salary as in effect at the time notice is given ( or his prior salary if it had
been reduced in the 30 days prior to such notice ) as well as continued accrual
of vacation and sick leave benefits; and continued medical, dental, life
insurance and pension benefits. Following such 90 day period, Mr. Snyder is
entitled to receive payments of $11,000 per month for an additional nine months.
If, prior to the conclusion of payments under the agreement, Mr. Snyder obtained
a new executive position with another firm, payments under the agreement would
be terminated or reduced.
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 which currently amounts to $387.36 a day, and (2) travel
expenses. Directors elected by shareholders are entitled to (1) annual
compensation of $7,000, (2) $1,000 for each board meeting attended and (3)travel
expenses. The Chairman of the Board is entitled to an additional $5,000 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.
Mr. Sollars is eligible for reimbursement of additional travel expenses up
to $7,000 incurred while attending functions or conducting business related to
cooperative business as an official representative of NCB.
NCB has entered into deferred compensation agreements with Mr. Lindquist
and Mr. Foley dated June 1, 1991 and April 20, 1992, respectively. Under the
terms of the agreement, fees payable to Messrs. Lindquist and Foley for their
services as Directors of NCB may be deferred at their option until retirement
from the Board. Interest will be credited, compounded quarterly, at an annual
rate equal to the yield on a 91 day US Treasury Bill plus 50 basis points
adjusted quarterly.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Stock Ownership of Certain Stockholders and Management
Several of NCB's stockholders owns 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, 1993.
Class B Stock Class C Stock
Name and Addresses of No. of Percent No. of Percent
Shareholders Shares of Class Shares of Class
- -------------------------- --------- -------- --------- -------
Co-operative Central Bank 30,500.00 5.11% 25,808.88 12.54%
265 Franklin Street
Boston, MA. 92110
Greenbelt Homes Inc 14,424.28 2.42% 28,843.47 14.02%
Hamilton Place
Greenbelt, MD. 20770
Group Health, Inc (1) 8,757.97 1.47% 11,108.24 5.40%
2829 Univ. Ave., S.E.
Minneapolis, MN 55414
Mutual Redevelopment 20,768.58 3.48% 10,697.36 5.20%
Houses, Inc.
321 Eighth Avenue
New York, NY 10001
(1) The holdings of Group Health, Inc. (GHI) include 2,769 shares of
Class C stock held of record by Central Minnesota Group Health Plan, which is
affiliated. GHI disclaims beneficial ownership of these shares.
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 affiliated 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 of 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
<TABLE>
largest Interest
Balance Balance as rate as
Related since of of
Party 1/1/93 12/31/93 12/31/93
------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Jeremiah J. Foley Co-operative
Central Bank 10,000,000 10,000,000 4.50
National Rural
Development 210,245 178,815 7.50
Leo H. Barlow Sealaska 9,900,000 5,300,000 5.75
Sealaska 3,297,806 2,890,217 6.65
Richard C. Biernacki Fastener
Industries, Inc. 185,147 115,321 various
Jerry W. Davis Affiliated Food and
Drug 652,649 637,394 7.25
Affiliated Food and
Drug 2,831,633 1,625,615 7.00
Thomas Henrion Kentucky Food Corp.
National
Purchansing
Cooperative 0 0 0.00
Mary Ann Rothman 110-118 Riverside
Tenants 1,600,000 2,215,000 7.00
Barry S. Silver International Town/
Country 867,425 787,911 7.00
Richard C. Koven Amalgamated Life
Insurance 537,591 386,025 9.25
NCB Savings Bank, FSB
Terry Simonette Personal 172,345 171,179 9.25
Charles H. Hackman Personal 155,000 154,005 7.00
</TABLE>
NCB has a loan outstanding to the Co-operative Central Bank of which Mr.
Jeremiah Foley is Vice President. This revolving line of credit was established
prior to Mr. Foley's election to the Board of Directors. The Co-operative
Central Bank has a $50MM line of credit of which NCB owns a 10% interest. Ms.
Cindy Copple,wife of Mr. Foley, is a director of National Rural Development (NRD
). NCB currently has a loan with NRD.
NCB has two loans outstanding with Sealaska Corporation of which Mr. Barlow
has been President and Chief Executive Officer. The first loan was used to
provide working capital financing and the second loan was used to refinance a
real estate term loan.
NCB has made a loan to Fastener Industries, Inc. of which Mr. Richard G.
Biernacki is President and Chief Executive Officer. The loan was made in 1987
to finance the purchase of equipment and inventory and was repaid in 1992.
NCB has one loan outstanding to Affiliated Food and Drug, a wholly-owned
subsidiary of Affiliated Food Stores, Inc. of which Mr. Jerry W. Davis is
President and Chief Operating Officer. The loan was made in 1990 for the purpose
of purchasing twelve existing retail drug stores and purchasing a computer
system.
NCB has a line of credit transaction with Kentucky Fried Chicken National
Purchasing Cooperative ( "KFCNPC" ). The purpose of this facility is to
guarantee loan commitments made by NCB to members of the KFCNPC.
NCB has one loan outstanding to 110-118 Riverside Tenants of which Ms.
Rothman is a member of the cooperative. The loan was made to fund capital
improvements for the housing cooperative.
Mr. Hackman, an officer of NCB, is a resident shareholder of the Watergate
South Cooperative. Mr. Hackman serves as an advisor to the Watergate South's
board of directors.
Mr. Silver, an officer of NCB, is a member of the Board of the
International Town and Country Club. This loan predates Mr. Silver's membership
in the club.
In its normal course of business, NCB Savings Bank makes loans to employees
at competitive market rates. NCB Savings Bank has issued home mortgage loans to
Terry Simonette and Charles Hackman.
NCB believes that the foregoing transactions contain terms comparable to
those obtainable in an arm's length transaction.
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, 1991, 1992, and 1993.
Page #
19 Consolidated Balance Sheets
20 Consolidated Statements of Income
21 Consolidated Statements of Changes in Members'
Equity
22-23 Consolidated Statements of Cash Flows
24-45 Notes to the Consolidated Financial Statements
46 Report of Independent Accountants
(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.
(e) 3.2 1989 Amendment to National Consumer Cooperative Bank
Act.
(i) 3.3 Bylaws of NCB
(j) 4.1 Election Rules of the NCB. For other instruments
defining the rights of security holders, see Exhibits
3.1 and 3.2.
(k) 4.2 Form of Assumption Agreements and Amended and
Restated Senior Note Agreements
(k) 4.3 Schedule Concerning Senior Note Agreements
(k) 10.1 Second Amended and Restated Loan Agreement with
National Westminster Bank USA et al.
(j) 10.2 Deferred Compensation Agreement with Jeremiah J. Foley
10.3 [ No exhibit ]
*(i) 10.4 Severance Agreement with Charles E. Snyder
*(k) 10.5 Incentive Plan for NCB Executive Officers
*(a) 10.6 Insurance Plan for NCB Executive Officers
(b) 10.7 Subordination Agreement with Consumer Cooperative
Development Corporation (now NCB Development
Corporation)
10.11 [ No exhibit ]
(g) 10.12 Lease on Headquarters of NCB
(e) 10.13 Issuing and Paying Agreement with Security Pacific
National Trust Co.
*(j) 10.14 Employment Agreement with Marlon W. Pickles
(e) 10.15 Commercial Paper Dealer Agreement with Merrill Lynch
Money Markets, Inc.
(e) 10.16 Financing Agreement with U.S. Treasury.
10.17-20 [ No Exhibit ]
*(g) 10.21 Deferred Compensation Agreement with Gordon E.
Lindquist
(k) 22.1 List of Subsidiaries and Affiliates of the NCB
(c) 25.1 Power of Attorney by Frank B. Sollars
(k) 25.2 Power of Attorney by Leo Barlow
(f) 25.3 Power of Attorney by Jerry W. Davis
(h) 25.4 Power of Attorney by Harry J. Bowie
(h) 25.5 Power of Attorney by Thomas D. Henrion
(d) 25.6 Power of Attorney by Richard G. Biernacki
(k) 25.7 Power of Attorney by Mary Ann Rothman
(f) 25.8 Power of Attorney by Edward J. Dirkswager, Jr.
(f) 25.9 Power of Attorney by Wally Smith
(h) 25.10 Power of Attorney by Terry Lewis
(d) 25.11 Power of Attorney by Jeremiah J. Foley
(d) 25.12 Power of Attorney by Gordon E. Lindquist
(d) 25.13 Power of Attorney by John K. Stewart
(f) 25.14 Power of Attorney by Robert L. Thompson
* Exhibits marked with an asterisk are management contracts or compensatory
plans.
(a) Incorporated by reference to the exhibit of the same number filed as part
of Registration Statement No. 2-99779 (Filed August 20, 1985).
(b) Incorporated by reference to the exhibit of the same number filed as part
of Amendment No. 1 to Registration Statement No. 2-99779 (Filed May 7, 1986).
(c) Incorporated by reference to the exhibit of the same number filed as part
of the registrant's annual report on Form 10-K for the year ended December 31,
1986 (File No. 2-99779).
(d) Incorporated by reference to the exhibit of the same number filed as part
of the registrant's annual report on Form 10-K for the year ended December 31,
1988 (File No. 2-99779).
(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,
1989 (File No. 2-99779).
(f) Incorporated by reference to the exhibit of the same number filed as part
of the registrant's annual report on Form 10-K for the year ended December 31,
1990 (File No. 2-99779).
(g) Incorporated by reference to the exhibit of the same number filed as part
of Registration Statement No. 33-42403 ( filed September 6, 1991 ).
(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,
1991 (File No. 2-99779).
(i) 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).
(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,
1992 (File No. 2-99779).
(k) Filed herewith.
(b) The Registrant filed a Current Report on Form 8-K, dated February 5, 1993,
Item 4: Changes in Registrant's Certifying Accountant. The Registrant
filed an Amendment to Application or Report on Form 8, dated March 12,
1993, Item 4: Changes in Registrant's Certifying Accountant.
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf of the undersigned, thereunto duly authorized.
NATIONAL CONSUMER COOPERATIVE BANK
DATE March 31, 1994 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
*/s/Jeremiah J. Foley Chairman of the Board and
Jeremiah J. Foley Director
/s/Richard L. Reed Vice President
Richard L. Reed (Principal Financial
Officer)
/s/Marietta J. Orcino Vice President (Principal
Marietta J. Orcino Accounting Officer)
*/s/Leo H. Barlow Director
Leo H. Barlow
*/s/Richard G. Biernacki Director
Richard G. Biernacki
*/s/Harry J. Bowie Director
Harry J. Bowie
*/s/Jerry W. Davis Director
Jerry W. Davis
*/s/Edward J. Dirkswager, Jr. Director
Edward J. Dirkswager, Jr.
Signature Title
*/s/Thomas D. Henrion Director
Thomas D. Henrion
*/s/Terry Lewis Director
Terry Lewis
*/s/Gordon E. Lindquist Director
Gordon E. Lindquist
*/s/Mary Ann Rothman Director
Mary Ann Rothman
*/s/Wally Smith Director
Wally Smith
*/s/Frank B. Sollars Director
Frank B. Sollars
*/s/John K. Stewart Director
John K. Stewart
*/s/Dr. Robert L. Thompson Director
Robert L. Thompson
* By /s/Richard L.Reed
Richard L. Reed
(Attorney-in-Fact)
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
With this report, the registrant is furnishing to the Commission for its
information four copies of the registrant's proxy materials for its 1993 annual
meeting. The registrant's annual report to securityholders is filed as Exhibit
13 to this report.
INDEX TO EXHIBITS
Exhibit No. Description
4.2 Form of Assumption Agreements and
Amended and Restated Senior Note
Agreements 68
4.3 Schedule Concerning Senior Note
Agreements 168
10.1 Second Amended and Restated Loan
Agreement with National Westminster
Bank USA et 170
10.5 Incentive Plan for NCB Executive
Officers 275
22.1 List of Subsidiaries of NCB 277
25.2 Power of Attorney by Leo Barlow 278
25.7 Power of Attorney by Mary Ann
Rothman 278
27 Financial Data Schedule 280
Supplemental Information
Registrant's 1994 Proxy Materials
Exhibit 4.2
