Annual Report (Form 10-K), fiscal year 1993

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:
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.



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:
Item 3.

Item 3. Legal Proceedings
NCB is not involved in any pending legal proceeding, other than ordinary routine litigation incidental to its business.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
NCB did not submit any matters to a vote of its security holders during the fourth quarter of 1993.
PART II
Item 5.

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.

Item 6. Selected Financial Data
Item 7.

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.
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.
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.
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.
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.
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").
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.


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.
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):
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:
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:
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):
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:
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.

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.



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:
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.

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.
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.

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.

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
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.

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