<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 MARCH 31, 2002 Commission file number 2-99779
NATIONAL CONSUMER COOPERATIVE BANK
--------------------------------------------------
(Exact name of registrant as specified in its charter)
United States of America
(12 U.S.C. Section 3001 et seq.) 52-1157795
- -------------------------------- -------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 MARCH 31, 2002
-----------------------------
CLASS C 220,180
- -------------------
(Common stock, $100.00 par value)
CLASS B 1,074,401
- -------------------
(Common stock, $100.00 par value)
CLASS D 3
- -------------------
(Common stock, $100.00 par value)
</Table>
<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 - March 31, 2001
(unaudited) and December 31, 2001 ....................... 3
Consolidated statements of income - for the three
months ended March 31, 2002 (unaudited) and 2001 ........ 4
Consolidated statements of comprehensive income -
for the three months ended March 31, 2002
(unaudited) and 2001..................................... 5
Consolidated statements of cash flows - for the
three months ended March 31, 2002 (unaudited) and 2001... 6-7
Condensed notes to the consolidated financial
statements - March 31, 2002 (unaudited).................. 8-18
Item 2 Management's discussion and analysis of
financial condition and results of operations -
for the three months ended March 31, 2002 and 2001....... 19-25
Item 3 Quantitative and qualitative disclosures about
market risk ............................................. 25
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security
Holders.................................................. 25
Item 6 Exhibit 26
Exhibit 13 - 2001 Annual Report
</Table>
<Page>
NATIONAL COOPERATIVE BANK
CONSOLIDATED BALANCE SHEETS
March 31, 2002 and December 31, 2001
<Table>
<Caption>
March 31, December 31,
2002 2001
Assets (Unaudited)
---------------- ----------------
Cash and cash equivalents $ 74,648,760 $ 66,487,131
Restricted cash 17,857,177 17,874,790
Investment securities
Available-for-sale 47,423,146 47,584,572
Held-to-maturity 3,633,875 3,620,419
Loans held for sale 216,801,065 176,540,933
Loans and lease financing 815,441,187 821,950,845
Less: Allowance for loan losses (23,018,356) (22,239,903)
---------------- ----------------
Net loans and lease financing 792,422,831 799,710,942
Other assets 58,923,637 54,619,991
---------------- ----------------
Total assets $ 1,211,710,491 $ 1,166,438,778
================ ================
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES
Deposits $ 268,554,716 $ 222,889,886
Patronage dividends payable in cash 6,727,426 4,922,056
Other liabilities 33,549,357 36,560,179
Borrowings
Short-term 301,502,887 256,553,797
Long-term
Current 48,333,333 78,333,333
Non-current 203,513,282 218,607,792
Subordinated debt 185,468,598 186,451,787
---------------- ----------------
Total borrowings 738,818,099 739,946,709
---------------- ----------------
Total liabilities 1,047,649,599 1,004,318,830
---------------- ----------------
MEMBERS' EQUITY
Common stock
Class B 111,738,805 111,738,805
Class C 22,141,668 22,141,668
Class D 300 300
Retained earnings
Allocated 9,884,154 7,677,591
Unallocated 17,237,690 17,287,555
Accumulated other comprehensive income 3,058,275 3,274,029
---------------- ----------------
Total members' equity 164,060,892 162,119,948
---------------- ----------------
Total liabilities and members' equity $ 1,211,710,491 $ 1,166,438,778
================ ================
</Table>
3
<Page>
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<Table>
<Caption>
FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001
---------------- ----------------
Interest income
Loans and lease financing $ 18,454,637 $ 21,383,590
Investment securities 738,807 893,138
---------------- ----------------
Total interest income 19,193,444 22,276,728
---------------- ----------------
Interest expense
Deposits 1,987,935 1,913,924
Short-term borrowings 1,931,350 4,492,631
Long-term debt, other borrowings
and subordinated debt 7,035,789 7,884,312
---------------- ----------------
Total interest expense 10,955,074 14,290,867
---------------- ----------------
Net interest income 8,238,370 7,985,861
Provision for loan losses 1,088,000 750,000
---------------- ----------------
Net interest income after
provision for loan losses 7,150,370 7,235,861
---------------- ----------------
Non-interest income
Gain on sale of loans 3,859,812 2,081,986
Loan and deposit servicing fees 886,617 798,168
Other 1,778,993 1,884,224
---------------- ----------------
Total non-interest income 6,525,422 4,764,378
---------------- ----------------
Non-interest expense
Compensation and employee benefits 5,011,574 4,899,356
Contractual services 1,548,218 1,392,298
Occupancy and equipment 1,536,034 1,289,936
Contribution to NCB Development 50,000 -
Other 1,247,749 679,936
---------------- ----------------
Total non-interest expense 9,393,575 8,261,553
---------------- ----------------
Net income before taxes 4,282,217 3,738,686
Provision for income taxes 320,150 437,588
---------------- ----------------
Net income $ 3,962,067 $ 3,301,098
================ ================
Distribution of net income
Patronage dividends $ 3,962,067 $ 3,301,098
Retained earnings - -
---------------- ----------------
$ 3,962,067 $ 3,301,098
================ ================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<Page>
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<Table>
<Caption>
FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001
------------- -------------
Net income $ 3,962,067 $ 3,301,098
Other comprehensive income
Unrealized (loss) gain on investment
securities available-for-sale, net (215,754) 511,753
------------- -------------
Comprehensive income $ 3,746,313 $ 3,812,851
============= =============
</Table>
5
<Page>
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001
------------- -------------
Cash flows from operating activities
Net income $ 3,962,067 $ 3,301,098
Adjustments to reconcile net income to net
cash used in operating activities
Provision for loan losses 1,088,000 750,000
Depreciation and amortization 4,457,338 1,633,107
Gain on sale of loans (3,859,812) (2,081,986)
Loans originated for sale (195,975,826) (78,075,012)
Proceeds from sale of loans held for sale 158,994,446 83,569,572
Increase in other assets (4,927,679) (4,775,231)
(Decrease) increase in other liabilities (3,618,170) (12,525,706)
------------- -------------
Net cash (used in) provided by operating
activities (39,879,636) (8,204,158)
------------- -------------
Cash flows from investing activities
Redemption of restricted cash 17,613 40,442
Purchase of investment securities
Available-for-sale (3,748,504) (3,515,336)
Proceeds from maturities of investments
Available-for-sale 1,900,025 3,787,728
Held-to-maturity - -
Net decrease (increase) in loans and lease
Financing 4,411,153 (2,789,362)
Proceeds from sale of portfolio loans 2,019,776 -
Purchases of premises and equipment (831,924) (490,826)
------------- -------------
Net cash provided by (used in)
investing activities 3,768,140 (2,967,354)
------------- -------------
Cash flows from financing activities
Net (decrease) increase in deposits 45,664,830 (2,967,354)
Net (decrease) increase in
short-term borrowings 43,608,296 36,352,178
Repayment on long-term debt (45,000,000) (28,333,333)
Net cash provided by financing activities 44,273,126 5,727,273
------------- -------------
(Decrease) increase in cash and cash equivalents 8,161,629 (5,444,239)
Cash and cash equivalents, beginning of period 66,487,131 36,494,978
------------- -------------
Cash and cash equivalents, end of period $ 74,648,760 $ 31,050,739
============= =============
</Table>
The accompanying notes are an integral part of these financial statements.
6
<Page>
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Supplemental schedule of investing and financing activities:
<Table>
<Caption>
2002 2001
------------ -------------
Unrealized (loss) gain on investment
securities available-for-sale $ (215,754) $ 511,753
Loans transferred to other real estate owned $ 557,804
Interest paid $ 8,490,156 $ 12,953,055
Income taxes paid $ 1,150 $ 2,560
</Table>
7
<Page>
NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
NATIONAL COOPERATIVE BANK
CONDENSED NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
The interim consolidated financial statements in this Quarterly Report
on Form 10-Q are in conformity with accounting principles generally accepted
in the United States of America which have been applied on a consistent
basis and follow general practice within the banking industry. In our opinion
these interim financial statements include all normal recurring adjustments
necessary to fairly present our results of operations, financial condition and
cash flows. The preparation of financial statements requires the use of
estimates and assumptions that affect the amounts reported. Actual results
could differ from those estimates and the results of operations for the three
months ended March 31, 2002 are not necessarily indicative of the results to
be expected for all of 2002. For comparability, certain prior period amounts
have been reclassified to conform with current period presentation. The
financial statements contained herein should be read in conjunction with the
financial statements and accompanying notes in our Annual Report on Form 10-K.
1. Cash, Cash Equivalents and Investment Securities
As of March 31, 2002, NCB's portfolios of investment securities, cash and
cash equivalents had an average adjusted maturity of 404 days with interest
rates in those portfolios varying from 2.250% to 8.125%.
<Table>
<Caption>
Cash and Investments Investments
Cash Available- Held-to-
Equivalents for-sale Maturity
--------------- ---------------- ----------------
Cash $ 30,904,095 $ - $ -
Federal funds 32,383,036 - -
Money market securities 11,361,629 2,583,920 -
Private debt security - - 792,878
Mutual funds - 1,217,396 -
Mortgage-backed
securities - - 2,840,997
Corporate bonds - 2,201,609 -
U.S. Treasury and Agency
obligations - 24,948,084 -
Interest-only receivables - 16,472,137 -
--------------- ---------------- ----------------
$ 74,648,760 $ 47,423,146 $ 3,633,875
=============== ================ ================
</Table>
8
<Page>
As of December 31, 2001, NCB's portfolios of investment securities, cash
and cash equivalents were comprised of the following:
<Table>
<Caption>
Cash and Investments Investments
Cash Available- Held-to-
Equivalents for-Sale Maturity
------------- ------------- ------------
Cash $ 15,754,791 $ - $ -
Federal funds 43,033,299 - -
Money market securities 7,699,041 2,570,698 -
Private debt security - - 792,878
Mutual funds - 1,208,049 -
Certificates of deposit - - -
Mortgage-backed
securities - - 2,827,541
Corporate bonds - 2,743,138 -
U.S. Treasury and Agency
obligations - 22,789,262 -
Interest-only receivables - 18,273,425 -
------------- ------------- ------------
$ 66,487,131 $ 47,584,572 $ 3,620,419
============= ============= ============
</Table>
At March 31, 2002 and December 31, 2001, the investments in the
available-for-sale portfolio were recorded at aggregate fair value.
Restricted cash of $3,777,177 and $3,794,790 as of March 31, 2002 and
December 31, 2001, 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 March 31, 2002 and December 31, 2001 and December 31, 2000, the
combined remaining balance of 1992 and 1993 loans totaled $30,445,728 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 at March 31, 2002 and
December 31, 2001, 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 December 31, 2001,
the remaining balance of the loans owned by MBIA under the terms of the
Agreement totaled $10,941,707. 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 as of March 31, 2002 and
December 31, 2001, 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.
2. Loans and Lease Financing
Loans and leases outstanding, including loans held for sale, by category,
were as follows:
<Table>
<Caption>
March 31, 2002 December 31, 2001
---------------- -----------------
Commercial loans
Portfolio $ 437,254,810 $ 466,025,616
Loans held for sale 12,825,273 14,236,011
Real estate loans
Residential 297,790,959 268,881,408
Loans held for sale 203,975,792 162,304,922
Commercial 4,426,037 4,490,320
Lease financing 75,969,381 82,553,501
---------------- -----------------
$ 1,032,242,252 $ 998,491,778
================ =================
</Table>
9
<Page>
3. Impaired Assets
Impaired loans, representing non-accrual loans at March 31, 2002 and
December 31, 2001, totaled $7,767,770 and $5,693,867, respectively, and averaged
$6,740,328 and $3,321,452 during the respective periods ending on these dates.
Specific allowances of $1,340,277 and $1,437,076 were established at March 31,
2002 and December 31, 2001, respectively. During the first quarters of 2002 and
2001, the interest collected on the non-accrual loans was applied to reduce the
outstanding principal.
At March 31, 2002 and December 31, 2001, there were no commitments to lend
additional funds to borrowers whose loans were impaired.
At March 31, 2002, there was $557,804 of real estate owned property and no
real estate owned property as of December 31, 2001.
4. Allowance for Loan Losses
The following is a summary of the activity in the allowance for loan losses
during the three months ended March 31:
<Table>
<Caption>
2002 2001
-------------- --------------
Beginning January 1 $ 22,239,903 $ 21,260,284
Provision for loan losses 1,088,000 750,000
Charge-offs (378,658) (481,125)
Recoveries of loans previously
charged-off 69,111 47,004
------------- ---------------
Balance at March 31, 2002 $ 23,018,356 $ 21,576,163
============= ===============
</Table>
The allowance for loan losses as a percentage of average loans and lease
financing and loans held for sale at March 31, 2002 and December 31, 2001 was
2.8% and 2.7%, respectively.
10
<Page>
5. Statement of Changes in Members' Equity
The following is a summary of the activity in members' equity for the three
months ended March 31, 2002:
<Table>
<Caption>
Retained Retained Total
Common Earnings Earnings Unrealized Members'
Stock Allocated Unallocated Gain Equity
------------- ------------- ------------ ------------ ----------------
Balance, December 31, 2001 $ 133,880,773 $ 7,677,591 $ 17,287,555 $ 3,274,029 $ 162,119,948
Net income - - 3,962,067 - 3,962,067
Adjustments to dividends
paid - - - - -
2002 patronage dividends
To be distributed in cash - - (1,805,369) - (1,805,369)
Retained in form of equity - 2,206,563 (2,206,563) - -
Unrealized (loss) gain on
investment securities
available-for-sale, net - - - (215,754) (215,754)
------------- ------------- ------------ ------------ ----------------
Balance, March 31, 2002 $ 133,880,773 $ 9,884,154 $ 17,237,690 $ 3,058,275 $ 164,060,892
============= ============= ============ ============ ================
</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.
12
<Page>
The following is the segment reporting for the three months ended March 31,
2002 and March 31, 2001 (dollars in thousands):
<Table>
<Caption>
Real
2002 Commercial Estate Warehouse NCB
Lending Lending Lending NCBSB Other Consolidated
---------- -------- --------- -------- -------- ------------
Net interest income
Interest income $ 8,684 $ 3,937 $ 2,799 $ 3,086 $ 687 $ 19,193
Interest expense 4,970 1,628 1,325 1,384 1,648 10,955
--------- -------- -------- -------- -------- -----------
Net interest income 3,714 2,309 1,474 1,702 (961) 8,238
Provision (credit) for loan
losses 450 218 - 420 - 1,088
Non-interest income-external 1,352 488 3,136 1,180 369 6,525
Non-interest expense
Direct expense 2,221 1,295 919 674 4,284 9,344
Overhead and support 501 692 155 393 (1,741) -
--------- -------- -------- -------- -------- -----------
Total non-interest expense 2,722 1,987 1,074 1,067 2,493 9,344
--------- -------- -------- -------- -------- -----------
Income (loss) before taxes $ 1,894 $ 592 $ 3,536 $ 1,395 $ (3,134) $ 4,282
========= ======== ======== ======== ======== ===========
Total average assets $536,652 $175,774 $143,064 $165,000 $177,982 $1,198,472
========= ======== ======== ======== ======== ===========
<Caption>
Real
2001 Commercial Estate Warehouse NCB
Lending Lending Lending NCBSB Other Consolidated
---------- -------- --------- -------- -------- ------------
Net interest income
Interest income $ 13,030 $ 3,671 $ 1,966 $ 3,097 $ 513 $ 22,277
Interest expense 9,213 2,614 1,251 1,918 (705) 14,291
--------- -------- -------- -------- -------- -----------
Net interest income 3,817 1,057 715 1,179 1,218 7,986
Provision (credit) for loan
losses 375 375 - - 750
Non-interest income-external 993 1,234 1,965 400 172 4,764
</Table>
13
<Page>
<Table>
Non-interest expense
Direct expense 1,738 972 466 626 4,459 8,261
Overhead and support 348 236 68 293 (945) -
--------- -------- -------- -------- -------- -----------
Total non-interest expense 2,614 1,208 534 919 3,514 8,261
--------- -------- -------- -------- -------- -----------
Income (loss) before taxes $ 2,349 $ 708 $ 2,146 $ 660 $ (2,124) $ 3,739
========= ======== ======== ======== ======== ===========
Total average assets $537,889 $176,225 $ 77,961 $154,287 $124,675 $1,071,037
========= ======== ======== ======== ======== ===========
</Table>
14
<Page>
7. Accounting for Derivatives
Adoption of FAS 133
Effective January 1, 2001, NCB adopted SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities", as amended, and recorded a
cumulative effect adjustment of $1.7 million gain to recognize the fair value
of interest rate swaps with an offsetting cumulative effect adjustment 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.
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 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.
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.
15
<Page>
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.
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, NCB
will continue to carry the derivative on the Balance Sheet at its fair value and
any gains or losses accumulated in Other Non-Interest Income will be recognized
immediately in earnings. 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 future contracts to hedge against
changes in the fair value of fixed rate loans and debt due to changes in
benchmark interest rates.
16
<Page>
Results related to the hedging of warehouse loans are summarized below
and included in the caption entitled "Gain On Sale of Loans" in the
accompanying consolidated statements of income (in thousands):
<Table>
<Caption>
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Unrealized gain (loss) on designated
derivatives recognized $ 1,238 $(2,324)
Increase (decrease) in value of
warehouse loans (1,298) 2,173
------- -------
Net hedge ineffectiveness (60) (151)
Unrealized gain (loss) on
undesignated loan commitments
recognized 812 (51)
Gain (loss) on undesignated
derivatives recognized (888) 60
------- -------
Net gain (loss) on undesignated
derivatives (76) 9
Unrealized gain (loss) on non-hedging
derivatives 732 (268)
------- -------
Net SFAS 133 adjustment $ 596 $ (410)
======= ========
</Table>
Interest rate swaps are executed to manage the interest rate risk
associated with specific assets or liabilities. An interest rate swap
agreement commits each party to make periodic interest payments to the other
based on an agreed-upon fixed rate or floating rate index. There are no
exchanges of principal amounts. Entering into an interest rate swap agreement
involves the risk of default by counterparties and interest rate risk
resulting from unmatched positions. The amounts potentially subject to credit
risk are significantly smaller than the notional amounts of the agreements.
NCB is exposed to credit loss in the event of nonperformance by its
counterparties in the aggregate amount of $7.6 million at March 31, 2002
representing the estimated cost of replacing, at current market rates, all
outstanding swap agreements. NCB does not anticipate nonperformance by any of
its counterparties. Income or expense from interest rate swaps is treated as
an adjustment to interest expense/income on the hedged asset or liability.
17
<Page>
Financial futures are contracts for delayed delivery of specific securities
at a specified future date and at a specified price or yield. NCB
purchases/sells these contracts to hedge the interest rate risk associated
with originating mortgage loans that will be held for sale. NCB has minimal
credit risk exposure on these financial instruments since changes in market
value of financial futures are settled in cash on the following business day,
and payment is guaranteed by the clearinghouse.
The contract or notional amounts and the respective estimated fair value
of NCB's financial future contracts and interest rate swaps at March 31, are
as follows (dollars in thousands):
<Table>
<Caption>
CONTRACT OR ESTIMATED
NOTIONAL AMOUNTS FAIR VALUE
---------------- ---------------
2002 2001 2002 2001
-------- ------ -------- -------
Financial instruments
whose contract amounts exceed
the amount of credit risk
Financial futures contracts $ 27,600 $ 27,400 $ 494 $ (118)
Interest rate swap agreements $223,590 $235,800 $7,600 $1,530
</Table>
8. New Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141, effective June 30, 2001, requires that all
business combinations initiated after June 30, 2001 be accounted for under the
purchase method of accounting; the use of the pooling-of-interests method of
accounting is eliminated. SFAS No. 141 also establishes how the purchase method
is to be applied for business combinations completed after June 30, 2001. This
guidance is similar to previous generally accepted accounting principles (GAAP);
however, SFAS No. 141 establishes additional disclosure requirements for
transactions occurring after the effective date.
SFAS No. 142 eliminates amortization of goodwill associated with business
combinations completed after June 30, 2001. SFAS No. 142 also provides
additional guidance on acquired intangibles that should be separately recognized
and amortized. During the transition period from July 1, 2001 through December
31, 2001, goodwill associated with business combinations completed prior to July
1, 2001 continued to be amortized through the income statement. Effective
January 1, 2002, goodwill amortization expense ceased and goodwill will be
assessed for impairment at least annually at the reporting unit level by
applying a fair-value-based test. Adoption of SFAS No. 142 did not have a
material effect on the financial statements.
SFAS No. 143, "Accounting for Asset Retirement Obligations," was also issued
in June 2001. SFAS No. 143 addresses accounting and reporting for legal
obligations and related costs associated with the retirement of long-lived
assets. The Statement requires that the fair value of the liability for an
asset retirement obligation be recognized in the period incurred if a
reasonable estimate of fair value can be made. The estimated retirement costs
are capitalized as part of the carrying amount of the long-lived asset. SFAS
No. 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Adoption of SFAS No. 143 will not have a
material effect on the financial statements.
18
<Page>
NATIONAL COOPERATIVE BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
SUMMARY
NCB's net income for the three months ended March 31, 2002 was $4.0
million. This was an increase of $0.7 million over the $3.3 million for the
three months ended March 31, 2001. The variance resulted from an increase in
gain on sale of loans of $1.8 million and an increase in net interest income
of $253,000. The variance was partially offset by an increase in non-interest
expense and increase to provision for loan losses of $1.1 million and $338
thousand, respectively.
Total assets were $1.212 billion at March 31, 2002, up $45.3 million from
December 31, 2001. This resulted primarily from a increase in net loans and
lease financing of $40.3 million related to an increase in loans held for sale
and an increase of $8.2 million in cash and cash equivalents.
The annualized return on average total assets was 1.32% for the first three
months of 2002 compared with 1.23% for the same period in 2001. The annualized
return on average equity for the period ended March 31, 2002 and March 31, 2001
was 9.7% and 8.5%, respectively.
NET INTEREST INCOME
Net interest income for the first three months of 2002 decreased $253
thousand or 3.2% over the same period of 2001.
For the three months ended March 31, 2002, total interest income decreased
13.8% or $3.1 million from the prior year's first quarter to $19.2 million. The
majority of the decrease was due to lower yield on loan and lease portfolios.
Interest expense decreased $3.3 million over the same period as last year.
The variance is a result of decreasing interests rates for short-term
facilities, such as deposits, short-term debt and revolving lines. Interest
expense related to deposits, revolving lines, and short-term borrowings
decreased $2.5 million from 2001; interest expense on commercial paper and
long-term borrowing decreased by $849 thousand from 2001.
See Table 1 for detailed information on the increases and decreases in
interest income and interest expense.
As shown in Table 1, the net interest spread increased 33 basis points to
2.38% from 2.05% for the three months ended March 31, 2002. The net interest
yield on earning assets was 2.90% and 3.04% for the three months ended March 31,
2002 and March 31, 2001, respectively.
NON-INTEREST INCOME
Non-interest income for the three months ended March 31, 2002 of $6.5
million increased $1.7 million from $4.8 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, advisory and debt placement
fees and other income. The majority of the increase resulted from gains on
loans sold of $1.8 million. Loans sold in the first quarter of 2002 were $148.0
million compared to $84.8 million in the first quarter of 2001.
19
<Page>
Servicing fee income for the quarter ended March 31, 2002 was $887
thousand, which was $88 thousand increase from the quarter ended March 31, 2002.
NCB serviced single and multi-family real estate and commercial loans for
investors in the amounts of $2.6 billion and $2.3 billion, at March 31, 2002 and
March 31, 2001, respectively.
Other income for the quarter ended March 31, 2002, decreased 5.6% or $105
thousand to $1.8 million from $1.9 million for the quarter ended March 31,
2001.
NON-INTEREST EXPENSE
Non-interest expense for the three months ended March 31, 2002 increased
13.7% or $1.1 million to $9.4 million compared with $8.3 million for the three
months ended March 31, 2001. Compensation and employee benefits, which remains
the single largest component of non-interest expense, increased 2.3% or $112
thousand. Compensation and employee benefits accounted for 53.4% and 59.3% of
non-interest expense for the three months ended March 31, 2002 and March 31,
2001, respectively.
Non-interest expense as a percentage of average assets was 3.1%
for both the three months ended March 31, 2002 and March 31, 2001.
20
<Page>
Table 1
RATE RELATED ASSETS AND LIABILITIES
(dollars in thousands)
<Table>
<Caption>
Three Months Ended March 31,
2002 2001
-------------------------------------------------------------------
ASSETS Average Income/ Yields/ Average Income/ Yields/
Balance Expenses Rates Balance Expenses Rates
---------- ------- ------ ---------- -------- ------
Interest earning assets
Real estate loans $ 483,838 $ 9,304 7.69% $ 378,017 $ 8,203 8.68%
Commercial loans
and leases 536,652 9,151 6.82% 601,325 13,181 8.77%
---------- ------- ---------- -------
Total loans and
leases 1,020,490 18,455 7.23% 979,342 21,384 8.73%
Investment securities
and cash equivalents 114,998 738 2.57% 70,758 893 5.05%
---------- ------- ---------- -------
Total interest earning
assets 1,135,488 19,193 6.76% 1,050,100 22,277 8.49%
---------- ------- ---------- -------
Allowance for loan losses (22,614) (21,587)
Non-interest earning assets
Cash 39,489 5,650
Other assets 46,108 37,095
---------- ----------
Total non-interest
earning assets 85,597 42,745
---------- ----------
Total assets $1,198,471 $1,071,258
========== ==========
LIABILITIES AND MEMBERS' EQUITY
Interest bearing liabilities
Subordinated debt $ 186,208 $ 2,072 4.45% $ 182,230 $ 2,628 5.77%
Notes payable 572,199 6,895 4.82% 561,627 9,749 6.94%
Deposits 241,918 1,988 3.29% 144,846 1,914 5.29%
---------- ------- ---------- -------
Total interest bearing
liabilities 1,000,325 10,955 4.38% 888,703 14,291 6.43%
------- -------
Other liabilities 35,068 26,864
Members' equity 163,078 155,691
---------- ----------
Total liabilities and
members' equity $1,198,471 $1,071,258
========== ==========
Net interest earning assets $ 134,823 $ 161,397
Net interest revenues and spread $ 8,238 2.38% $ 7,986 2.06%
Net yield on interest earning assets 2.90% 3.04%
</Table>
21
<Page>
PROVISION FOR INCOME TAXES
The federal income tax provision is determined on the basis of non-member
income generated by NCB Savings Bank, FSB and the 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 three months ended March 31, 2002 was $320 thousand compared with the
prior year's provision of $438 thousand.
CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES
Cash, cash equivalents and investment securities totaling $143.6 million at
March 31, 2002 increased $8.0 million or 5.9% from $135.6 million at year-end
2001 primarily due to funding of loans and leases. As a percentage of earning
assets, cash, cash equivalents and investment securities decreased to 12.2% at
March 31, 2002 from 11.9 % at December 31, 2001.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at March 31, 2002 was $23.0 million, up by
3.5% from December 31, 2001. The allowance during the period was impacted by
loans charged-off of $378.6 thousand, recoveries of loans previously charged-off
of $69 thousand and the provision of $1.1 million. NCB's annualized provision
for loan losses as a percentage of average loans and leases outstanding was 0.5%
for the quarter ended March 31, 2002 and less than 0.4% for the quarter ended
March 31, 2001.
The loan loss allowance as a percentage of average loans and leases
increased to 2.8% at March 31, 2002 from 2.7% at December 31, 2001.
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 36.4% from $5.7 million at December 31, 2001 to $7.8
million at March 31, 2002. Impaired assets as a percentage of loans and leases
outstanding plus real estate owned was 0.95% at March 31, 2002 compared with
0.69% at year-end 2001. The allowance for loan losses as a percentage of
impaired assets decreased to 296% at March 31, 2002 from 391% at December 31,
2001.
22
<Page>
Table 2
Changes in Net Interest Income
(dollars in thousands)
For the three months ended March 31, 2002 compared to 2001
<Table>
<Caption>
Increase (decrease) due to change in:
-------------------------------------
Average Average
Volume* Yield Net**
------- ------- ------
Interest Income
Cash equivalents and investment securities $ 614 $ 116 $ 730
Commercial loans and leases (1,315) (2,714) (4,029)
Real estate loans 2,030 (1,814) 216
------- ------- -------
Total interest income 1,329 (4,412) (3,083)
------- ------- -------
Interest expense
Deposits 973 (899) 74
Notes payable (117) (2,737) (2,854)
Subordinated debt 56 (612) (556)
------- ------- -------
Total interest expense 912 (4,248) (3,336)
------- ------- -------
Net interest income $ (417) $ 164 $ 253
======= ======= ======
</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.
23
<Page>
INTEREST BEARING LIABILITIES
Interest Bearing Liabilities
(dollars in thousands)
<Table>
<Caption>
3/31/02 12/31/01 % Change
----------- ---------- --------
Deposits $ 268,555 $ 222,890 20.5%
Short-term debt 301,503 256,554 17.5%
Long-term debt 251,846 296,941 (15.2%)
Subordinated debt 185,469 186,452 (0.5%)
----------- ----------
Total $ 1,007,373 $ 962,837 4.6%
=========== ==========
</Table>
Interest bearing liabilities increased $44.5 million to $1,007.3 million at
March 31, 2002 from $962.8 million at December 31, 2001.
For the first three months of 2002, deposits at NCB Saving Bank, FSB
(NCBSB) increased 20.5% to $268.6 million compared with $222.9 million at
December 31, 2001. The increase was attributable to an on-going strategic
campaign to attract local and national deposit accounts and cooperative
customers. Average maturity of the certificates of deposits is 9.4 months at
March 31, 2002. NCB relies heavily on funds raised through the capital markets,
deposits are a major portion of interest bearing liabilities - 26.7% and 23.1%
at March 31, 2002 and December 31, 2001, respectively.
At March 31, 2002, total short-term and long-term borrowings (including
subordinated debt) decreased 0.15% or $1.1 million to $738.8 million in
comparison to prior year-end 2001 of $739.9 million. Proceeds from the
borrowings were used to fund growth in loans and leases. At March 31, 2002 and
December 31, 2001, NCBSB had advances of zero from the Federal Home Loan Bank.
At March 31, 2002, included in the short-term borrowings were revolving lines of
credit of $54.5 million; commercial paper with a face value of $207.1 million
and $41.5 million in borrowings from a related entity and cooperative customers.
At December 31, 2001, included in the short-term borrowings were revolving lines
of credit of $50.5 million; commercial paper with a face value of $190.6 million
and $16.1 million in borrowings from a related entity and cooperative customers.
Long-term debt decreased 15.2% from year-end 2001 due to a maturity of $45.0
million under the long-term facilities. At March 31, 2002, there was unused
capacity under the short-term and long-term facilities of approximately $69.4
million and $231.0 million, respectively. At December 31, 2001, unused capacity
under the short-term and long-term facilities was $90.3 million and $231.0
million, respectively.
24
<Page>
TABLE 3
Impaired assets
(dollars in thousands)
<Table>
<Caption>
March 31, Dec. 31, Sept. 30, June 30, March 31,
2002 2001 2001 2001 2001
--------- -------- --------- -------- --------
Real estate owned $ 557 $ 0 $ 0 $ 0 $ 0
Non-accruing 7,210 5,694 3,487 3,198 3,347
--------- -------- --------- -------- --------
$ 7,767 $ 5,694 $ 3,487 $ 3,198 $ 3,347
========= ======== ========= ======== ========
</Table>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes in NCB's market risk profile occurred from December 31,
2001 to March 31, 2002.
Part II OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business we are involved in various types of
litigation and disputes, which may lead to litigation. The Company has
determined that pending or unasserted legal actions will not have a material
impact on its financial condition or future operations.
Item 2. Submission of Matters to a Vote of Security Holders
NCB held its annual meeting on April 25, 2002. Shareholders previously
elected the following persons to serve as directors:
William F. Casey Jr.
J. Jeffrey Leonard
Walden Swanson
The following directors continued in office after this meeting:
James L. Burns, Jr.
Harry J. Bowie
Kirby J. Erickson
Lynn Marie Hoopingarner
Eben Hopson, Jr.
Dean Janeway
Jackie Jenkins-Scott
Stephanie McHenry-Lucky
Marilyn J. McQuiade
Michael J. Mercer
Stuart M. Saft
Shiela A. Smith
Peter C. Young
Thomas K. Zaucha
25
<Page>
ITEM 3. EXHIBIT
(a). The following exhibit is filed as part of this report:
Exhibit 13 - 2001 Annual Report
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: May 15, 2002
By: /s/
-----------------------
Richard L. Reed,
Managing Director,
Chief Financial Officer
By: /s/
-----------------------
Marietta J. Orcino
Vice President, Tax &
Regulatory Compliance
By: /s/
-----------------------
E. Michael Ramberg
Vice President,
Corporate Controller
27