FORM 10-Q/A
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 June 30, 2001 Commission file number 2-99779
-------------- -------
NATIONAL CONSUMER COOPERATIVE BANK
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
United States of America 52-1157795
(12 U.S.C. Section 3001 et seq.) ----------
- -------------------------------- (I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
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
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
OUTSTANDING AT JUNE 30, 2001
----------------------------
CLASS C 220,115
- ------------------
(Common stock, $100.00 par value)
CLASS B 1,073,383
- ------------------
(Common stock, $100.00 par value)
CLASS D 3
- ------------------
(Common stock, $100.00 par value)
EXPLANATORY NOTE
This amended Quarterly Report on Form 10-Q/A amends and restates in its
entirety National Consumer Cooperative Bank's (NCB) Quarterly Report on Form
10-Q for the quarter ended June 30, 2001 as of the date of filing the original
Form 10-Q, August 14, 2001. The financial results for the quarter ended June 30,
2001 have been restated for adjustments to deferred loan origination costs, the
amortization of interest-only receivables, loan sale activity and accrued
incentive compensation, as well as for the reclassification of certain income
and expense items.
Form 10-Q/A revises the Consolidated Statements of Income for the three
and six months ended June 30, 2001 as follows:
- - Interest income - Loans and lease financing is being increased by $21,247 and
$125,890
- - Interest income - Investment securities is being decreased by $4,466 and
$114,403
- - Non-interest income - Gain (loss) on sale of loans is being increased by
$88,681 for both periods
- - Non-interest income - Other is being decreased by $568,179 and $1,269,977
- - Non-interest expense - Compensation and employee benefits is being increased
by $328,500 and $444,443
- - Non-interest expense - Contractual Services is being decreased by $589,727
and $1,291,525
The net effect of the above revisions is to decrease Net income by
$201,490 and $322,727 for the three and six-month periods ended June 30, 2001,
respectively. Related disclosures in the Condensed Notes to the Consolidated
Financial Statements and Management's Discussion and Analysis have been changed
accordingly to reflect the above revisions as have the Consolidated Statement of
Comprehensive Income and Consolidated Statement of Cash Flows for the six months
ended June 30, 2001.
In addition, this Form 10-Q/A revises the Consolidated Balance Sheet as
of June 30, 2001 as follows:
- - Investment securities - Available-for-sale are being decreased by $114,403
- - Loans and lease financing is being decreased by $606,990
- - Other assets are being increased by $259,766
- - Other liabilities are being decreased by $138,900
- - Retained earnings - Unallocated are being decreased by $322,727
Related disclosures in the Condensed Notes to the Consolidated Financial
Statements and Management's Discussion and Analysis have been changed
accordingly to reflect the above revisions as have the Consolidated Statement of
Comprehensive Income and Consolidated Statement of Cash Flows for the six months
ended June 30, 2001.
National Consumer Cooperative Bank
(doing business as National Cooperative Bank)
and Subsidiaries
INDEX
PART I FINANCIAL INFORMATION
Page No.
--------
Item 1 Consolidated balance sheets - June 30, 2001
and December 31, 2000....................................................................4
Consolidated statements of income - for
the three and six months ended June 30, 2001
and 2000.................................................................................5
Consolidated statements of comprehensive
income - for the six months ended
June 30, 2001 and 2000...................................................................6
Consolidated statements of cash flows -
for the six months ended June 30, 2001 and 2000........................................7-8
Condensed notes to the consolidated
financial statements - June 30,2001...................................................9-17
Item 2 Management's discussion and analysis of financial
condition and results of operations - for the
three and six months ended June 30, 2001 and 2000....................................18-27
Item 3 Quantitative and qualitative disclosures
about market risk.......................................................................27
PART II OTHER INFORMATION
Item 6 Exhibits................................................................................27
Exhibit 10-11 - Amendment No. 4 to Third Amended and
Restated Loan Agreement with Fleet Bank as Agent
Exihibit 10-16 - Amendment to Term Loan Agreement dated
November 5, 1998 with Greenwich Funding Corporation and
Credit Suisse First Boston
NATIONAL COOPERATIVE BANK
CONSOLIDATED BALANCE SHEETS
June 30, 2001 and December 31, 2000
(Unaudited)
June 30, December 31,
ASSETS 2001 2000
-------------- --------------
Cash and cash equivalents $ 51,958,977 $ 36,494,978
Restricted cash 3,835,107 3,875,549
Investment securities
Available-for-sale 42,542,192 44,505,034
Held-to-maturity 2,923,694 2,923,694
Loans held for sale 115,137,732 99,077,161
Loans and lease financing 896,114,052 879,459,566
Less: Allowance for loan losses (21,899,714) (21,260,284)
-------------- --------------
Net loans held for sale and
loans and lease financing 989,352,070 957,276,443
Other assets 49,688,734 41,410,785
-------------- --------------
Total assets $1,140,300,774 $1,086,486,483
============== ==============
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES
Deposits $ 177,036,394 $ 148,960,621
Patronage dividends payable in cash 5,910,234 3,330,296
Other liabilities 19,453,751 37,313,873
Borrowings
Short-term 314,258,517 269,579,985
Long-term
Current 123,333,333 147,991,796
Non-current 160,586,107 143,834,724
Subordinated debt 182,042,612 182,022,471
-------------- --------------
Total borrowings 780,220,569 743,428,976
-------------- --------------
Total liabilities 982,620,948 933,033,766
-------------- --------------
MEMBERS' EQUITY
Common stock
Class B 107,338,280 107,440,170
Class C 22,011,521 22,017,993
Class D 300 300
Retained earnings
Allocated 8,579,393 5,433,641
Unallocated 17,882,954 16,804,590
Accumulated other comprehensive
income 1,867,378 1,756,023
-------------- --------------
Total members' equity 157,679,826 153,452,717
-------------- --------------
Total liabilities and members' equity $1,140,300,774 $1,086,486,483
============== ==============
4
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
2001 2000 2001 2000
----------- ----------- ------------- -----------
Interest income
Loans and lease financing $41,694,176 $43,443,662 $20,310,586 $22,862,582
Investments securities 2,063,750 2,331,643 1,170,612 1,090,231
----------- ----------- ------------- -----------
Total interest income 43,757,926 45,775,305 21,481,198 23,952,813
----------- ----------- ----------- -----------
Interest expense
Deposits 3,904,964 3,200,690 1,991,040 1,742,364
Short-term borrowings 8,979,065 10,547,178 4,486,434 5,841,421
Long-term debt, other borrowings
and subordinated debt 14,449,782 16,629,159 6,565,470 8,515,237
----------- ----------- ----------- -----------
Total interest expense 27,333,811 30,377,027 13,042,944 16,099,022
----------- ----------- ----------- -----------
Net interest income 16,424,115 15,398,278 8,438,254 7,853,791
Provision for loan losses 1,500,000 441,667 750,000 429,167
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 14,924,115 14,956,611 7,688,254 7,424,624
----------- ----------- ----------- -----------
Non-interest income
Gain on sale of loans 3,526,665 232,994 1,444,679 237,063
Loan and deposit servicing fees 1,604,867 1,447,851 806,699 635,918
Other 4,744,276 3,363,332 2,860,052 1,687,874
----------- ----------- ----------- -----------
Total non-interest income 9,875,808 5,044,177 5,111,430 2,560,855
---------- ----------- ----------- -----------
Non-interest expense
Compensation and
employee benefits 9,745,144 7,487,420 4,845,788 3,234,188
Contractual services 3,107,285 4,397,774 1,714,987 2,285,156
Occupancy and equipment 2,903,113 2,519,984 1,613,150 1,278,394
Other 1,479,513 1,319,459 799,577 789,664
----------- ----------- ----------- -----------
Total non-interest expense 17,235,055 15,724,637 8,973,502 7,587,402
----------- ----------- ----------- -----------
Net income before income taxes 7,564,868 4,276,151 3,826,182 2,398,077
Provision for income taxes 771,537 805,457 333,949 427,193
----------- ----------- ----------- -----------
Net income $ 6,793,331 $ 3,470,694 $ 3,492,233 $ 1,970,884
=========== =========== =========== ===========
Distribution of net income
Patronage dividends $ 6,793,331 $ 3,470,694 $ 3,492,233 $ 1,970,884
Retained earnings - - - -
----------- ----------- ----------- -----------
$ 6,793,331 $ 3,470,694 $ 3,492,233 $ 1,970,884
=========== =========== =========== ===========
5
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the six months ended June 30, 2001 2000
---------- ----------
Net income $6,793,331 $3,470,694
Other comprehensive income, net of tax:
Net unrealized holding
gains before tax 111,355 648,328
---------- ----------
Comprehensive income $6,904,686 $4,119,022
========== ==========
6
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended June 30, 2001 2000
-------------- -------------
Cash flows from operating activities
Net income $ 6,793,331 $ 3,470,694
Adjustments to reconcile net income to net cash
used in operating activities
Provision for loan losses 1,500,000 441,667
Depreciation and amortization 3,271,226 3,432,986
Gain on sale of loans (4,118,558) (232,994)
Loans originated for sale (210,817,721) (115,896,466)
Proceeds from sale of loans held for sale 199,656,610 40,398,910
(Increase) decrease in other assets (10,803,875) 2,826,011
(Decrease) increase in other liabilities (14,629,533) 3,026,290
-------------- -------------
Net cash used in operating activities (29,148,520) (62,532,902)
-------------- -------------
Cash flows from investing activities
Decrease in restricted cash 40,442 29,606
Purchase of investment securities
Available-for-sale (3,585,313) (2,260,916)
Proceeds from maturities of investments
securities
Available-for-sale 3,794,405 2,752,681
Net increases in loans and lease financing (16,681,134) (80,564,806)
Proceeds from sale of portfolio loans - 13,823,937
Purchases of premises and equipment (501,777) (73,460)
-------------- -------------
Net cash used in investing activities (16,933,377) (66,292,958)
-------------- ------------
Cash flows from financing activities
Net increase in deposits 28,075,773 16,410,899
Net increase in short-term borrowings 44,678,532 94,009,063
Proceeds from issuance of long-term debt 49,763,049 49,768,128
Repayment on long term debt (60,833,333) (32,000,000)
Dividends paid (138,125) (287,630)
-------------- -------------
Net cash provided by financing activities 61,545,896 127,900,460
-------------- -------------
Increase (decrease) in cash and cash equivalents 15,463,999 (925,400)
Cash and cash equivalents, beginning of year 36,494,978 29,910,037
-------------- -------------
Cash and cash equivalents, end of period $ 51,958,977 $ 28,984,637
============== =============
7
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Supplemental schedule of investing and financing activities:
For the six months ended June 30, 2001 2000
----------- -----------
Unrealized gain on investment
available-for-sale $ 111,355 $ 648,328
Interest paid $30,364,013 $29,247,787
Income taxes paid $ 638,960 $ 731,970
8
NATIONAL COOPERATIVE BANK
CONDENSED NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
June 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.
Certain prior year amounts have been reclassified to conform to the 2001
presentation.
1. Cash, Cash Equivalents and Investment Securities
As of June 30, 2001, NCB's portfolios of investment securities, cash and
cash equivalents had an average adjusted maturity of approximately 1.9 years
with interest rates in those portfolios varying from 5.00% to 8.13%.
Cash and Investments Investments
Cash Available- Held-to-
Equivalents For-sale Maturity
----------- ----------- -----------
Cash $ 3,369,724 $ - $ -
Federal funds 32,264,623 - -
Money market securities 15,974,630 807,059 -
Private debt security - - 792,931
Mutual funds - 1,658,846 -
Certificates of deposit 350,000 - -
Mortgage-backed
securities - - 2,130,763
Corporate bonds - 8,941,461 -
U.S. Treasury and Agency
obligations - 15,469,070 -
Interest-only receivables - 15,665,756 -
----------- ----------- -----------
$51,958,977 $42,542,192 $ 2,923,694
=========== =========== ===========
9
As of December 31, 2000, NCB's portfolios of investment securities, cash
and cash equivalents were comprised of the following:
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
=========== =========== ==========
At June 30, 2001 and December 31, 2000, the investments in the
available-for-sale portfolio were recorded at aggregate fair value.
Restricted cash of $3,835,107 and $3,875,549 at June 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 June 30, 2001 and December 31, 2000, the combined remaining balance of
1992 and 1993 loans totaled $32,752,720 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.
Interest-only receivables substantially pertain to blanket loans to
cooperative housing corporations.
2. Loans and Lease Financing
Loans and leases outstanding by category were as follows:
June 30, 2001 December 31, 2000
------------- -----------------
Commercial loans $ 516,386,127 $519,725,819
Lease financing 87,566,464 83,562,445
Real estate loans
Residential 402,681,559 370,510,903
Commercial 4,617,634 4,737,560
-------------- ------------
$1,011,251,784 $978,536,727
============== ============
At June 30, 2001 and December 31, 2000, loans held for sale were
$115.1 million and $99.1 million, respectively.
10
3. Impaired Assets
Impaired loans, representing the non-accrual loans at June 30, 2001 and
December 31, 2000, totaled $3,198,183 and $2,570,135, respectively, and averaged
$3,279,872 and $1,180,000 during the respective periods ending on these dates.
Specific allowances of $1,312,661 and $1,185,960 were established at June 30,
2001 and December 31, 2000, respectively. During the first half of 2001 and
2000, the interest collected on the non-accrual loans was applied to reduce the
outstanding principal.
At June 30, 2001 and December 31, 2000, there were no commitments to lend
additional funds to borrowers whose loans were impaired.
At June 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 six months ended June 30, 2001:
Balance at January 1, 2001 $21,260,284
Provision for loan losses 1,500,000
Charge-offs (1,428,588)
Recoveries of loans previously charged-off 568,018
-----------
Balance at June 30, 2001 $21,899,714
===========
The allowance for loan losses as a percentage of average loans and lease
financing, and loans held for sale at June 30, 2001 was 2.20%.
11
5. Statement of Changes in Members' Equity
The following is a summary of the activity in members' equity for the six
months ended June 30, 2001:
Retained Retained Total
Common Earnings Earnings Unrealized Members'
Stock Allocated Unallocated Gain Equity
----------- ------------- ------------ ----------- ------------
Balance, December 31, 2000 $ 129,458,463 $ 5,433,641 $ 16,804,590 $ 1,756,023 $ 153,452,717
Net income 6,793,331 6,793,331
Adjustments to dividends paid 10,723 10,723
Cancellation and redemption
of stock (108,362) (108,362)
Unrealized gain on investment
securities available-for-sale 111,355 111,355
2001 patronage dividends
to be distributed in cash (2,579,938) (2,579,938)
retained in form of equity 3,145,752 (3,145,752) 0
------------- ------------- ------------- ------------- -------------
Balance, June 30, 2001 $ 129,350,101 $ 8,579,393 $ 17,882,954 $ 1,867,378 $ 157,679,826
============= ============= ============= ============= =============
12
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 six months ended June 30,
2001 and June 30, 2000 (dollars in thousands):
2001 Commercial Real Estate Warehouse NCB
Lending Lending Lending NCBSB Other Consolidated
---------- ----------- --------- ----- ----- ------------
Net interest income
Interest income $24,830 $7,582 $3,970 $6,104 1,272 43,758
Interest expense 16,633 5,051 2,521 3,909 (780) 27,334
------- ------ ------ ------ ------- --------
Net interest income 8,197 2,531 1,449 2,195 2,052 16,424
Provision (credit) for loan
losses 153 85 - - 1,262 1,500
Non-interest income-external 2,601 2,921 2,718 883 753 9,876
Non-interest expense
Direct expense 4,500 2,187 1,167 1,310 8,071 17,235
Overhead and support 821 528 137 535 (2,021) -
------- ------ ------ ------ ------- --------
Total non-interest expense 5,321 2,715 1,304 1,845 6,050 17,235
------- ------ ------ ------ ------- --------
Income (loss) before taxes $ 5,324 $2,652 $2,863 $1,233 $(4,507) $ 7,565
======= ====== ====== ====== ======== =======
Total average assets $555,144 $184,723 $80,517 $171,820 $106,706 $1,098,910
======== ======== ======= ======== ======== ==========
13
2000 Commercial Real Estate Warehouse NCB
Lending Leading Lending NCBSB Other Consolidated
---------- ----------- --------- ----- ----- ------------
Net interest income
Interest income $ 22,565 $ 6,487 $ 7,142 $ 6,283 $ 3,298 45,775
Interest expense 18,308 4,589 5,473 3,809 (1,802) 30,377
-------- -------- -------- -------- -------- ----------
Net interest income 4,257 1,898 1,669 2,474 5,100 15,398
Provision (credit) for loan
losses 10,419 81 - 67 (10,125) 442
Non-interest income-external 1,061 797 568 505 3 2,934
Non-interest expense
Direct expense 2,556 1,700 406 1,111 7,841 13,614
Overhead and support 587 477 81 544 (1,689) -
-------- -------- -------- -------- -------- ----------
Total non-interest expense 3,143 2,177 487 1,655 6,152 13,614
-------- -------- -------- -------- -------- ----------
Income (loss) before taxes $ (8,244) $ 437 $ 1,750 $ 1,257 $ 9,076 $ 4,276
======== ======== ======== ======== ======== ==========
Total average assets $573,277 $151,677 $167,808 $164,703 $ 74,748 $1,132,213
======== ======== ======== ======== ======== ==========
The following is the segment reporting for the three months ended June 30,
2001 and June 30, 2000 (dollars in thousands):
2001 Commercial Real Estate Warehouse NCB
Lending Lending Lending NCBSB Other Consolidated
---------- ----------- --------- ----- ----- ------------
Net interest income
Interest income $11,800 $3,912 $2,004 3,007 $ 758 21,481
Interest expense 7,420 2,438 1,270 1,991 (76) 13,043
----- ----- ----- ----- ----- ------
Net interest income 4,380 1,474 734 1,016 834 8,438
Provision (credit) for loan
losses 586 (13) - - 177 750
Non-interest income-external 1,608 1,686 753 483 581 5,111
Non-interest expense
Direct expense 2,762 1,215 701 684 3,611 8,973
Overhead and support 473 291 69 242 (1,075) -
------- ------ ------ ----- ------- ------
Total non-interest expense 3,235 1,506 770 926 2,536 8,973
------- ------ ------ ----- ------- ------
Income (loss) before taxes $ 2,167 $1,667 $717 $ 573 $ (1,298) $3,826
======= ====== ==== ===== ======== ======
Total average assets $531,290 $193,094 $82,805 $181,846 $137,528 $1,126,563
======== ======== ======= ======== ======== ==========
14
2000 Commercial Real Estate Warehouse NCB
Lending Leading Lending NCBSB Other Consolidated
---------- ----------- --------- ----- ----- ------------
Net interest income
Interest income $ 11,142 $ 3,402 $ 3,659 $ 3,350 $ 2,400 23,953
Interest expense 9,435 2,421 3,180 2,106 (1,043) 16,099
-------- -------- -------- -------- -------- ----------
Net interest income 1,707 981 479 1,244 3,443 7,854
Provision (credit) for loan
losses 4,471 11 - 54 (4,107) 429
Non-interest income-external 404 327 386 279 113 1,509
Non-interest expense
Direct expense 1,337 760 194 557 3,688 6,536
Overhead and support 300 266 39 270 (875) -
-------- -------- -------- -------- -------- ----------
Total non-interest expense 1,637 1,026 233 827 2,813 6,536
-------- -------- -------- -------- -------- ----------
Income (loss) before taxes $ (3,997) $ 271 $ 632 $ 642 $ 4,850 $ 2,398
========= ======== ======== ======== ======== ==========
Total average assets $564,483 $150,243 $157,568 $161,369 $141,082 $1,174,745
======== ======== ======== ======== ======== ==========
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 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.
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
15
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 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.
16
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 six months ending June 30, 2001, NCB recognized a net loss of
$596.6 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.
17
NATIONAL COOPERATIVE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
SUMMARY
NCB's net income for the six months ended June 30, 2001 was $6.8 million.
This was a $3.3 million increase compared with $3.5 million for the six months
ended June 30, 2000. The variance resulted from an increase in gain on sale of
loans and an increase in net interest income of $3.3 million and $1.0 million,
respectively. The variance was partially offset by increases to provision for
loan losses and non-interest expenses of $1.1 million and $1.5 million,
respectively.
Total assets were $1.1 billion at June 30, 2001, up $53.8 million from
December 31, 2000. This resulted primarily from increases in loans and lease
balances of $16.7 million and loans held for sale of $16.1 million and from
increased interest-only receivables from loans sold.
The annualized return on average total assets was 1.24% for the first six
months of 2001 compared with 0.61% for the same period in 2000. The annualized
return on average equity for the period ended June 30, 2001 and June 30, 2000
was 8.67% and 4.67%, respectively.
NET INTEREST INCOME
Net interest income for the first six months of 2001 was $16.4 million, an
increase of 6.7% or $1.0 million compared with $15.4 million over the same
period a year ago.
For the six months ending June 30, 2001, interest income decreased 4.4% or
$2.0 million to $43.8 million from $45.8 million in the prior year's period. The
majority of the decrease was due to the lower yield on commercial loan and lease
portfolios and lower volume on real estate loans. Table 2 shows that decreases
of $1.3 million and $738 thousand were volume and yield related, respectively.
Interest expense decreased $3.1 million to $27.3 million for the six months
ended June 30, 2001 compared with $30.4 million for the six months ended June
30, 2000. Interest expense was down as a result of efforts to grow deposits,
which are normally at a lower rate than other sources of funds, as well as,
decreases in the rates at which NCB borrows short-term and long-term debt. As
shown on Table 2, a $3.0 million decrease in interest expense was both volume
and yield related.
For the six months ended June 30, 2001 and 2000, the average rate on
interest earning assets was 8.16% and 8.28%, respectively. Average rate on
interest bearing liabilities was down 39 basis points to 6.01% for the first
half of 2001 compared with 6.40% for the same period in 2000.
18
For the three month period ended June 30, 2001, net interest income
increased 7.4% or $584.5 thousand from the same period in 2000.
Interest income decreased $2.5 million to $21.5 million for the three
months ended June 30, 2001 compared with $24.0 million for the same period ended
June 30, 2000. The decrease in interest income was due to a lower average
balance of interest earning assets and lower related yields.
For the second quarter ended June 30, 2001, interest expense decreased
19.0% or $3.1 million to $13.0 million compared with $16.1 million for the
second quarter ended June 30, 2000 due to lower short-term interest rates and
increased funding from deposits. As shown on Table 2A, the decrease in interest
expense amounting to $1.0 million was volume related while $2.1 million was
yield related.
For the quarter ended June 30, 2001, the average rate on interest earning
assets was down 56 basis points to 7.78% from 8.34% for the same quarter ended
June 30, 2000. Average rate on interest bearing liabilities was 5.60% and 6.51%
for the periods ended June 30, 2001 and 2000, respectively.
NON-INTEREST INCOME
Non-interest income for the six months ended June 30, 2001 of $9.9 million
increased $4.9 million from $5.0 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. The
majority of the increase resulted from gains on loans sold.
For the six months ended June 30, 2001, gain on sale of loans was $3.5
million compared with $233.0 thousand in the same period last year. The increase
resulted from the timing and volume of loans sold. Total loans sold were $185.6
million and $55.8 million for the periods ended June 30, 2001 and 2000,
respectively.
Servicing fee income for the six months ended June 30, 2001 increased 10.8%
or $157.0 thousand to $1.60 million compared to $1.45 million in the prior year.
NCB serviced single and multi-family real estate and commercial loans for
investors in the amounts of $2.4 billion and $2.1 billion as of June 30, 2001
and 2000, respectively.
Other non-interest income for the six months ended June 30, 2001 increased
$1.3 million from $3.4 million to $4.7 million due primarily to increases in
excess yield and prepayment penalties received.
19
NON-INTEREST EXPENSE
Non-interest expense for the six months ended June 30, 2001 increased 9.6%
or $1.5 million to $17.2 million compared with $15.7 million for the six months
ended June 30, 2000. Compensation and benefits, the largest component of
non-interest expense, increased 30.2% or $2.3 million due to a higher employee
base and salary increases. Total number of employees has increased 13.2% or 26
people to 223 for the six months ended June 30, 2001 from 197 total employees,
as of June 30, 2000.
Non-interest expense as a percentage of average assets increased to 3.1% on
an annualized basis for the six months ended June 30, 2001 compared with 2.8%
for the same period a year ago.
For the three months ended June 30, 2001, non-interest expense increased
18.3% or $1.4 million to $9.0 million from $7.6 million for the same period in
2000. The variance was primarily due to the increased employee base and salary
increases.
20
Table 1
RATE RELATED ASSETS AND LIABILITIES
(dollars in thousands)
Six Months Ended June 30,
2001 2000
--------------------------------- -------------------------------
ASSETS Average Income/ Yields/ Average Income/ Yields/
Balance Expenses Rates Balance Expenses Rates
-------- -------- ------- ------- -------- -------
Interest earning assets
Real estate loans $ 402,421 $16,703 8.30% $ 462,519 $18,691 8.08%
Commercial loans
and leases 592,164 24,991 8.44% 563,606 24,753 8.78%
------- ------ ---------- -------
Total loans and
leases 994,585 41,694 8.38% 1,026,125 43,444 8.47%
Investment securities
and cash equivalents 78,208 2,064 5.28% 78,988 2,331 5.90%
-------- ------ ---------- -------
Total interest earning
assets 1,072,793 43,758 8.16% 1,105,113 45,775 8.28%
--------- ------ ---------- -------
Allowance for loan
losses (21,757) (18,796)
Non-interest earning assets
Cash 2,539 4,446
Other assets 45,335 41,450
--------- ----------
Total non-interest
earning assets 47,874 45,896
--------- ----------
Total assets $1,098,910 $1,132,213
========== ==========
LIABILITIES AND MEMBERS' EQUITY
Interest bearing liabilities
Subordinated debt $ 182,129 $ 5,065 5.56% $ 182,571 $ 5,441 5.96%
Notes payable 577,722 18,364 6.36% 631,347 21,735 6.89%
Deposits 149,998 3,905 5.21% 135,315 3,201 4.73%
------------ ------ ---------- -------
Total interest bearing
liabilities 909,849 27,334 6.01% 949,233 30,377 6.40%
------ -------
Other liabilities 32,351 34,415
Members' equity 156,710 148,565
---------- ----------
Total liabilities and
members' equity $1,098,910 $1,132,213
========== ==========
Net interest earning assets $ 162,944 $ 155,880
Net interest revenues and spread $16,424 2.15% $15,398 1.88%
Net yield on interest earning
assets 3.06% 2.79%
21
Table 1A
RATE RELATED ASSETS AND LIABILITIES
(dollars in thousands)
Three Months Ended June 30,
2001 2000
--------------------------------- -------------------------------
ASSETS Average Income/ Yields/ Average Income/ Yields/
Balance Expenses Rates Balance Expenses Rates
-------- -------- ------- ------- -------- -------
Interest earning assets
Real estate loans $ 425,633 $8,500 7.99% $ 482,955 $10,055 8.33%
Commercial loans
and leases 592,878 11,810 7.97% 584,048 12,808 8.77%
--------- ------ ---------- -------
Total loans and
leases 1,018,511 20,310 7.98% 1,067,003 22,863 8.57%
Investment securities
and cash equivalents 85,627 1,171 5.47% 82,414 1,090 5.29%
--------- ------- ---------- -------
Total interest earning
assets 1,104,138 21,481 7.78% 1,149,417 23,953 8.34%
--------- ------ ---------- -------
Allowance for loan
losses (21,927) (18,868)
Non-interest earning assets
Cash 2,791 3,923
Other assets 41,561 40,273
--------- ----------
Total non-interest
earning assets 44,352 44,196
--------- ----------
Total assets $1,126,563 $1,174,745
========== ==========
LIABILITIES AND MEMBERS' EQUITY
Interest bearing liabilities
Subordinated debt $ 182,034 $2,437 5.36% $ 182,541 $ 2,795 6.13%
Notes payable 593,622 8,615 5.80% 664,430 11,562 6.96%
Deposits 155,159 1,991 5.13% 141,923 1,742 4.91%
-------- ------- ---------- -------
Total interest bearing
liabilities 930,815 13,043 5.60% 988,894 16,099 6.51%
--------- -------
Other liabilities 38,455 36,607
Members' equity 157,293 149,244
--------- ----------
Total liabilities and
members' equity $1,126,563 $1,174,745
========== ==========
Net interest earning assets $ 173,323 $ 160,523
Net interest revenues and spread $ 8,438 2.18% $ 7,854 1.83%
Net yield on interest earning
assets 3.06% 2.73%
22
Table 2
Changes in Net Interest Income
(dollars in thousands)
For the six months ended June 30, 2001 compared to 2000
Increase (decrease) due to change in:
-------------------------------------
Average Average
Volume* Yield Net**
------- ----- -----
Interest Income
Cash equivalents and
investment securities $ (23) $ (244) $ (267)
Commercial loans and leases 1,227 (989) 238
Real estate loans (2,483) 495 (1,988)
------- ----- -------
Total interest income (1,279) (738) (2,017)
------- ----- -------
Interest expense
Deposits 365 339 704
Notes payable (1,772) (1,599) (3,371)
Subordinated debt (13) (363) (376)
------- ------- --------
Total interest expense (1,420) (1,623) (3,043)
------- ------- --------
Net interest income $ 141 $ 885 $1,026
====== ====== ======
* 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.
23
Table 2A
Changes in Net Interest Income
(dollars in thousands)
For the three months ended June 30, 2001 compared to 2000
Increase (decrease) due to change in:
-------------------------------------
Average Average
Volume* Yield Net**
------- ----- -----
Interest Income
Cash equivalents and
investment securities $ 43 $ 38 $ 81
Commercial loans and leases 191 (1,189) (998)
Real estate loans (1,157) (398) (1,555)
------- ------- -------
Total interest income (923) (1,549) (2,472)
------- ------- -------
Interest expense
Deposits 167 82 249
Notes payable (1,152) (1,795) (2,947)
Subordinated debt (8) (350) (358)
------- ------- --------
Total interest expense (992) (2,064) (3,056)
------- ------- --------
Net interest income $ 69 $ 515 $ 584
======= ======= =======
* 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.
24
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 six months ended June 30, 2001 was $771.5 thousand compared with the
prior year's provision of $805.4 thousand.
CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES
Cash, cash equivalents and investment securities totaling $97.4 million at
June 30, 2001 increased $13.5 million or 16.1% from $83.9 million at year-end
2000. The increase was due mostly to operating cash for NCB Savings Bank. As a
percentage of earning assets, cash, cash equivalents and investment securities
increased to 8.8% at June 30, 2001 from 8.2% at December 31, 2000.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at June 30, 2001 was $21.9 million, up slightly
by 3.0% from December 31, 2000. The allowance during the period was impacted by
loans charged-off of $1.4 million, recoveries of loans previously charged-off of
$568 thousand and the provision of $1.5 million. NCB's annualized provision for
loan losses as a percentage of average loans and leases outstanding was 0.3% for
the six months ended June 30, 2001 and less than 0.1% for the six months ended
June 30, 2000.
The loan loss allowance as a percentage of average loans and leases remained
2.2% at June 30, 2001 and at 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 24.4% from $2.6 million at December 31, 2000 to $3.2
million at June 30, 2001. Impaired assets as a percentage of loans and leases
outstanding plus real estate owned was 0.32% at June 30, 2001 compared with
0.26% at year-end 2000. The allowance for loan losses as a percentage of
impaired assets decreased to 685% at June 30, 2001 from 827% at December 31,
2000.
25
INTEREST BEARING LIABILITIES
Interest Bearing liabilities
(dollars in thousands)
6/30/01 12/31/00 % CHANGE
------- -------- --------
Deposits $177,036 $148,961 18.8%
Short-term debt 314,259 269,580 16.6%
Long-term debt 283,919 291,827 (2.7%)
Subordinated debt 182,043 182,022 0.0%
-------- --------
Total $957,257 $892,390 7.3%
======== ========
Interest bearing liabilities increased $64.9 million to $957.3 million at
June 30, 2001 from $892.4 million at December 31, 2000.
For the six months of 2001, deposits at NCBSB grew 18.8% to $177 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
cooperatives customers. Average maturity of the certificates of deposits is 14.3
months. Deposits are a major portion of interest bearing liabilities - 18.5% and
16.7% at June 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 June 30, 2001, total short-term and long-term borrowings (including
subordinated debt) increased 4.9% or $36.8 million to $780.2 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 June 30, 2001 and
December 31, 2000, NCBSB had advances of zero and $5 million, respectively, from
the Federal Home Loan Bank. At June 30, 2001, included in the short-term
borrowings were revolving lines of credit of $153.5 million; commercial paper
with a face value of $145.2 million and $16 million in borrowing from a related
entity and 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 2.7% from year-end 2000 due to a maturity of $28.3 million under the
long-term facilities which was offset by a SFAS No. 133 valuation of $3 million.
At June 30, 2001, there was unused capacity under short-term and long-term
facilities of approximately $45.8 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.
26
TABLE 3
Impaired assets
(dollars in thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2001 2001 2000 2000 2000
------- -------- ------- -------- ---------
Real estate owned $ 0 $ 0 $ 0 $ 14 $ 125
Non-accruing 3,198 3,347 2,570 504 707
------ ------ ------ ------ ------
$3,198 $3,347 $2,570 $ 518 $ 832
====== ====== ====== ====== ======
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in NCB's market risk profile occurred from
December 31, 2000 to June 30, 2001.
ITEM 6. EXHIBITS
(a) The following exhibits are filed as part of this report:
Exhibit 10-11 - Amendment No. 4 to Third Amended and
Restated Loan Agreement with Fleet Bank as Agent
Exhibit 10-16 - First Amendment to Term Loan Agreement
Dated November 5, 1998 with Greenwich Funding Corporation
And Credit Suisse First Boston
27
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: APRIL 10, 2002
------------------------
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
By: /s/ E. MICHAEL RAMBERG
-----------------------
E. Michael Ramberg
Vice President,
Corporate Controller
28