<Page>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2001 Commission file number 2-99779
------------------- -------
NATIONAL CONSUMER COOPERATIVE BANK
(Exact name of registrant as specified in its charter)
<Table>
United States of America 52-1157795
(12 U.S.C. Section 3001 et seq.) ----------
- -------------------------------- (I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
</Table>
1725 EYE STREET, NW, SUITE 600, WASHINGTON, D.C. 20006
(Address of principal executive offices)
Registrant's telephone number, including area code (202) 336-7700
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<Table>
<Caption>
OUTSTANDING AT SEPTEMBER 30, 2001
---------------------------------
CLASS C 221,416
- ------------------
(Common stock, $100.00 par value)
CLASS B 1,117,157
- ------------------
(Common stock, $100.00 par value)
CLASS D 3
- ------------------
(Common stock, $100.00 par value)
</Table>
1
<Page>
National Consumer Cooperative Bank
(doing business as National Cooperative Bank)
and Subsidiaries
INDEX
<Table>
<Caption>
PART I FINANCIAL INFORMATION
PAGE NO.
--------
Item 1 Consolidated balance sheets - September 30,
2001 and December 31, 2000 ............ ......................................................3
Consolidated statements of income - for
the three and nine months ended
September 30, 2001 and 2000 ..................................................................4
Consolidated statements of comprehensive income -
for the nine months ended September 30, 2001 and 2000.........................................5
Consolidated statements of cash flows - for
the nine months ended September 30, 2001 and 2000...........................................6-7
Condensed notes to the consolidated financial
statements - September 30, 2001............................................................8-16
Item 2 Management's discussion and analysis of financial
condition and results of operations - for the
three and nine months ended September 30, 2001 and 2000...................................17-26
Item 3 Quantitative and qualitative disclosures
about market risk............................................................................26
</Table>
2
<Page>
NATIONAL COOPERATIVE BANK
CONSOLIDATED BALANCE SHEETS
September 30, 2001 and December 31, 2000
(Unaudited)
<Table>
<Caption>
September 30, December 31,
ASSETS 2001 2000
--------------- --------------
Cash and cash equivalents $ 66,863,242 $ 36,494,978
Restricted cash 17,873,449 3,875,549
Investment securities
Available-for-sale 44,609,350 44,505,034
Held-to-maturity 2,973,031 2,923,694
Loans held for sale 97,010,533 99,077,161
Loans and lease financing 880,302,618 879,459,566
Less: Allowance for loan losses (22,977,614) (21,260,284)
-------------- --------------
Net loans held for sale and
loans and lease financing 954,335,537 957,276,443
Other assets 50,556,890 41,410,785
-------------- --------------
Total assets $1,137,211,499 $1,086,486,483
============== ==============
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES
Deposits $ 193,650,639 $ 148,960,621
Patronage dividends payable in cash 3,854,305 3,330,296
Other liabilities 17,131,122 37,313,873
Borrowings
Short-term 293,213,830 269,579,985
Long-term
Current 158,333,333 147,991,796
Non-current 128,786,842 143,834,724
Subordinated debt 182,052,878 182,022,471
-------------- --------------
Total borrowings 762,386,883 743,428,976
-------------- --------------
Total liabilities 977,022,949 933,033,766
-------------- --------------
MEMBERS' EQUITY
Common stock
Class B 111,715,755 107,440,170
Class C 22,141,668 22,017,993
Class D 300 300
Retained earnings
Allocated 4,710,818 5,433,641
Unallocated 18,511,523 16,804,590
Accumulated other comprehensive income 3,108,486 1,756,023
-------------- --------------
Total members' equity 160,188,550 153,452,717
-------------- --------------
Total liabilities and members' equity $1,137,211,499 $1,086,486,483
=============== ==============
</Table>
3
<Page>
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<Table>
<Caption>
Nine Months Ended Three Months Ended
September 30, September 30,
2001 2000 2001 2000
----------- ----------- --------- -----------
Interest income
Loans and lease financing $62,563,708 $65,587,541 $20,454,560 $22,143,879
Investment securities 3,846,148 3,573,296 1,667,995 1,241,653
----------- ----------- --------- -----------
Total interest income 66,409,856 69,160,837 22,122,555 23,385,532
----------- ----------- ---------- -----------
Interest expense
Deposits 6,045,904 4,941,354 2,140,940 1,740,664
Short-term borrowings 12,516,416 15,283,180 3,537,351 4,736,002
Long-term and subordinated
debt and other borrowings 21,868,268 25,638,734 7,418,486 9,009,575
----------- ----------- ----------- -----------
Total interest expense 40,430,588 45,863,268 13,096,777 15,486,241
----------- ----------- ---------- -----------
Net interest income 25,979,268 23,297,569 9,025,778 7,899,291
Provision for loan losses 2,305,000 2,456,667 805,000 2,015,000
----------- ----------- --------- -----------
Net interest income after
provision for loan losses 23,674,268 20,840,902 8,220,778 5,884,291
----------- ----------- ----------- -----------
Non-interest income
Gain on sale of loans 4,320,189 2,072,389 882,205 1,839,395
Loan and deposit servicing fees 2,391,969 2,169,772 787,102 721,921
Other 6,694,154 2,581,851 2,512,293 1,329,383
----------- ----------- ----------- -----------
Total non-interest income 13,406,312 6,824,012 4,181,600 3,890,699
----------- ----------- ----------- -----------
Non-interest expense
Compensation and employee benefits 13,946,280 11,515,643 4,645,581 4,028,223
Contractual services 4,937,596 3,489,450 1,830,313 1,202,540
Occupancy and equipment 4,895,642 3,697,996 1,992,530 1,178,012
Other 2,259,516 1,988,175 780,003 668,716
--------- ---------- ----------- -----------
Total non-interest expense 26,039,034 20,691,264 9,248,427 7,077,491
---------- ----------- ----------- -----------
Income before income taxes 11,041,546 6,973,650 3,153,951 2,697,499
Provision for income taxes 1,335,007 1,417,500 563,470 612,043
----------- ---------- ----------- -----------
Net income $ 9,706,539 $ 5,556,150 $ 2,590,481 $ 2,085,456
=========== =========== =========== ===========
Distribution of net income
Patronage dividends $ 9,706,539 $ 5,556,150 $ 2,590,481 $ 2,085,456
Retained earnings - - - -
----------- ----------- ----------- -----------
$ 9,706,539 $ 5,556,150 $ 2,590,481 $ 2,085,456
=========== =========== =========== ===========
</Table>
4
<Page>
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<Table>
<Caption>
For the nine months ended September 30, 2001 2000
----------- ----------
Net income $ 9,706,539 $5,556,150
Other comprehensive income, net of tax:
Net unrealized holding gains before tax 1,352,463 961,211
----------- ----------
Comprehensive income $11,059,002 $6,517,361
=========== ==========
</Table>
5
<Page>
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
For the nine months ended September 30, 2001 2000
------------- --------------
Cash flows from operating activities
Net income $ 9,706,539 $ 5,556,150
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 2,305,000 2,456,667
Depreciation and amortization 4,636,511 4,243,623
Gain on sale of loans (4,320,189) (2,072,389)
Loans originated for sale (314,166,953) (135,233,554)
Proceeds from sale of loans held for sale 325,515,086 201,408,277
(Increase) decrease in other assets (10,524,905) 1,073,452
(Decrease) increase in other liabilities (19,306,590) 7,491,804
------------ -------------
Net cash (used in) provided by operating activities (6,155,501) 84,924,030
------------ -------------
Cash flows from investing activities
(Increase) decrease in restricted cash (13,997,900) 983,349
Purchase of investment securities
available-for-sale (11,626,899) (5,060,916)
Proceeds from maturities of investment securities
available-for-sale 9,298,592 4,790,134
Net increase in loans and leases (214,725) (93,204,080)
Proceeds from sale of portfolio loans - 28,272,995
Purchases of premises and equipment (564,576) (129,024)
------------ -------------
Net cash used in investing activities (17,105,508) (64,347,542)
------------ -------------
Cash flows from financing activities
Net increase in deposits 44,690,018 7,484,471
Net increase (decrease) in short-term borrowings 23,636,567 (19,744,264)
Proceeds from issuance of long-term debt 50,057,169 49,768,128
Repayment on long term debt (60,833,333) (44,500,000)
Patronage dividends paid (3,783,023) (5,654,452)
Dividends paid (138,125) (283,047)
------------ -------------
Net cash provided by (used in) financing activities 53,629,273 (12,929,164)
------------ -------------
Increase in cash and cash equivalents 30,368,264 7,647,324
Cash and cash equivalents, beginning of year 36,494,978 29,910,037
------------ -------------
Cash and cash equivalents, end of period $ 66,863,242 $ 37,557,361
============= =============
</Table>
6
<Page>
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
Supplemental schedule of investing and financing activities:
For the nine months ended September 30, 2001 2000
----------- -----------
Unrealized gain on investment available-for-sale $ 1,352,463 $ 961,211
Interest paid $40,583,430 $42,810,934
Income taxes paid $ 638,960 $ 1,058,270
</Table>
7
<Page>
NATIONAL COOPERATIVE BANK
CONDENSED NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
The accompanying financial statements have been prepared without audit and
reflect all adjustments (consisting only of normal recurring adjustments) which
were, in the opinion of management, necessary to a fair statement of the results
of the interim period presented. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. Accordingly,
these condensed financial statements should be read in conjunction with the
financial statements and the notes thereto included in National Cooperative
Bank's (NCB's) most current annual report. The results of operations for the
interim periods are not necessarily indicative of the results of the entire
year.
1. Cash, Cash Equivalents and Investment Securities
As of September 30, 2001, NCB's portfolios of investment securities, cash
and cash equivalents had an average adjusted maturity of approximately 1.1 years
with interest rates in those portfolios varying from 3.70% to 8.13%.
<Table>
<Caption>
CASH AND INVESTMENTS INVESTMENTS
CASH AVAILABLE- HELD-TO-
EQUIVALENTS FOR-SALE MATURITY
----------- ----------- -----------
Cash $ 5,660,969 $ - $ -
Federal funds 38,792,281 - -
Money market securities 22,059,992 2,455,527
Private debt security - - 792,931
Mutual funds - 1,681,688 -
Certificates of deposit 350,000 - -
Mortgage-backed securities - - 2,180,100
Corporate bonds - 2,751,190 -
U.S. Treasury and Agency obligations - 22,952,072 -
Interest-only receivables - 14,768,873 -
----------- ---------- -----------
$66,863,242 $44,609,350 $ 2,973,031
=========== =========== ===========
</Table>
8
<Page>
As of December 31, 2000, NCB's portfolios of investment securities,
cash and cash equivalents were composed of the following:
<Table>
<Caption>
CASH AND INVESTMENTS INVESTMENTS
CASH AVAILABLE- HELD-TO-
EQUIVALENTS FOR-SALE MATURITY
----------- ------------ -----------
Cash $ 3,344,711 $ - $ -
Federal funds 19,636,506 - -
Money market securities 13,163,761 1,273,601 -
Private debt security - - 792,931
Mutual funds - 1,115,860 -
Certificates of deposit 350,000 - -
Mortgage-backed securities - - 2,130,763
Corporate bonds - 2,148,400 -
U.S. Treasury and Agency obligations - 22,302,795 -
Interest-only receivables - 17,664,378 -
----------- ----------- ----------
$36,494,978 $44,505,034 $2,923,694
=========== =========== ==========
</Table>
At September 30, 2001 and December 31, 2000, the investments in the
available-for-sale portfolio were recorded at aggregate fair value.
Restricted cash of $3,793,449 and $3,875,549 at September 30, 2001 and
December 31, 2000, respectively, is held by a trustee for the benefit of
certificate holders in the event of a loss on certain loans sold in 1992 and
1993. At September 30, 2001 and December 31, 2000, the combined remaining
balance of 1992 and 1993 loans totaled $32,645,027 and $33,284,777,
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.
In addition, restricted cash of $10,000,000 and $0 at September 30, 2001
and December 31, 2000, respectively, is held for the benefit of MBIA
Insurance Corporation (MBIA) in the event of a loss on certain loans sold
under the terms of a Loan Purchase and Sale Agreement dated June 29, 2001
(the "Agreement"). The restricted cash replaces a first loss letter of
credit, which NCB had issued for the benefit of MBIA under a pre-existing
agreement. At September 30, 2001, the remaining balance of the loans owned by
MBIA under the terms of the Agreement totaled $12,107,712. The restricted
cash will become available to NCB Retail Finance Corporation as the principal
balance of the respective loans decrease. The loans sold have original
maturities of five to seven years.
Finally, restricted cash of $4,080,000 and $0 for September 30, 2001 and
December 31, 2000, respectively, is held for the benefit of Rabobank
International under the terms of the Agreement. The restricted cash is in the
form of an Equity Reserve Account maintained at Allfirst Bank and represents
3% of the loan purchase capacity under the terms of the Agreement.
Interest-only receivables substantially pertain to blanket loans to
cooperative housing corporations.
9
<Page>
2. Loans and Lease Financing
Loans and leases outstanding by category were as follows:
<Table>
<Caption>
SEPT. 30, 2001 DEC. 31, 2000
-------------- -------------
Commercial loans $501,714,681 $519,725,819
Lease financing 83,664,764 83,562,445
Real estate loans
Residential 387,368,367 370,510,903
Commercial 4,565,339 4,737,560
------------ ------------
$977,313,151 $978,536,727
============ ============
</Table>
At September 30, 2001 and December 31, 2000, loans held for sale were $97.0
million and $99.1 million, respectively.
3. Impaired Assets
Impaired loans, representing the non-accrual loans at September 30, 2001
and December 31, 2000, totaled $3,487,344 and $2,570,135, respectively, and
averaged $3,260,261 and $1,180,000 during the respective periods ending on these
dates. Specific allowances of $1,521,124 and $1,185,960 were established at
September 30, 2001 and December 31, 2000, respectively. During 2001 and 2000,
the interest collected on the non-accrual loans was applied to reduce the
outstanding principal.
At September 30, 2001 and December 31, 2000, there were no commitments to
lend additional funds to borrowers whose loans are impaired.
At September 30, 2001 and December 31, 2000, there was no real estate owned
property.
4. Allowance for Loan Losses
The following is a summary of the activity in the allowance for loan losses
during the nine months ended September 30, 2001:
<Table>
Balance at January 1, 2001 $21,260,284
Provision for loan losses 2,305,000
Charge-offs (1,786,281)
Recoveries of loans previously charged-off 1,198,611
-----------
Balance at September 30, 2001 $22,977,614
===========
</Table>
The allowance for loan losses as a percentage of average loans and lease
financing and loans held for sale was 2.2% at September 30, 2001.
10
<Page>
5. Statement of Changes in Members' Equity
The following is a summary of the activity in members' equity for the
nine months ended September 30, 2001:
<Table>
<Caption>
RETAINED RETAINED TOTAL
COMMON EARNINGS EARNINGS UNREALIZED MEMBERS'
STOCK ALLOCATED UNALLOCATED (LOSS) GAIN EQUITY
----- ---------- ----------- ----------- ------
Balance, December 31, 2000 $129,458,463 $ 5,433,641 $16,804,590 $1,756,023 $153,452,717
Net income 9,706,539 9,706,539
2000 patronage dividends
distributed in stock 5,002,291 (5,002,291) -
Adjustments to dividends paid 4,583 4,583
Other dividends declared (138,125) (138,125)
Cancellation of stock (603,031) (431,350) 699,059 (335,322)
2001 patronage dividends
to be distributed in cash (3,854,305) (3,854,305)
Retained in form of equity 4,710,818 (4,710,818) -
Unrealized gain on investment
securities available-for-
sale 1,352,463 1,352,463
------------ ---------- ----------- ---------- ------------
Balance, September 30, 2001 $133,857,723 $ 4,710,818 $18,511,523 $3,108,486 $160,188,550
============ =========== =========== ========== ============
</Table>
11
<Page>
6. Segment Reporting
NCB's reportable segments are strategic business units that provide diverse
products and services within the financial services industry. NCB has five
reportable segments: commercial lending, real estate lending, warehouse lending,
NCB Savings Bank and other. The commercial lending segment provides financial
services to cooperative and member-owned businesses. The real estate lending
segment originates and services real estate loans nationally, with a
concentration in New York City. The warehouse lending segment originates real
estate and commercial loans for sale in the secondary market. The NCB Savings
Bank segment provides traditional banking services such as lending and deposit
gathering to retail, corporate and commercial customers. "Other" consists of
NCB's unallocated parent company income and expense, and net interest income
from investments and corporate debt after allocations to segments.
NCB evaluates segment performance based on net income before taxes. The
accounting policies of the segments are substantially the same as those
described in the summary of significant accounting policies in the most recent
annual report. Overhead and support expenses are allocated to each operating
segment based on number of employees, and other factors relevant to expenses
incurred. Also included in overhead and support is depreciation allocated based
on equipment usage.
The following is the segment reporting for the nine months ended September
30, 2001 and 2000 (dollars in thousands):
<Table>
<Caption>
2001 COMMERCIAL REAL ESTATE WAREHOUSE NCB
LENDING LENDING LENDING NCBSB OTHER CONSOLIDATED
------- ------- ------- ----- ----- ------------
Net interest income
Interest income $ 36,869 $ 11,276 $ 6,803 $ 9,411 $ 2,049
Interest expense 23,575 7,127 4,421 6,051 (745)
-------- -------- --------- -------- -------
Net interest income 13,294 4,149 2,382 3,360 2,794 25,979
Provision (credit) for loan losses 1,290 (12) - 55 972 2,305
Non-interest income-external 3,305 4,423 2,666 1,678 1,335 13,407
Non-interest expense
Direct expense 6,681 3,413 1,052 2,040 12,853 26,039
Overhead and support 1,231 810 210 1,006 (3,257) -
-------- -------- --------- -------- ------- ----------
Total non-interest expense 7,912 4,223 1,262 3,046 9,596 26,039
-------- -------- --------- -------- ------- ----------
Income (loss) before taxes $ 7,397 $ 4,361 $ 3,786 $ 1,937 $(6,439) $ 11,042
======== ======== ========= ======== ======= ==========
Total average assets $618,736 $170,081 $95,561 $161,666 $99,323 $1,145,367
======== ======== ========= ======== ======= ==========
</Table>
12
<Page>
<Table>
<Caption>
2000 COMMERCIAL REAL ESTATE WAREHOUSE NCB
LENDING LEADING LENDING NCBSB OTHER CONSOLIDATED
------- ------- ------- ----- ----- ------------
Net interest income
Interest income $ 34,930 $ 9,975 $ 9,166 $ 9,497 $ 5,593
Interest expense 28,085 7,002 6,724 5,878 (1,826)
-------- -------- --------- -------- --------
Net interest income 6,845 2,973 2,442 3,619 7,419 23,298
Provision (credit) for loan losses 12,131 170 - 82 (9,926) 2,457
Non-interest income-external 1,893 2,259 1,483 972 217 6,824
Non-interest expense
Direct expense 3,913 2,638 659 1,707 11,774 20,691
Overhead and support 860 693 128 709 (2,390) -
-------- -------- --------- -------- -------- ----------
Total non-interest expense 4,773 3,331 787 2,416 9,384 20,691
-------- -------- -------- -------- -------- ----------
(Loss) income before taxes $ (8,166) $ 1,731 $ 3,138 $ 2,093 $ 8,178 $ 6,974
========= ======== ======== ======== ======== ==========
Total average assets $592,405 $153,250 $145,961 $170,451 $ 62,168 $1,124,235
========= ======== ======== ======== ======== ==========
</Table>
The following is the segment reporting for the three months ended September
30, 2001 and 2000 (dollars in thousands):
<Table>
<Caption>
2001 COMMERCIAL REAL ESTATE WAREHOUSE NCB
LENDING LENDING LENDING NCBSB OTHER CONSOLIDATED
------- ------- ------- ----- ----- ------------
Net interest income
Interest income $ 12,025 $ 3,694 $ 2,858 $ 3,307 $ 777
Interest expense 6,942 2,076 1,900 2,142 35
------ ------ ------ ------ ------
Net interest income 5,083 1,618 958 1,165 742 9,566
Provision (credit) for loan losses 1,137 (97) - 55 (290) 805
Non-interest income-external 704 1,502 (52) 795 692 3,641
Non-interest expense
Direct expense 2,211 1,226 417 730 4,664 9,248
Overhead and support 410 282 73 471 (1,236) -
------ ------ ------ ------ ------ ------
Total non-interest expense 2,621 1,508 490 1,201 3,428 9,248
------ ------ ------ ------ ------ ------
Income (loss) before taxes $ 2,029 $ 1,709 $ 416 $ 704 $ (1,704) $ 3,154
========= ======== ======== ======== ======== ==========
Total average assets $ 617,641 $137,050 $125,176 $168,784 $125,159 $1,173,810
========= ======== ======== ======== ======== ==========
</Table>
13
<Page>
<Table>
<Caption>
2000 COMMERCIAL REAL ESTATE WAREHOUSE NCB
LENDING LEADING LENDING NCBSB OTHER CONSOLIDATED
------- ------- ------- ----- ----- ------------
Net interest income
Interest income $ 12,365 $ 3,488 $ 2,024 $ 3,214 $ 2,295
Interest expense 9,777 2,413 1,251 2,069 (23)
-------- -------- --------- -------- --------
Net interest income 2,588 1,075 773 1,145 2,318 7,899
Provision (credit) for loan losses 1,712 89 - 15 199 2,015
Non-interest income-external 831 1,464 915 467 214 3,891
Non-interest expense
Direct expense 1,356 938 253 596 3,934 7,077
Overhead and support 273 216 47 165 (701) -
-------- -------- --------- -------- -------- ----------
Total non-interest expense 1,629 1,154 300 761 3,233 7,077
-------- -------- -------- -------- -------- ----------
Income (loss) before taxes $ 78 $ 1,296 $ 1,388 $ 836 $ (900) $ 2,698
======== ======== ======== ======== ======== ==========
Total average assets $582,841 $152,463 $156,885 $167,577 $ 67,355 $1,127,121
======== ======== ======== ======== ======== ==========
</Table>
7. Accounting for Derivatives
ADOPTION OF SFAS NO. 133
NCB adopted SFAS No. 133, "Accounting for Derivative Investments and
Hedging Activities", as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment to SFAS No.
133", as of January 1, 2001. On that date, NCB recorded a cumulative effect
adjustment of $1.7 million gain to recognize the fair value of interest rate
swaps with an offsetting cumulative effect of $1.7 million loss to recognize the
change in fair value of related hedged debt due to changes in benchmark interest
rates. Additionally, NCB recorded a cumulative effect adjustment of $4.5 million
loss to recognize derivatives at fair value and a cumulative effect adjustment
of $4.6 million gain to recognize the change in fair value of related loans held
for sale and loan commitments due to changes in benchmark interest rates. The
net of these amounts was recorded in Other Non-Interest Income.
NCB uses futures and interest rate swaps to hedge loan commitments prior
to actually funding a loan. During the commitment period, the loan commitments
and related interest rate swaps are accounted for as derivatives and therefore
recorded at fair value through income. Once a commitment becomes a loan, the
derivative associated with the commitment is designated as a hedge on the loan.
14
<Page>
DERIVATIVE INSTRUMENTS AND HEDGING
NCB maintains a risk management strategy that includes the use of
derivative instruments to reduce unplanned earnings fluctuations caused by
interest rate volatility. Use of derivative instruments is a component of NCB's
overall risk management strategy in accordance with a formal policy that is
monitored by management, which has delegated authority over the interest rate
risk management function.
The derivative instruments utilized include interest rate swaps and
futures contracts. Interest rate swaps involve the exchange of fixed and
variable rate interest payments between two parties based upon a notional
principal amount and maturity date. Interest rate futures generally involve
exchange-traded contracts to buy or sell U.S. Treasury bonds or notes in the
future at specified prices.
NCB is exposed to credit and market risk as a result of its use of
derivative instruments. If the fair value of the derivative contract is
positive, the counterparty owner owes NCB and a repayment risk exists. If the
fair value of the derivative contract is negative, NCB owes the counterparty, so
there is no repayment risk. NCB minimizes repayment risk by entering into
transactions with financially stable counterparties that are specified by policy
and reviewed periodically by management. When NCB has multiple derivative
transactions with a single counterparty, the net mark-to-market exposure
represents the netting of positive and negative exposures with that
counterparty. The net mark-to-market exposure with a counterparty is a measure
of credit risk when there is a legally enforceable master netting agreement
between NCB and the counterparty. NCB uses master netting agreements with the
majority of its counterparties.
Market risk is the adverse effect that a change in interest rates or
comparative currency values has on the fair value of a financial instrument or
expected cash flows. NCB manages the market risk associated with the interest
rate hedge contracts by establishing formal policy limits concerning the types
and degree of risk that may be undertaken. Compliance with this policy is
monitored by management and reported to the Board of Directors.
ACCOUNTING FOR DERIVATIVES
All derivatives are recognized on the Balance Sheet at fair value. When
a derivative contract is entered into, NCB determines whether or not it
qualifies as a hedge. If it does, NCB designates the derivative as (1) a hedge
of the fair value of a recognized asset or liability or (2) a hedge of actual or
forecasted cash flows.
When entering into hedging transactions, NCB documents the relationships
between the hedging instruments and the hedged items to link all derivatives
that are designated fair value or cash flow hedges to specific assets and
liabilities on the Balance Sheet. NCB assesses, both at inception and on an
on going basis, the
15
<Page>
effectiveness of all hedges in offsetting changes in fair values or cash flows
of hedged items.
NCB discontinues hedge accounting prospectively when (1) the derivative
is no longer effective in offsetting changes in fair value or cash flows of a
hedged item; or (2) the derivative matures or is sold, terminated or exercised.
When hedge accounting is discontinued because the derivative no longer
qualifies as an effective fair value hedge, it will continue to be carried on
the Balance Sheet at its fair value and the hedged asset or liability will no
longer be adjusted to reflect changes in fair value. When hedge accounting is
discontinued because it is probable a forecasted transaction will not occur, any
gains or losses accumulated in Other Comprehensive Income will be recognized
immediately in earnings as will any change in the fair value of the derivative
subsequent to the discontinuation of hedge accounting. In all other situations
in which hedge accounting is discontinued, the derivative will be carried at
fair value with the changes in fair value recognized in income.
Fair-Value Hedges
NCB enters into interest rate swaps and futures contracts to hedge
against changes in the fair value of fixed rate loans and debt due to changes in
benchmark interest rates.
For the nine months ending September 30, 2001, NCB recognized a net loss
of $973.7 thousand for the ineffective portion of all fair value hedges. This
amount is included in Other Non-interest Income in the accompanying Consolidated
Statement of Income.
8. New Accounting Standards
On April 1, 2001, Emerging Issues Task Force (EITF) No. 99-20,
"Recognition of Interest Income and Impairment of Purchased and Retained
Beneficial Interests in Securitized Financial Assets" was effective. This
statement addresses the recognition of income when assumptions are changed which
relate to expected future cash flows of assets with calculated income yields.
The changes in income yields primarily relate to prepayments, which adjust the
initial yield. NCB currently recognizes prepayments as a catch-up adjustment
within the same period.
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<Page>
NATIONAL COOPERATIVE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
SUMMARY
NCB's net income for the nine months ended September 30, 2001 was $9.7
million. This was a 74.7% or $4.2 million increase compared with $5.6 million
for the nine months ended September 30, 2000. The variance resulted from an
increase of $2.7 million in net interest income, and an increase of $6.6
million in non-interest income. This was partially offset by an increase in
non-interest expenses of $5.3 million. For the three month period ending
September 30, 2001, net income increased $0.5 million or 24.2% compared with
the same period in 2000. This increase in net income was due to an increase
in net interest income of $1.1 million and a decrease in the provision for
loan losses of $1.2 million offset by a $2.2 million increase in non-interest
expenses.
Total assets increased 4.7% or $50.7 million to $1.1 billion at
September 30, 2001 from year end December 31, 2000. This resulted from
increases in cash and cash equivalents, restricted cash and investment
securities of $44.5 million and other assets of $9.1 million, respectively,
which were offset by a $2.9 million decrease in net loans and leases.
The annualized return on average total assets was 1.13% for the first nine
months of 2001 compared with .66% for the same period in 2000. The annualized
return on average equity for the periods ended September 30, 2001 and 2000 was
8.20% and 4.96%, respectively.
NET INTEREST INCOME
Net interest income for the nine months ended September 30, 2001 was $26.0
million, an increase of 11.5% or $2.7 million compared with $23.3 million over
the same period a year ago.
For the nine months ending September 30, 2001, interest income decreased
4.0% or $2.8 million to $66.4 million from $69.2 million in the prior year's
period. The majority of the decrease was due to the lower yield on commercial
loan and lease portfolios. Table 2 shows that increases of $2.5 million and
decreases of $5.2 were volume and yield related, respectively.
Interest expense decreased $5.4 million to $40.4 million for the nine
months ended September 30, 2001 compared with $45.9 million for the nine months
ended September 30, 2000. Interest expense declined due to lower short-term
interest rate on borrowed funds and deposits. As shown on Table 2, a $162
thousand increase in interest expense was volume related while a $5.6 million
decrease was due to lower interest rates.
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<Page>
For the nine months ended September 30, 2001 and 2000, the average rate on
interest earning assets was 7.76% and 8.39%, respectively. Average rate on
interest bearing liabilities was down 83 basis points to 5.69% at September 30,
2001 compared with 6.52% for the same period in 2000.
For the three month period ended September 30, 2001 and 2000, net
interest income increased 21.1% or $1.7 million to $9.6 million.
Interest income decreased 3.1% or $722 thousand to $22.7 million for the
three months ended September 30, 2001 compared with $23.4 million for the
same period a year ago. The decrease in interest income was due to lower
interest rates on earning assets.
For the quarter ended September 30, 2001, interest expense decreased 15.4%
or $2.4 million to $13.1 million compared with $15.5 million for the quarter
ended September 30, 2000 due to lower short-term interest rates on borrowed
funds. As shown on Table 2A, the decrease in interest expense amounting to $2.4
million was primarily yield related.
For the quarter ended September 30, 2001, the average rate on interest
earning assets decreased 90 basis points to 7.56% from 8.46% for the quarter
ended September 30, 2000. The average rate on interest bearing liabilities was
5.39% and 6.62% for the quarters ended September 30, 2001 and 2000,
respectively.
NON-INTEREST INCOME
Non-interest income for the nine months ended September 30, 2001 of
$13.4 million increased 96.5% or $6.6 million from $6.8 million for the same
period last year. Non-interest income is composed of gains from sales of blanket
mortgages and share loans to secondary market investors, servicing fees, net
origination fees on loans sold, management fees and advisory and debt placement
fees.
For the nine months ended September 30, 2001, gain on sale of loans was
$4.3 million compared with $2.1 million in the same period last year. The
increase resulted from increased profitability on the sale of single family and
multi-family mortgages. Total loans sold were $321.2 million and $226.5 million
for the nine-month periods ended September 30, 2001 and 2000, respectively.
Servicing fee income for the nine months ended September 30, 2001
increased 10.1% or $222 thousand to $2.4 million compared with $2.2 million
in the prior year. NCB serviced single and multi-family real estate and
commercial loans for investors in the amounts of $2.5 billion and $2.2
billion as of September 30, 2001 and 2000, respectively.
Other non-interest income for the three quarters ended September 30, 2001
increased 159.3% or $4.1 million to $6.7 million from $2.6 million for the same
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<Page>
period in the prior year due primarily to increases in excess yield and the
prepayment penalty received.
NON-INTEREST EXPENSE
Non-interest expense for the nine months ended September 30, 2001
increased 25.8% or $5.3 million to $26.0 million compared with $20.7 million
for the nine months ended September 30, 2000. Compensation and benefits, the
largest component of non-interest expense, increased 21.1% or $2.4 million.
The increase resulted from new hires and increases in base salaries and
incentive accruals. As of September 30, 2001 and 2000, NCB and its
consolidated subsidiaries employed 218 and 203 employees, respectively.
Contractual services increased 41.5% due to higher consulting expenditures
related to the development of certain electronic commerce initiatives, and
strategic planning expenditures, as well as higher advertising and corporate
development expenditures. Occupancy and equipment increased 32.4% or $1.2
million primarily due to the relocation of NCB's corporate headquarters
during the second quarter of 2001.
Non-interest expense as a percentage of average assets increased to 2.3%
for the nine months ended September 30, 2001 compared with 1.8% for the same
period a year earlier.
For the three months ended September 30, 2001, non-interest expenses
increased 30.7% or $2.2 million to $9.2 million from $7.1 million for the
same period in 2000. The variance was due to an increase in compensation and
employee benefits of $617 thousand, which resulted from an increase in
employees and increases in base salaries and incentive accruals. Contractual
services increased $628 thousand due to higher consulting expenditures
related to the development of certain electronic commerce initiatives, and
strategic planning expenditures, as well as higher advertising and corporate
development expenditures. Occupancy and equipment increased $815 thousand due
to the relocation of NCB's headquarters during the second quarter.
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<Page>
Table 1
RATE RELATED ASSETS AND LIABILITIES
(dollars in thousands)
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
2001 2000
------------------------------------- ------------------------------------
ASSETS AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
BALANCE EXPENSES RATES BALANCE EXPENSES RATES
----------- -------- ------- ----------- -------- -------
Interest earning assets
Real estate loans $ 427,309 $ 25,219 7.87% $ 442,542 $ 26,619 8.02%
Commercial loans and leases 618,736 37,345 8.05% 576,480 38,969 9.01%
---------- --------- ---------- --------
Total loans and leases 1,046,045 62,564 7.97% 1,019,022 65,588 8.58%
Investment securities
and cash equivalents 95,532 3,846 5.37% 79,782 3,573 5.97%
---------- --------- ---------- --------
Total interest earning assets 1,141,577 66,410 7.76% 1,098,804 69,161 8.39%
---------- --------- ---------- --------
Allowance for loan losses (21,972) (19,119)
Non-interest earning assets
Cash 3,317 3,501
Other assets 22,445 41,049
---------- ----------
Total non-interest earning assets 25,762 44,550
---------- ----------
Total assets $1,145,367 $1,124,235
========== ==========
LIABILITIES AND MEMBERS' EQUITY
Interest bearing liabilities
Subordinated debt $ 182,101 $ 7,441 5.45% $ 182,504 $ 8,469 6.19%
Notes payable 605,156 26,944 5.94% 620,364 32,453 6.98%
Deposits 160,829 6,046 5.01% 135,192 4,941 4.87%
---------- --------- ---------- -------
Total interest bearing liabilities 948,086 40,431 5.69% 938,060 45,863 6.52%
--------- -------
Other liabilities 39,733 36,711
Members' equity 157,548 149,464
---------- ----------
Total liabilities and members' equity $1,145,367 $1,124,235
========== ==========
Net interest earning assets $ 193,491 $ 160,744
Net interest revenues and spread $ 25,979 2.07% $ 23,298 1.87%
Net yield on interest earning assets 3.03% 2.83%
</Table>
20
<Page>
Table 1A
RATE RELATED ASSETS AND LIABILITIES
(dollars in thousands)
<Table>
<Caption>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
2001 2000
------------------------------------- -----------------------------------
ASSETS AVERAGE INCOME/ YIELDS/ AVERAGE INCOME/ YIELDS/
BALANCE EXPENSES RATES BALANCE EXPENSES RATES
----------- -------- ------- ----------- -------- -------
Interest earning assets
Real estate loans $ 431,010 8,657 8.03% $ 421,114 $ 7,928 7.53%
Commercial loans and leases 617,641 11,798 7.64% 603,751 14,216 9.42%
----------- -------- ---------- -------
Total loans and leases 1,048,651 20,455 7.80% 1,024,865 22,144 8.64%
Investment securities
and cash equivalents 122,306 1,668 5.46% 80,688 1,242 6.16%
----------- -------- ---------- -------
Total interest earning assets 1,170,957 22,123 7.56% 1,105,553 23,386 8.46%
----------- -------- ---------- -------
Allowance for loan losses (22,402) (19,673)
Non-interest earning assets
Cash 4,872 1,688
Other assets 20,383 39,553
----------- ----------
Total non-interest earning assets 25,255 41,241
----------- ----------
Total assets $ 1,173,810 $1,127,121
=========== ==========
LIABILITIES AND MEMBERS' EQUITY
Interest bearing liabilities
Subordinated debt $ 182,045 2,376 5.22% $ 182,385 $ 3,027 6.64%
Notes payable 607,773 8,580 5.65% 616,489 10,718 6.95%
Deposits 182,491 2,141 4.69% 136,799 1,741 5.09%
----------- -------- ---------- -------
Total interest bearing liabilities 972,309 13,097 5.39% 935,673 15,486 6.62%
-------- -------
Other liabilities 42,276 40,335
Members' equity 159,225 151,113
----------- ----------
Total liabilities and members' equity $ 1,173,810 $1,127,121
=========== ==========
Net interest earning assets $ 198,648 $ 169,880
Net interest revenues and spread $ 9,026 2.17% $ 7,900 1.84%
Net yield on interest earning assets 3.08% 2.86%
</Table>
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<Page>
Table 2
CHANGES IN NET INTEREST INCOME
(dollars in thousands)
For the nine months ended September 30, 2001 compared to 2000:
<Table>
<Caption>
INCREASE (DECREASE) DUE TO CHANGE IN:
----------------------------------------
AVERAGE AVERAGE
VOLUME* YIELD NET**
------- ----- -----
Interest income
Cash equivalents and investment securities $ 658 $ (385) $ 273
Commercial loans and leases 2,732 (4,356) (1,624)
Real estate loans (905) (495) (1,400)
------- ------- -------
Total interest income 2,485 (5,236) (2,751)
------ ------- -------
Interest expense
Deposits 960 145 1,105
Notes payable (779) (4,730) (5,509)
Subordinated debt (19) (1,009) (1,028)
------- ------- --------
Total interest expense 162 (5,594) (5,432)
------ ------- --------
Net interest income $2,323 $ 358 $ 2,681
====== ====== =======
</Table>
* Average monthly balances
**Changes in interest income and interest expense due to changes in rate and
volume have been allocated to "change in average volume" and "change in average
rate" in proportion to the absolute dollar amounts in each.
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<Page>
Table 2A
CHANGES IN NET INTEREST INCOME
(dollars in thousands)
For the three months ended September 30, 2001 compared to 2000:
<Table>
<Caption>
INCREASE (DECREASE) DUE TO CHANGE IN:
-----------------------------------------
AVERAGE AVERAGE
VOLUME* YIELD NET**
------- ----- ------
Interest income
Cash equivalents and investment securities $ 581 $ (155) $ 426
Commercial loans and leases 320 (2,739) (2,419)
Real estate loans 190 540 730
------ ------- -------
Total interest income 1,091 (2,354) (1,263)
------ -------- --------
Interest expense
Deposits 540 (140) 400
Notes payable (150) (1,989) (2,139)
Subordinated debt (5) (645) (651)
------- -------- --------
Total interest expense 385 (2,774) (2,389)
------ -------- --------
Net interest income $ 706 $ 420 $ 1,126
====== ======= =======
</Table>
* Average monthly balances
**Changes in interest income and interest expense due to changes in rate and
volume have been allocated to "change in average volume" and "change in average
rate" in proportion to the absolute dollar amounts in each.
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<Page>
PROVISION FOR INCOME TAXES
The federal income tax provision is determined on the basis of non-member
income generated by NCB Savings Bank, FSB (NCBSB) and reserves set aside for the
retirement of Class A notes and dividends on Class C stock. NCB's subsidiaries
are also subject to varying levels of state taxation. The income tax provision
for the nine months ended September 30, 2001 increased to $1.3 million compared
with a provision of $1.4 million for the same period during 2000.
CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES
Cash, cash equivalents and investment securities totaling $132.3 million
at September 30, 2001 increased $44.5 million or 50.7% from $87.8 million at
year-end 2000. The increase was due to growth in deposits but not having
deployed funds in the way of new loans or repayments on debt. As a percentage
of earning assets, cash, cash equivalents and investment securities increased
to 10.3% at September 30, 2001 from 8.2% at December 31, 2000.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at September 30, 2001 was $23 million, up by
8.1% from December 31, 2000. The allowance during the period was impacted by
loans charged-off of $1.8 million, recoveries of loans previously charged-off of
$1.2 million and the provision of $2.3 million. NCB's annualized provision for
loan losses as a percentage of average loans and leases outstanding was .3% for
the nine months ended September 30, 2001 and .3% for the nine months ended
September 30, 2000.
The loan loss allowance as a percentage of loans and leases was 2.4% and 2.2%
at September 30, 2001 and December 31, 2000. Management considers the current
allowance to be adequate to absorb known and inherent risks in the loan
portfolio.
As shown in Table 3, total impaired assets (non-accruing loans and real
estate owned) increased 35.7% from $2.6 million at December 31, 2000 to $3.5
million at September 30, 2001. Impaired assets as a percentage of loans and
leases outstanding plus real estate was .36% at September 30, 2001 compared with
.26% at year-end 2000. The allowance for loan losses as a percentage of impaired
assets decreased to 659% at September 30, 2001 from 827% at December 31, 2000.
24
<Page>
INTEREST BEARING LIABILITIES
Interest bearing liabilities
(dollars in thousands)
<Table>
<Caption>
9/30/01 12/31/00 % CHANGE
------- -------- --------
Deposits $193,651 $148,961 30.0%
Short-term debt 293,214 269,580 8.8%
Long-term debt 287,120 291,827 (1.6%)
Subordinated debt 182,053 182,022 0.0%
-------- --------
Total $956,038 $892,390 7.1%
======== ========
</Table>
Interest bearing liabilities increased $63.7 million to $956 million at
September 30, 2001 from $892.4 million at December 31, 2000.
For the first nine months of 2001, deposits at NCBSB grew 30% to $193.7
million compared with $149 million at December 31, 2000. The growth was due
to an on-going strategic campaign to attract local and national deposit
accounts and cooperative customers. Average maturity of the certificates of
deposits is 12.8 months at September 30, 2001. Deposits are a major portion
of interest bearing liabilities representing 20.2% and 16.7% as of
September 30, 2001 and December 31, 2000, respectively. Funds generated by
the increased deposit activity were used to originate single-family loans
and increase liquidity.
At September 30, 2001, total short-term and long-term borrowings
(including subordinated debt) increased 2.6% or $18.9 million to $762.4
million in comparison to prior year-end 2000 of $743.4 million. Proceeds from
the borrowings were used to fund growth in loans and leases. At September 30,
2001, and December 31, 2000, NCBSB had advances of zero and $5.0 million,
respectively, from the Federal Home Loan Bank. At September 30, 2001,
included in the short-term borrowings were revolving lines of credit of $96.5
million; commercial paper with a face value of $164.2 million and $33 million
in borrowings from cooperative customers. At December 31, 2000, included in
the short-term borrowing were revolving lines of credit of $132.5 million;
commercial paper with face value of $108.3 million and $24.2 million in
borrowings from a related entity and cooperative customers. Long-term debt
decreased 1.6% from year-end 2000 due to the maturity of $60.8 million and
new issues of $50 million under the long-term facilities which was offset by
a SFAS No. 133 valuation of $5.9 million. At September 30, 2001, there was
unused capacity under short-term and long-term facilities of approximately
$66.8 million and $250 million, respectively. At December 31, 2000, unused
capacity under the short-term and long-term facilities was $152.5 million and
$312.5 million, respectively.
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<Page>
TABLE 3
IMPAIRED ASSETS
(dollars in thousands)
<Table>
<Caption>
SEPT. 30 JUNE 30, MARCH 31, DEC. 31, SEPT. 30
2001 2001 2001 2000 2000
-------- -------- -------- -------- --------
Real estate owned $ 0 $ 0 $ 0 $ 0 $ 14
Non-accruing 3,487 3,198 3,347 2,570 504
------ ------ ------ ------ -----
$3,487 $3,198 $3,347 $2,570 $ 518
====== ====== ====== ====== =====
</Table>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in NCB's market risk profile occurred from
December 31, 2000 to September 30, 2001.
26
<Page>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
NATIONAL CONSUMER COOPERATIVE BANK
Date: November 14, 2001
By: /s/ Richard L. Reed
----------------------------
Richard L. Reed,
Managing Director,
Chief Financial Officer
By: /s/ Marietta J. Orcino
----------------------------
Marietta J. Orcino
Vice President, Tax &
Regulatory Compliance
27