FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998 Commission file number
2-99779
National Consumer Cooperative Bank
(Exact name of registrant as specified in its charter)
United States of America 52-1157795
(12 U.S.C. Section 3001 et seq.) (I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
1401 Eye Street, NW, Suite 700, Washington, D.C. 20005
(Address of principal executive offices)
Registrant's telephone number, including area code (202)336-7700
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No________.
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Outstanding at September 30, 1998
Class C 221,994
(Common stock, $100.00 par value)
Class B 922,096
(Common stock, $100.00 par value)
Class D 3
(Common stock, $100.00 par value)
<PAGE>
National Consumer Cooperative Bank
(doing business as National Cooperative Bank)
and Subsidiaries
INDEX
PART I FINANCIAL INFORMATION Page No.
Item 1 Consolidated balance sheets - September 30,
1998 and December 31, 1997................. 3
Consolidated statements of income - for the
three and nine months ended September 30,
1998 and 1997.............................. 4
Consolidated statements of cash flows - for
the nine months ended September 30, 1998
and 1997................................... 5-6
Condensed notes to the consolidated
financial statements - September 30, 1998.. 7-11
Item 2 Management's discussion and analysis of
financial condition and results of
operations - for the three and nine months
ended September 30, 1998 and 1997.......... 11-22
Item 3 Quantitative and qualitative disclosures
about market risk ......................... 22
PART II OTHER INFORMATION
Item 6 Exhibits
Exhibit 10.16 - Amendment to Fleet Loan
Agreement
Exhibit 27 - Financial Data Schedule
<PAGE>
NATIONAL COOPERATIVE BANK
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1998 1997
Assets
Cash and cash equivalents $ 75,242,169 $ 21,689,245
Restricted cash 5,690,096 6,884,572
Investment securities
Available-for-sale 41,976,008 61,268,440
Held-to-maturity 1,942,312 1,942,312
Loans and lease financing 588,027,947 584,635,993
Loans held for sale 170,144,145 189,132,330
Less: Allowace for loan losses (17,496,730) (17,638,136)
740,675,362 756,130,187
Other assets 32,909,605 21,389,059
Total assets $898,435,552 $869,303,815
Liabilities and Members' Equity
Liabilities
Deposits $113,963,720 $ 83,825,979
Patronage dividends payable
in cash 3,070,189 5,872,708
Other liabilities 31,296,157 17,072,271
Borrowings
Short-term 239,022,469 243,120,607
Long-term 191,634,856 204,793,392
430,657,325 447,913,999
Subordinated debt 182,725,381 182,785,385
Total borrowings 613,382,706 630,699,384
Total liabilities 761,712,772 737,470,342
Members' equity
Common stock
Class B 92,209,648 84,004,502
Class C 22,199,404 21,904,447
Class D 300 300
Retained earnings
Allocated 3,922,719 8,109,931
Unallocated 17,739,728 17,474,132
Unrealized gain on investment
securities available-for-sale 650,981 340,161
Total members' equity 136,722,780 131,833,473
Total liabilities and members'
equity $898,435,552 $869,303,815
<PAGE>
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
Interest income
Loans and lease
financing $49,219,198 $47,961,897 $16,961,818 $17,073,791
Investment securities 4,407,079 4,577,103 1,392,289 1,471,209
Total interest income 53,626,277 52,539,000 18,354,107 18,545,000
Interest expense
Deposits 3,465,479 2,971,432 1,343,115 954,298
Short-term borrowings 11,014,736 9,154,820 4,325,657 3,529,479
Long-term debt,other
borrowings and
subordinated debt 19,623,263 19,986,984 6,452,345 6,944,315
Total interest expense 34,103,478 32,113,236 12,121,117 11,428,092
Net interest income 19,522,799 20,425,764 6,232,990 7,116,908
Provision for loan losses 812,881 2,044,000 30,000 655,000
Net interest income
after provision for
loan losses 18,709,918 18,381,764 6,202,990 6,461,908
Non-interest income
Gain on sale of loans 4,017,035 1,801,975 95,680 60,666
Loan and deposit
servicing fees 1,891,524 1,664,558 639,341 552,615
Other 3,571,969 3,245,467 1,168,414 1,246,719
Total non-interest
income 9,480,528 6,712,000 1,903,435 1,860,000
Non-interest expenses
Compensation and employee
benefits 11,218,378 9,068,209 3,378,087 3,360,102
Contractual services 3,085,029 2,604,307 1,146,493 878,021
Occupancy and equipment 3,157,296 2,902,869 1,023,399 1,015,493
Contribution to NCB
Development Corporation 375,000 125,000
Other 2,011,133 1,805,931 697,510 697,761
Total non-interest
expenses 19,471,836 16,756,316 6,245,489 6,076,377
Income before income
taxes 8,718,610 8,337,448 1,860,936 2,245,531
Provision for income
taxes 1,074,328 1,022,276 404,454 282,744
Net income $ 7,644,282 $ 7,315,172 $ 1,456,482 $ 1,962,787
Distribution of net income
Patronage dividends $ 7,644,282 $ 7,315,172 $ 1,456,482 $ 1,962,787
Retained earnings
$ 7,644,282 $ 7,315,172 $ 1,456,482 $ 1,962,787
<PAGE>
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended September 30, 1998 1997
Cash flows from operating activities
Net income $ 7,644,282 $ 7,315,172
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Provision for loan losses 812,881 2,044,000
Depreciation and amortization 4,161,146 4,014,516
Gain on sale of assets (4,017,035) (1,801,975)
Loans originated for sale (496,969,928) (170,827,847)
Proceeds from sale of loans held for sale 510,044,276 146,619,898
Increase in other assets (3,271,561) (2,459,911)
Increase in other liabilities 14,223,887 10,345,915
Net cash provided by (used in) operating
activities 32,627,948 (4,750,232)
Cash flows from investing activities
Redemption of restricted cash 1,220,192 1,464,131
Purchases of investment securities
Available-for-sale - (5,516,353)
Proceeds from maturities and sales of
investment securities
Available-for-sale 16,586,761 3,522,809
Held-to-maturity - 150,624
Net increase in loans and lease financing (12,000,764) (42,641,746)
Proceeds from sale of portfolio loans 8,156,399 -
Net cash provided by (used in) investing
activities 13,962,588 (43,020,535)
Cash flows from financing activities
Net increase (decrease) in deposits 30,137,741 (6,577,401)
Net (decrease)increase in short-term
borrowings (4,098,138) 36,862,804
Proceeds from issuance of
long-term debt 34,800,078 31,000,000
Repayment on long-term debt (48,000,000) -
Sale of common stock - 400
Dividends paid (256,961) (210,173)
Patronage dividends paid (5,620,332) (4,070,946)
Net cash provided by financing activities 6,962,388 57,004,684
Increase in cash and cash equivalents 53,552,924 9,233,917
Cash and cash equivalents, beginning of year 21,689,245 17,150,534
Cash and cash equivalents, end of period $ 75,242,169 $ 26,384,451
<PAGE>
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Supplemental shedule of noncash investing and financing activities:
For the nine months ended September 30, 1998 1997
Unrealized gain(loss)on investment securities
available-for-sale $ 310,820 $ (29,241)
Interest paid 32,201,761 33,992,130
Income taxes paid 890,000 1,078,752
Loans charged off 1,111,172 677,168
Transfer of real estate owned from
loans receivable to other assets - 5,168,018
<PAGE>
NATIONAL COOPERATIVE BANK
CONDENSED NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
The accompanying financial statements have been prepared without
audit and reflect all adjustments (consisting only of normal
recurring adjustments) which were, in the opinion of management,
necessary to a fair statement of the results of the interim period
presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. Accordingly, these condensed financial statements should
be read in conjunction with the financial statements and the notes
thereto included in NCB's most current annual report. The results
of operations for the interim periods are not necessarily indicative
of the results of the entire year.
Certain reclassifications have been made to the prior-period
amounts to conform with the current year's presentation.
1. Cash, Cash Equivalents and Investment Securities
As of September 30, 1998, NCB's portfolio of investment
securities, cash and cash equivalents had an average adjusted
maturity of 1,420 days with interest rates in those portfolios
varying from 5.25% to 8.38%.
Cash and Investment Investment
Cash Available- Held-to
Equivalents for-Sale Maturity
Cash $ 4,676,592 $ - $ -
Federal funds 33,623,334 - -
Money market securities 36,942,243 686,174 -
Mutual funds - 1,481,282 -
Mortgage-backed securities - 4,937 1,942,312
Corporate bonds - 7,678,122 -
U.S. Treasury and
Agency obligations - 6,227,292 -
Interest-only receivables - 25,898,201 -
$75,242,169 $41,976,008 $1,942,312
At September 30, 1998, the investments in the available-for-sale
portfolio were recorded at aggregate fair value. Restricted cash of
$5,690,096 is held by a trustee for the benefit of certificate
holders in the event of loss on certain loans sold in 1993 and 1992,
the remaining balance of which totalled $49,543,403 and $57,800,721
respectively, at September 30, 1998. The restricted cash will become
available to NCB I, Inc., as the principal balance of the respective
loans decreases. On March 25, 1998 and July 27, 1998, $1,003,495 and
$216,697, respectively, were received as a reduction of the
restricted cash account due to loan repayments.
2. Loans and Lease Financing
Loans and leases outstanding by category at September 30, 1998
were:
Commercial loans $ 349,935,137
Lease financing 37,616,225
Real estate loans
Residential 364,231,339
Commercial 6,389,391
$758,172,092
At September 30, 1998 and December 31, 1997 real estate loans held
for sale were $170.1 million and $189.1 million, respectively.
3. Impaired Assets
Impaired loans at September 30, 1998 and 1997 totalled $1,831,090
and $4,833,838, respectively. The 1998 impaired loans were comprised
of nonaccrual loans and a restructured loan totalling $818,701 and
$1,012,389, respectively. The 1997 impaired loans were comprised of
nonaccrual loans and a restructured loan totalling $3,801,463 and
$1,032,375, respectively. A specific allowance of $341,377 and
$1,428,349 was set aside for these loans at September 30, 1998 and
1997, respectively, as management's best estimate of their fair
value is less than the recorded investment in the loans. During
1998 and 1997, the interest collected on the nonaccrual loans was
applied to reduce the outstanding principal. Interest earned on the
restructured loans totalled $70,749 and $72,211 during the nine
months ended September 30, 1998 and 1997, respectively.
At September 30, 1998 there were no commitments to lend
additional funds to borrowers whose loans are non-performing.
At September 30, 1998 and 1997, NCB had real estate acquired
through foreclosure of $4,154,697 and $5,544,726, respectively,
which were classified as other assets.
4. Allowance for Loan Losses
The following is a summary of the activity in the allowance for
loan losses during the nine months ended September 30, 1998:
Balance at January 1, 1998 $17,638,136
Provision for loan losses 812,881
Charge-offs (1,111,172)
Recoveries of loans previously charged off 156,885
Balance at September 30, 1998 $17,496,730
The allowance for loan losses as a percentage of average loans and
lease financing outstanding as of the nine months ended September
30, 1998 was 2.3%.
5. Statement of Comprehensive Income
The following is a statement of comprehensive income for the nine
months ended September 30, 1998:
Net income $7,644,282
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising
during period 310,820
Comprehensive income $7,955,102
5. Statement of Changes in Members' Equity
The following is a summary of the activity in members' equity for the
nine months ended September 30, 1998:
<TABLE>
Retained Retained Total
Common Earnings Earnings Unrealized Members'
Stock Allocated Unallocated Gain Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $105,909,249 $ 8,109,931 $17,474,132 $ 340,161 $131,833,473
Net income - - 7,644,282 - 7,644,282
Adjustment to 1996 patronage
dividends paid in 1997 (40,338) - - - (40,338)
Cancellation and redemption
of stock (403,194) - - - (403,194)
1997 patronage dividends
distributed in common
stock 8,943,635 (8,109,931) (833,704) - 0
Other dividends paid - - (256,961) - (256,961)
1998 patronage dividends
To be distributed in cash - - (2,365,302) - (2,365,302)
Retained in form of equity - 3,922,719 (3,922,719) - 0
Unrealized gain on investment
securities available-for-
sale - - - 310,820 310,820
Balance, September 30, 1998 $114,409,352 $ 3,922,719 $17,739,728 $ 650,981 $136,722,780
</TABLE>
<PAGE>
NATIONAL COOPERATIVE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
SUMMARY
NCB's net income for the nine months ended September 30, 1998 was
$7.6 million. This was a 4.5% or $329 thousand increase compared with $7.3
million for the nine months ended September 30, 1997. The variance
resulted primarily from a 41.2% increase in non-interest income and a
decrease of 60.2% in the provision for loan losses which were partially
offset by a 16.2% increase in non-interest expenses. For the three month
period ended September 30, 1998, net income decreased to $1.5 million from
$2.0 million due to a decrease in net interest income and an increase in
non-interest expenses of 12.4% and 2.8%, respectively.
Total assets were $898.4 million at September 30, 1998, representing
growth of $29.1 million or 3.4% from $869.3 million at December 31, 1997.
This growth resulted from increases in cash, cash equivalents, restricted
cash and investments of $33.1 million and other assets of $11.5 million
which were offset in part by a decrease of $15.6 million in outstanding
loans.
The annualized return on average total assets was 1.12% for the nine
months of 1998 compared with 1.15% for the same period in 1997. The
annualized return on average equity for the periods ended September 30,
1998 and 1997 was 7.50% and 7.63%, respectively.
NET INTEREST INCOME
Net interest income for the nine months ended September 30, 1998
decreased 4.4% or $902.9 thousand from the same period in the prior year.
As shown on Table 1, net interest spread decreased 23 basis points to 2.06%
from 2.29% while net interest yield on earning assets was 2.96% and 3.29%
for the nine months ended September 30,1998 and 1997, respectively.
In comparison to the year earlier quarter, net interest income
decreased 12.4% or $883.9 thousand. As shown on Table 1A, net interest
spread and net yield on interest earning assets decreased by 50 basis
points and 78 basis points, respectively.
As shown on Table 2 and Table 2A, for the nine months and three
months ended September 30, 1998, the decrease in net interest income was
largely due to lower yields on investments and real estate loans held for
sale.
For the nine months ended September 30, 1998, interest income went
up 2.1% or $1.1 million to $53.6 million compared with $52.5 million from
the prior year. The increase in interest income was mostly due to a higher
average balance of the real estate loans (most of which are held for sale).
Interest income was down 1.0% or $191 thousand to $18.4 milion from
the three months ended September 30, 1998 compared with $18.5 million of
the prior year's quarter. As shown on Table 1A, interest income decreased
primarily due to lower interest rates on real estate loans.
Interest expense increased 6.2% or $2.0 million to $34.1 million for
the nine months ended September 30, 1998 compared with $32.1 million for
the same period in 1997. Interest expense went up due to a higher volume
of notes payable required to fund growth of the loans held for sale and
increased volume of deposits. The average rate on interest bearing
liabilities decreased 11 basis points to 6.07% from 6.18%.
For the three month period ended September 30, 1998, interest expense
increased 6.1% or $693 thousand to $12.1 million from $11.4 million for the
three months ended September 30, 1997 due to increased expenses to
"warehouse" loans for future sale. The average rate on interest bearing
liabilities decreased 59 basis points to 6.11% compared with 6.70% in the
same period in 1997.
NON-INTEREST INCOME
Non-interest income for the nine months ended September 30, 1998 of
$9.5 million increased 41.2% or $2.8 million from $6.7 million for the same
period last year. Non-interest income is composed of gains from sale of
loans, servicing fees, origination fees, management fees and financial
advisory and debt placement fees. The majority of the increase was caused
by increased gains due to a higher volume of assets sold to the secondary
market. Assets sold were $493.8 million and $154.5 milion for the first
nine months of 1998 and 1997, respectively.
For the nine months ended September 30, 1998, gain on sale of blanket
mortgages and share loans was $4.0 million compared with $1.8 million in
the same period last year. The gain on sale was net of a $3.3 million mark
to market adjustment on the loans held for sale at September 30, 1998. For
the nine months ended September 30,1998 and 1997, NCB earned servicing
income of $1.9 million and $1.7 million, respectively, based on loans
serviced for others of $1.7 billion and $1.2 billion at September 30, 1998
and 1997, respectively. Other income increased 10.0% to $3.6 million for
the nine month period ended September 30, 1998 compared with $3.2 million
for the same period in 1997. The majority of other income is related to
commercial line of business activities.
For the three month period ended September 30, 1998, non-interest
income went up 2.3% or $43 thousand to $1.9 million from the same period
in the prior year. The majority of the increase was related to servicing
fees received during the third quarter of 1998.
NON-INTEREST EXPENSES
Non-interest expenses for the nine months ended September 30, 1998
increased 16.2% to $19.5 million compared with $16.8 million for the nine
months ended September 30, 1997. Compensation and benefits, representing
57.6% and the largest component of non-interest expenses, increased 23.7%
or $2.2 million. The increase was due to a higher employee base at the
start of 1998 and to higher bonus accruals related to higher origination
volume for the current period compared with 1997. Contractual services,
occupancy and equipment and other expenses had a total increase of $940.4
thousand or 12.9% from $7.3 million for the nine months ended September 30,
1997 to $8.3 million for the same period this year. The majority of the
variance was caused by increases in corporate marketing and development,
office space rent and equipment and technology costs. Non-interest
expenses, excluding the voluntary contribution to NCB Development
Corporation, increased slightly as a percentage of average assets to 2.1%
for the nine months ended September 30, 1998 from 1.9% for the nine months
ended September 30, 1997.
For the three months ended September 30, 1998, non-interest expenses
increased $169 thousand or 2.8% to $6.2 million from $6.1 million for the
same period in 1997. The increase was primarily due to expenses related
to corporate business development.<PAGE>
Table 1
Rate Related Assets and Liabilities
(dollars in thousands)
Nine Months Ended September 30,
ASSETS 1998 1997
Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates
Interest earning assets
Real estate loans $417,481 $25,497 8.14% $369,237 $24,198 8.74%
Commercial loans
and leases 358,380 23,722 8.83% 368,887 23,764 8.59%
Total loans and
leases 775,861 49,219 8.46% 738,124 47,962 8.66%
Investment securities
and cash equivalents 103,231 4,407 5.69% 89,257 4,577 6.84%
Total interest earning
assets 879,092 53,626 8.13% 827,381 52,539 8.47%
Allowance for loan
losses (17,799) (16,492)
Non-interest earning assets
Cash 2,026 5,089
Other assets 46,326 33,167
Total non-interest
earning assets 48,352 38,256
Total assets $909,645 $849,145
LIABILITIES AND MEMBERS' EQUITY
Interest bearing liabilities
Subordinated debt $182,542 8,207 5.99% $182,542 7,797 5.70%
Notes payable 465,814 22,431 6.42% 426,120 21,345 6.68%
Deposits 101,368 3,465 4.56% 83,892 2,971 4.72%
Total interest bearing
liabilities 749,724 34,103 6.07% 692,554 32,113 6.18%
Other liabilities 23,948 35,556
Members' equity 135,973 121,035
Total liabilities and
members' equity $909,645 $849,145
Net interest earning
assets $129,368 $134,827
Net interest revenues
and spread $19,523 2.06% $20,426 2.29%
Net yield on
interest earning assets 2.96% 3.29%
Table 1A
Rate Related Assets and Liabilities
(dollars in thousands)
Three Months Ended September 30,
ASSETS 1998 1997
Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates
Interest earning assets
Real estate loans $442,468 $ 8,851 8.00% $357,963 $ 9,043 10.11%
Commercial loans
and leases 367,968 8,111 8.82% 369,832 8,030 8.69%
Total loans and
leases 810,436 16,962 8.37% 727,795 17,073 9.38%
Investment securities
and cash equivalents 108,549 1,392 5.13% 89,014 1,471 6.61%
Total interest earning
assets 918,985 18,354 7.99% 816,809 18,544 9.08%
Allowance for loan
losses (17,667) (17,107)
Non-interest earning assets
Cash 804 6,585
Other assets 41,401 37,349
Total non-interest
earning assets 42,205 43,934
Total assets $943,523 $843,636
LIABILITIES AND MEMBERS' EQUITY
Interest bearing liabilities
Subordinated debt $182,542 2,922 6.40% $182,542 2,630 5.76%
Notes payable 497,786 7,856 6.31% 415,187 7,843 7.56%
Deposits 113,176 1,343 4.75% 84,501 954 4.52%
Total interest bearing
liabilities 793,504 12,121 6.11% 682,230 11,427 6.70%
Other liabilities 13,547 33,787
Members' equity 136,472 127,619
Total liabilities and
members' equity $943,523 $843,636
Net interest earning
assets $125,481 $134,579
Net interest revenues
and spread $ 6,233 1.88% $ 7,117 2.38%
Net yield on
interest earning assets 2.71% 3.49%
Table 2
Change in Net Interest Income
(dollars in thousands)
For the nine months ended September 30, 1998 compared to 1997
Increase (decrease) due to changes in:
Average Average
Volume* Yield Net**
Interest Income
Cash equivalents and
investment securities $ 659 $ (829) $ (170)
Commercial loans and leases (686) 644 (42)
Real estate loans 3,020 (1,721) 1,299
Total interest income 2,993 (1,906) 1,087
Interest Expense
Deposits 601 (107) 494
Notes payable 1,934 (848) 1,086
Subordinated debt 0 410 410
Total interest expense 2,535 (545) 1,990
Net interest income $ 458 $(1,361) $ (903)
* 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.
<PAGE>
Table 2A
Change in Net Interest Income
(dollars in thousands)
For the three months ended September 30, 1998 compared to 1997
Increase (decrease) due to changes
in:
Average Average
Volume* Yield Net**
Interest Income
Cash equivalents and
investment securities $ 287 $ (366) $ (79)
Commercial loans and leases (41) 122 81
Real estate loans 1,899 (2,092) (193)
Total interest income 2,145 (2,336) (191)
Interest Expense
Deposits 338 51 389
Notes payable 1,420 (1,408) 12
Subordinated debt 0 292 292
Total interest expense 1,758 (1,065) 693
Net interest income $ 387 $(1,271) $ (884)
* 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.
<PAGE>
PROVISION FOR INCOME TAXES
The federal income tax provision is determined on the basis of
non-member income generated by NCB Savings Bank, FSB and reserves
set aside for the retirement of Class A notes and dividends on Class
C stock. NCB's subsidiaries are also subject to varying levels of
state taxation. The income tax provision for the nine months ended
September 30, 1998 was $1.07 million compared with the prior year's
provision of $1.02 million.
CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES
Cash, cash equivalents and investment securities at September 30,
1998 increased $33.1 million or 36.0% from $91.8 million at year-
end 1997. As a percentage of interest earning assets, cash, cash
equivalents and investment securities increased to 14.1% from 10.6%
at December 31, 1997.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at September 30, 1998 decreased .8%
to $17.5 million from $17.6 million at December 31, 1997. The
allowance during the period was impacted by loans charged off of
$1.1 million, recoveries of loans previously charged-off amounting
to $157 thousand, and the provision of $813 thousand. Net charge-
offs as a percentage of average loans and leases outstanding were
.1% for the nine months ended September 30, 1998 compared with .2%
for the year ended December 31, 1997. Overall, credit quality
remained strong. NCB's provision for loan losses as a percentage of
average loans and leases outstanding decreased to .1% at September
30, 1998 compared with .4% for the same period in 1997.
The loan loss allowance as a percentage of average loans and
leases remained flat at 2.3% on September 30, 1998 and December 31,
1997. Management considers the current allowance to be adequate to
absorb known and inherent risks in the loan portfolio.
As shown in Table 3, total impaired assets (restructured, non-
accruing loans and real estate owned) decreased from $9.2 million at
December 31, 1997 to $6.0 million at September 30, 1998. The
decrease was caused by the sale of various parcels of foreclosed
real estate and a decline in non-accruing loans. Impaired assets as
a percentage of loans and leases outstanding plus real estate owned
were .8% at September 30, 1998 compared with 1.2% at year-end 1997.
The allowance for loan losses as a percentage of impaired assets
increased to 292.3% at September 30, 1998 from 192.2% at December
31, 1997.
INTEREST BEARING LIABILITIES
Interest bearing liabilities
(dollars in thousands)
9/30/98 12/31/97 % Change
Deposits $113,964 $ 83,826 36.0%
Short-term debt 239,022 243,121 -1.7%
Long-term debt 191,635 204,793 -6.4%
Subordinated debt 182,725 182,785 0.0%
Total $727,346 $714,525 1.8%
Interest bearing liabilities increased 1.8% to $727.3 million at
September 30, 1998 from $714.5 million at December 31, 1997.
For the first nine months of 1998, deposits at NCB Savings Bank,
FSB increased 36.0% to $114.0 million from $83.8 million at year-end
1997. The growth was attributable to an aggressive campaign to
attract local and national deposit accounts and cooperative
customers. The average maturity of the certificates of deposits is
15.9 months as of September 30, 1998. Funds generated by the
increased deposit activity were used to originate single-family
loans and increase liquidity.
At September 30, 1998, total short-term and long-term borrowings
(including the subordinated debt) decreased 2.7% from year-end 1997.
Proceeds from the sale of loans were used to pay down the debt. NCB
had approximately $239.0 million, net of discount, outstanding on
its short-term facilities at September 30, 1998. Included in the
short-term borrowings were revolving lines of credit of $145.0
million; commercial paper program with a face value of $75.0 million
and $19.3 million in borrowings from an affiliate and cooperative
customers. Long-term debt decreased 6.4% from year-end 1997 due to
payments of $28.0 million under the long term facilities which were
partially offset by an additional issuance of $15.0 million of
medium-term notes. Unused capacity under the short-term and long-
term facilities of approximately $183.2 million and $85.0 million,
respectively, are sufficient to meet anticipated disbursements
during 1998.
<PAGE>
TABLE 3
Impaired assets
(dollars in thousands)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
1998 1998 1998 1997 1997
Real estate owned $4,155 $4,272 $ 5,068 $5,114 $ 5,545
Non-accruing 819 3,445 5,738 3,030 3,801
Restructured 1,012 1,016 1,022 1,027 1,032
Total $5,986 $8,733 $11,828 $9,171 $10,378
Year 2000
A significant challenge facing NCB, its subsidiaries and affiliate
as well as all companies, is the readiness of its computer systems
for the next millennium. NCB is dependent upon its internal computer
systems and has external interdependencies with other financial
institutions and customers.
NCB has surveyed all mission critical internal software and systems
(See Table (1)) and has determined a remediation strategy. Table (2)
reflects the phase completion with respect to all mission critical
systems. NCB fully expects all testing to be completed by April 1, 1999.
With respect to "non-information technology items", NCB has surveyed
the vendors/providers with the results shown in Table (3).
NCB is in the process of surveying all associated banks and financial
institutions with which a mission critical interdependence exists. Based
upon the results of this survey, NCB will take actions which will involve
testing of key systems or transitioning to alternative institutional systems.
To date, all associated respondents have indicated that they are already or
will be Year 2000 compliant by December 31, 1998.
To date, direct costs relative to the Year 2000 efforts have totalled less
than $100,000. NCB does not anticipate exceeding this amount in addressing
all associated Year 2000 issues. All costs to date are and in the future
will be funded through operating income and are not considered material.
NCB is converting to a new loan accounting system in November 1998 which
will replace its existing systems which are not Year 2000 compliant. The
cost of this replacement is expected to be less than $500,000. While this
system will resolve a Year 2000 issue, it has not been accelerated due to
those issues and is proceeding as a phase progress.
NCB has surveyed the major portion of its customer base to determine the
ability of its customers to continue debt service coverage and will follow
with a specific review of annual financial statements for Year 2000
disclosure. A primary risk for NCB lies in the ability of its customers to
continue debt service payment on schedule in the Year 2000. To date,
survey results indicated that the issue is being addressed.
While NCB is confident that all core systems will be tested and
found to be compliant by April 1999, efforts are underway to develop
contingency plans at the business unit level as an added precaution.
The contingency plans will be completed by April 1999.
Table (1)
Total Mission Critical Systems (MCS) 88
Number of MCS to be:
Repaired 0
Replaced 7
Retired 15
Vendor Upgraded 62
Tested Only 4
Outscored 0
Table (2)
Phase Completion Status
Phase Percent Complete Estimate or Actual # of MCS in Phase
Awareness 100% A 67
Assessment 100% A 67
Renovation 87% A 58
Validation 76% E 51
Implementation 76% E 51
Table (3)
Non-Information Technology Items (Infrastructure Items)
Compliant (Y=Yes)
Kastle System Y
Montgomery Kone (HVAC) Y
TRANE (Elevators) Y
Willtel (Phone) Y
PEPCO Y
Sungard Business Recovery Y
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOUSRES ABOUT MARKET RISK
No material changes in NCB's market risk profile occured from December 31,
1997 to September 30, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NATIONAL CONSUMER COOPERATIVE BANK
Date:
By:/s/ Richard L. Reed
Richard L. Reed
Managing Director,
Chief Financial Officer
By:/s/Marietta J. Orcino
Marietta J. Orcino
Vice President
Tax & Regulatory Compliance
