SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarter ended March 31, 2004 Commission file number 2-99779

National Consumer Cooperative Bank

Registrant’s telephone number, including area code (202) 336-7700

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None

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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements of the past 90 days. Yes x No o.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No x.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

National Consumer Cooperative Bank
(doing business as National Cooperative Bank) and Subsidiaries

INDEX

NATIONAL COOPERATIVE BANK

The accompanying notes are an integral part of these financial statements.

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NATIONAL COOPERATIVE BANK

The accompanying notes are an integral part of these financial statements.

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NATIONAL COOPERATIVE BANK

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NATIONAL COOPERATIVE BANK

NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ EQUITY
For the three months ended March 31, 2003
(Unaudited)

The accompanying notes are an integral part of these financial statements.

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NATIONAL COOPERATIVE BANK

The accompanying notes are an integral part of these financial statements.

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NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2004 and 2003
(Unaudited)

     Supplemental schedule of investing and financing activities:

The accompanying notes are an integral part of these financial statements.

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NATIONAL COOPERATIVE BANK

1. BASIS OF PRESENTATION

     The interim consolidated financial statements presented 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 consolidated 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, 2004 are not necessarily indicative of the results to be expected for all of 2004. For comparability, certain prior period amounts have been reclassified to conform to 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.

2. CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     As noted above, management has prepared the consolidated interim financial statements in conformity with accounting principles generally accepted in the United States of America. Accordingly, management is required to make certain estimates, judgments and assumptions that it believes to be reasonable based upon the information available. These estimates, judgments, and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net interest income, non-interest income and non-interest expense. The following accounting policies comprise those that management believes involve estimates, judgments and assumptions that are the most critical to aid in fully understanding and evaluating our reported financial results: allowance for loan losses, servicing assets and interest-only receivables, derivative instruments and hedging, and income taxes.

     We discuss the assumptions involved in applying these policies in our Annual Report on Form 10-K. We evaluate our accounting estimates and assumptions on an on-going basis. As of March 31, 2004, we have not made any significant changes to the estimates and assumptions used in applying our critical accounting policies from our audited 2003 financial statements. While we believe our estimates and assumptions are reasonable based on historical experience and other factors, actual results could differ from those estimates and these differences could be material to the financial statements.

     NCB enters into rate lock commitments to originate loans whereby the interest rate on the loan is set prior to funding. In March 2004, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 105, which provides guidance regarding loan commitments that are accounted for as derivative instruments under Financial Accounting Standards Board (“FASB”) No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities. In this Bulletin, the SEC ruled that the amount of the expected servicing rights should not be included when determining the fair value of derivative interest rate lock commitments. This guidance must be applied to rate locks initiated after March 31, 2004. In anticipation of this Bulletin, NCB prospectively changed its accounting policy for derivative rate lock commitments on January 1, 2004. Under the new policy, the value expected to be created from the eventual sale of the loan that had previously been recorded at the initiation of the rate lock is not recognized until the underlying loans are sold. If NCB had not implemented this new policy the impact on NCB’s results of operations in the first quarter of 2004 would have been to increase non-interest income by $1.6 million. The impact the new policy will have on NCB’s results of operations in future periods will be significantly influenced by the volume of salable rate lock commitments and by the timing of when loan sales are executed. Rate locks are highly sensitive to changes in interest rates and the timing of loan sales may be affected by market conditions, therefore, NCB cannot provide a reliable estimate of the impact this change will have to its future results of operations.

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3. CASH AND CASH EQUIVALENTS

The composition of cash and cash equivalents are as follows:

     In addition, there was restricted cash of $9.0 million as of both March 31, 2004 and December 31, 2003. Of this amount, $4.1 million is held for the benefit of Rabobank International under the terms of the Loan Purchase and Sale Agreement relating to its grocery loan conduit program. The restricted cash is in the form of an Equity Reserve Account maintained at M&T Bank and represents 3% of the loan purchase capacity under the terms of the Agreement. The remaining $4.9 million of restricted cash relates to a recourse obligation as discussed in Note 8.

4. INVESTMENT SECURITIES

The composition of available-for-sale investment securities at March 31, 2004, is as follows:

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The composition of available-for-sale investment securities at December 31, 2003 is as follows:

     Interest-only receivables substantially pertain to blanket loans to cooperative housing corporations.

     During the three months ending March 31, 2004 NCB sold $80.9 million of mortgage-backed securities, generating proceeds of $81.2 million and a net gain on sale of $3.5 million.

5. LOAN SERVICING

     Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans at March 31, 2004 and December 31, 2003 are $3.4 billion and $3.3 billion, respectively.

6. LOANS AND LEASE FINANCING

     Loans and leases outstanding by category are as follows:

7. LOANS HELD FOR SALE

     Loans held for sale by category, are as follows:

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8. RECEIVABLES SOLD WITH RECOURSE

     In 1998, NCB entered into a Credit Support and Collateral Pledge Agreement (“the Agreement”) with Fannie Mae in connection with NCB’s sale of conventional multifamily and multifamily cooperative mortgage loans to Fannie Mae and Fannie Mae’s issuance of Guaranteed Mortgage Pass-Through Securities backed by the loans sold by NCB. Under the Agreement, NCB agreed to be responsible for certain losses related to the loans sold to Fannie Mae and to provide collateral in the form of letters of credit to be held by a trustee to secure the obligation for such losses. The Agreement allows for reductions in the initial obligation as either losses are paid by NCB or when the obligation, as adjusted for any losses paid, exceeds 12% of the unpaid principal balance of the covered loans.

     The Letter of Credit maintained under the Agreement (as subsequently amended for additional sales) was approximately $12.4 million as of March 31, 2004 and December 31, 2003. The unpaid principal balance of the loans covered by the Agreement was $285.4 million as of March 31, 2004 compared with $287.9 million as of December 31, 2003. Since the inception of the Agreement, NCB has not been required to reimburse Fannie Mae for any losses. Additionally, the loans covered by the recourse obligations have not paid down substantially enough to warrant a reduction in the collateral provided by NCB under the terms of the Agreement.

     In January 2003, NCB purchased from NCB Development Corporation the recourse obligation under an agreement with Fannie Mae covering loans sold by NCB to Fannie Mae. As of March 31, 2004 the unpaid principal balance was $109.6 million. As collateral for the associated recourse, NCB was required to deposit $4.9 million in a restricted cash account with a designated custodian.

9. IMPAIRED ASSETS

     Impaired assets, comprising of non-accrual loans and real estate owned, totaled $9.6 million and $1.8 million at March 31, 2004 and December 31, 2003, respectively. The average balance of impaired loans was $5.6 million and $3.1 million for the three months ended March 31, 2004 and the year ended December 31, 2003, respectively. Specific allowances of $2.4 million and $0.4 million were established at March 31, 2004 and December 31, 2003, respectively.

     On February 17, 2004, a non-profit continuing care provider filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. At the time of the bankruptcy filing the company was indebted to the Bank in the amount of $9.4 million. As a result of the filing the loan was placed in non-accrual status. On February 27, 2004 the Bank charged $1.9 million to the allowance for loan losses. Reserves at March 31, 2004 were deemed to be adequate to cover the estimated loss exposure related to the loan. As new information regarding the bankruptcy proceedings become available, reserve levels may be adjusted accordingly. The remaining outstanding balance of $7.5 million is in non-accrual status. The loan is unsecured, as were all creditors at the time of the bankruptcy filing.

     At March 31, 2004 and December 31, 2003, there were no commitments to lend additional funds to borrowers whose loans were impaired.

     At March 31, 2004, there was no real estate owned property and $0.1 million real estate owned property at December 31, 2003.

10. ALLOWANCE FOR LOAN LOSSES AND UNFUNDED COMMITMENTS

     The following is a summary of the activity in the allowance for loan losses during the three months ended March 31:

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     The allowance for loan losses was 1.8% and 1.9% of loans and lease financing, excluding loans held for sale, at March 31, 2004 and December 31, 2003, respectively.

     As detailed in Note 9, a non-profit continuing care provider filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. On February 27, 2004 the Bank charged $1.9 million to the allowance for loan losses.

     Recoveries of loans of $0.7 million relates to the cancellation of stock from a corporation whose outstanding balance of $0.7 million had previously been charged off. NCB determined that the corporation no longer exists, and, in accordance with NCB’s bylaws and capitalization policy, the stock was cancelled and applied to the allowance for loan losses.

     The following is a summary of the activity in the reserve for losses on unfunded commitments, which is included in other liabilities, during the three months ended March 31:

11. OTHER ASSETS

     At March 31, 2004 and December 31, 2003, other assets consisted of the following:

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12. REGULATORY CAPITAL AND RETAINED EARNINGS OF NCB, FSB

     In connection with the insurance of deposit accounts, NCB, FSB, a federally chartered, federally insured savings bank, is required to maintain minimum amounts of regulatory capital. If NCB, FSB fails to meet its minimum required capital, the appropriate regulatory authorities may take such actions, as they deem appropriate, to protect the Savings Association Insurance Fund (SAIF), NCB, FSB, and its depositors and investors. Such actions may include various operating restrictions, limitations on liability growth, limitations on deposit account interest rates, and investment restrictions.

     NCB, FSB’s capital exceeded the minimum capital requirements at March 31, 2004 and December 31, 2003, respectively. The following table summarizes NCB, FSB’s capital at March 31, 2004 and December 31, 2003:

     The Office of Thrift Supervision regulations impose certain restrictions on NCB, FSB’s payment of dividends. At March 31, 2004, because NCB, FSB’s capital exceeded the minimum capital requirements, substantially all retained earnings were available for dividend declaration without prior regulatory approval.

13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND DERIVATIVE FINANCIAL INSTRUMENTS

     NCB is a party to financial instruments with off-balance sheet risk. These financial instruments may include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the exposure that NCB has in particular classes of financial instruments. Unless noted otherwise, NCB does not require collateral or other security to support off-balance sheet financial instruments.

     NCB’s exposure to credit loss in the event of nonperformance by the other parties to the commitments to extend credit and standby letters of credit issued is represented by the contract or notional amounts of those instruments. NCB uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For interest rate swap transactions, forward commitments, and financial futures contracts, the contract or notional amounts do not represent exposure to credit loss.

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     In the normal course of business, NCB makes loan commitments to extend credit that are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

     Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. NCB evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by NCB upon extension of credit, is based on management’s credit evaluation of the customer. Collateral varies but may include accounts receivable; inventory; property, plant and equipment; and residential and income-producing commercial properties.

     NCB also makes rate lock commitments to extend credit to borrowers for the origination of blanket loans made to cooperative housing corporations, cooperative share loans, and single-family residential loans. In the case of cooperative share loans and single-family residential loans, the rate lock commitments generally extend for a 30-day period. Some of these commitments will expire without being completed. For blanket loans, the rate lock commitments can extend for as long as 12 months, but there is generally little to no fall out prior to closing.

     Standby letters of credit can be either financial or performance-based. Financial standby letters of credit obligate NCB to disburse funds to a third party if the customer fails to repay an outstanding loan or debt instrument. Performance letters of credit obligate NCB to disburse funds if the customer fails to perform a contractual obligation including obligations of a non-financial nature. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

     Issuance fees associated with the standby letters of credit range from 0.25% to 2.25% of the commitment amount. The standby letters of credit mature throughout 2004 to 2007.

     The contract or commitment amounts and the respective estimated fair value of NCB’s commitments to extend credit and standby letters of credit at March 31, are as follows (dollars in thousands):

     In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantors, including Indirect Guarantees of Indebtedness of Others: an Interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34.”. In accordance with FIN 45, a liability of $5.9 million and $5.0 million was recorded in Other liabilities in the Consolidated Balance Sheet at March 31, 2004 and December 31, 2003, respectively, representing the fair value of standby letters of credit either issued or modified subsequent to December 31, 2002. Many of the commitments may expire without being drawn upon. Such commitments are issued only upon careful evaluation of the financial condition of the customer.

     In accordance with Statement of Financial Accounting Standards No. 133. “Accounting for Derivative Instruments and Hedging Activities, and Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 105 (SAB 105), an asset of $2.0 million was recorded in Other assets in the Consolidated Balance Sheet at March 31, 2004 representing the fair value of rate lock commitments related to loans intended to be sold after they

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are funded. At December 31, 2003, under the prior accounting treatment, an asset of $0.3 million was recorded in Other assets.

Derivative Financial Instruments Held or Issued for Purposes Other Than Trading

     NCB uses derivative financial instruments in the normal course of business for the purpose of reducing its exposure to fluctuations in interest rates. These instruments include interest rate swaps, financial futures contracts, and forward loan sales commitments. Existing NCB policies prohibit the use of derivative financial instruments for any purpose other than managing interest rate risk.

     NCB enters into interest rate swaps, futures contracts, and forward loan sales commitments to hedge against changes in the fair value of fixed rate warehouse loans, mortgage-backed securities held for sale, rate lock commitments, and debt due to changes in benchmark interest rates.

     Results related to the hedging of warehouse loans, mortgage-backed securities held for sale, and rate lock commitments are summarized below and included in the caption entitled “Gain On Sale of Loans” in the accompanying consolidated statements of income for the three months ending March 31 (dollars in thousands):

     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 $3.8 million at March 31, 2004 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.

     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

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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.

     Forward loan sales commitments lock in the prices at which single-family residential loans and co-operative share loans will be sold to investors. Management limits the variability of a major portion of the change in fair value of these loans held for sale by employing forward loan sale commitments to minimize the interest rate and pricing risks associated with the origination and sale of such warehoused loans. Forward loan sale commitments are also used to hedge rate lock commitments to extend credit to borrowers for generally a 30-day period for the origination of single-family residential and co-operative share loans. Some of these rate lock commitments will ultimately expire without being completed. To the extent that a loan is ultimately granted and the borrower ultimately accepts the terms of the loan, these rate lock commitments expose the NCB to variability in their fair value due to changes in interest rates. To mitigate the effect of this interest rate risk, NCB enters into offsetting forward loan sale commitments. Both the rate lock commitments and the forward loan sale commitments are undesignated derivatives, and accordingly are marked to market through earnings.

     The contract or notional amounts and the respective estimated fair value of NCB’s financial futures contracts, interest rate swaps and forward sales commitments at March 31, are as follows (dollars in thousands):

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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, Consumer and Local Lending and Other. The Commercial Lending segment provides financial services to cooperative and member-owned businesses. The Real Estate Lending segment originates and services multi-family cooperative 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 Retail and Consumer Lending segment provides traditional banking services such as lending and deposit gathering to retail, corporate and commercial customers. The Other segment 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 detailed in our Annual Report on Form 10-K.

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     The following is the segment reporting for the three months ended March 31, 2004 and 2003 (dollars in thousands):

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15.

LOAN SALES AND SECURITIZATIONS

     NCB sells and services commercial loans and commercial and residential real estate loans. Interests in the securitized and sold loans are generally retained in the form of senior interest-only strips, escrow accounts and mortgage servicing rights.

     During the three months ended March 31, 2004 and 2003, NCB sold receivables in securitizations of mortgage loans and retained interest-only receivables, which are considered retained interests in the securitization transactions. The proceeds from NCB’s 2004 sales of mortgage loans for securitization were $162.9 million and generated a total of $6.6 million in retained interests. In 2003, the proceeds from NCB’s sales of mortgage loans for securitization were $105.0 million and resulted in retained interests of $7.4 million.

     In addition during the three months ended March 31, 2004 and 2003, NCB sold mortgage backed securities, generating proceeds of $81.2 million and $52.9 million and retained interests of $3.1 million and $4.9 million, respectively.

     Retained interest due to securitization activity is comprised of the following (dollars in thousands):

     The amounts below reflect the sensitivity of the fair value of interest-only receivables to 100, 200 and 300 basis points adverse conditions at (dollars in thousands):

The following table reflects the cash flows received from loan sales and securitization for the three months ended March 31, (dollars in thousands):

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NEW ACCOUNTING STANDARDS

     In March 2004, the SEC issued Staff Accounting Bulletin No. 105, which provides guidance regarding loan commitments that are accounted for as derivative instruments under FASB No. 133 (as amended), Accounting for Derivative Instruments and Hedging Activities. In this Bulletin, the SEC ruled that the amount of the expected servicing rights should not be included when determining the fair value of derivative interest rate lock commitments. This guidance must be applied to rate locks initiated after March 31, 2004. Refer to Note 2 for NCB’s application of this guidance.

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17.

SUBSEQUENT EVENTS

     On May 5, 2004 NCB and the banks providing its revolving credit facility amended the facility to extend $175.0 million of the committed facility from May 7, 2004, to May 7, 2008. The extension was concluded under substantially the same terms and conditions as the original revolving line. No amendments were made to $175.0 million of the facility that is available to May 7, 2006.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The purpose of this analysis is to provide the reader with information relevant to understanding and assessing NCB’s results of operations. In order to fully appreciate this analysis, the reader is encouraged to review the consolidated financial statements and statistical data presented in this document.

Introduction

     NCB provides financial and technical assistance to eligible cooperative enterprises or enterprises controlled by eligible cooperatives throughout the United States. A cooperative enterprise is an organization which is owned by its members and which is engaged in producing or furnishing goods, services, or facilities for the benefit of its members or voting stockholders who are the ultimate consumers or primary producers of such goods, services, or facilities. NCB is structured as a cooperative institution whose voting stock can only be owned by its members or those eligible to become its members.

     In the National Consumer Cooperative Bank Act, or the “Act”, Congress stated its finding that cooperatives have proven to be an effective means of minimizing the impact of inflation and economic hardship on members/owners by narrowing producer-to-consumer margins and price spreads, broadening ownership and control of economic organizations to a larger base of consumers, raising the quality of goods and services available in the marketplace and strengthening the nation’s economy as a whole. To further the development of cooperative businesses, Congress specifically directed NCB (1) to encourage the development of new and existing cooperatives eligible for its assistance by providing specialized credit and technical assistance; (2) to maintain broad-based control of NCB by its voting shareholders; (3) to encourage a broad-based ownership, control and active participation by members in eligible cooperatives; (4) to assist in improving the quality and availability of goods and services to consumers; and (5) to encourage ownership of its equity securities by cooperatives and others.

     NCB’s profitability is affected by the net interest income and non-interest income generated on earning assets, consumer usage patterns, credit quality, and operating efficiency. NCB’s revenues consist primarily of interest income on consumer loans and securities and non-interest income consisting of servicing income on securitized loans, fees and gains on the securitizations of loans. Loan securitization transactions qualifying as sales under accounting principles generally accepted in the United States (“GAAP”) remove the loan receivables from the consolidated balance sheet. However, NCB continues to service the vast majority of the related accounts. NCB generates earnings from its managed loan portfolio that includes both on-balance sheet and off-balance sheet loans.

     NCB’s primary expenses are the costs of funding assets, provision for loan losses, operating expenses (including salaries and benefits), marketing expenses and income taxes.

2004 Financial Summary

     NCB’s net income for the three months ended March 31, 2004 was $10.6 million. This was an 11.2% or $1.4 million decrease compared with $12.0 million for the three months ended March 31, 2003. The primary factors affecting this were a $0.5 million decline in net interest income and a $0.8 million increase in non interest expense.

     Total assets increased $1.2 million to $1,399 million at March 31, 2004 from $1,398 million at December 31, 2003.

     The annualized return on average total assets was 3.0% and 4.0% for the three months ended March 31, 2004 and 2003, respectively. For the same period the annualized return on average members’ equity was 21.7% and 26.7%.

Net Interest Income

     Net interest income for the first three months of 2004 decreased $0.5 million or 5.6% to $7.8 million compared with $8.3 million for the same period in 2003.

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     For the three months ended March 31, 2004, interest income increased 0.4% or $0.1 million to $17.6 million compared with $17.5 million for the three months ended March 31, 2003. While balances increased, the yield on total average earning assets declined from 5.88% in 2003 to 5.15% in 2004.

     Interest income from real estate loans increased by $0.5 million, or 5.6%. An increase in average balances of $97.7 million or 17.5% was offset by a decline in yields from 6.06% in 2003 to 5.44% in 2004. Commercial loans and lease interest income saw a decline of $0.3 million or 3.8%. Although average balances increased by $37.9 million, this was more than offset by a decline in yields from 6.39% in 2003 to 5.69% in 2004. Interest income from investment securities and cash equivalents decreased by $0.1 million. A $38.8 million or 24.0% increase in average balances was not sufficient to offset a decline in yields from 3.75% in 2003 to 2.78% in 2004.

     Interest expense for the three months ended March 31, 2004 increased $0.5 million or 5.8% from $9.2 million in 2003 to $9.7 million. The overall rate on total interest bearing liabilities decreased from 3.73% in 2003 to 3.42% in 2004, which was offset by the growth in deposits. Interest expense on deposits increased $0.7 million or 29.9%. Deposit balances grew by $141.7 million or 37.9% from March 31, 2003 to March 31, 2004, which was offset by a decline in deposit rates from 2.33% in 2003 to 2.20% in 2004. Interest expense on notes payable, which includes short and long term debt, decreased by $0.1 million or 1.1%. Although there was a 4.3% or $18.4 million increase in average balances that resulted in $0.2 million of higher interest expense this was offset by a decrease in rates from 5.04% to 4.78%. Included within interest expense on notes payable is $1.6 million and $1.7 million of hedge swap expense for the three months ending March 31, 2004 and 2003, respectively. Interest expense on subordinated debt decreased by $0.1 million due primarily to a 5.0% decline in average balances from 2003 to 2004.

Non-interest Income

     Total non-interest income decreased $0.3 million or 1.7% from $14.8 million during the three months ended March 31, 2003 to $14.5 million in 2004. Non-interest income is composed of loan fees, gains on sale of loans or securities, servicing fees, excess yield income, and other income.

     Gains on sales of loans and investment securities of $10.4 million for the three months ended 2004, represented 71.6% of non-interest income, and increased $0.1 million from $10.3 million in 2003. Although there was a higher volume of loans sold in 2004 compared with 2003, this was offset by reduced investor spreads. Of the total gain in 2004, $3.5 million relates to the sale of $80.9 million of mortgage-backed securities (MBS), created from a swap with Fannie Mae in December 2003. Of the total gain in 2003, $3.0 million relates to the sale of $55.1 million of MBS.

     The following table shows loans sold for the three months ended March 31, (dollars in thousands):

     NCB’s servicing fee income was $1.2 million for the three months ended March 31, 2004 and 2003. This was despite growth in the volume of loans serviced from $3.0 billion as of March 31, 2003 to $3.4 billion as of March 31, 2004 primarily due to a decline in lease program management fees.

     Loan fees include those fees which NCB earns related to the extension of credit, including commitment fees, letter of credit fees, and late and pre-payment penalty fees. In addition, loan fees include fees earned by NCB from the administration of its grocery loan conduit program. For the three months ended March 31, 2004, loan fees decreased $0.2 million from $1.8 million in 2003 to $1.6 million primarily due to a decline in Commercial fees.

     In total, non-interest income amounted to 65.0% of total net revenue (net interest income plus non-interest income) for the three months ended March 31, 2004 compared with 64.0% in 2003.

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Non-interest Expense

     Non-interest expense for the three months ended March 31, 2004 increased 8.0% or $0.8 million to $11.1 million compared with $10.3 million for the corresponding prior year period. Compensation and employee benefits, the single largest component of non-interest expense, increased 1.9% or $0.1 million compared with the three months ended March 31, 2003.

     Contractual services increased 18.8% or $0.2 million from $1.2 million in 2003 to $1.4 million in 2004 due primarily to higher investment advisory fees.

     A provision for losses on unfunded commitments of $0.4 million was recorded for the three months ended March 31, 2004. No equivalent provision was recorded for the same period in 2003.

     Non-interest expense as a percentage of average assets was 3.2% and 3.4% for the three months ended March 31, 2004 and 2003, respectively.

See Table 1 and Table 2

Table 1
CHANGES IN NET INTEREST INCOME
(dollars in thousands)

*Average monthly balances

**Changes in interest income and interest expense due to changes in rate and volume have been allocated to “change in average volume” and “change in average rate” in proportion to the absolute dollar amounts in each.

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Table 2
RATE RELATED ASSETS AND LIABILITIES
(dollars in thousands)