UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2005

or

Commission File Number 2-99779

National Consumer Cooperative Bank

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 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  þ  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  þ.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of March 31, 2005: Class B 1,374,591; Class C 227,582; Class D 1.

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

NATIONAL COOPERATIVE BANK
CONSOLIDATED BALANCE SHEETS

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

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NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31,
(Unaudited)

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

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NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31,
(Unaudited)

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

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NATIONAL COOPERATIVE BANK
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS’ EQUITY
For the three months ended March 31, 2005 and 2004
(Unaudited)

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,
(Unaudited)

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,
(Unaudited)

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

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NATIONAL COOPERATIVE BANK
CONDENSED NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)

1. BASIS OF PRESENTATION

     The interim consolidated financial statements presented in this Quarterly Report on Form 10-Q are in conformity with U.S. generally accepted accounting principles 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, 2005 are not necessarily indicative of the results to be expected for all of 2005. 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 U.S. generally accepted accounting principles. 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, 2005, we have not made any significant changes to the estimates and assumptions used in applying our critical accounting policies from our audited 2004 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.

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3. CASH AND CASH EQUIVALENTS

     The composition of cash and cash equivalents is as follows:

     In addition, there was restricted cash of $5.0 million as of March 31, 2005 and December 31, 2004, which relates to a recourse obligation as discussed in Note 8.

4. INVESTMENT SECURITIES

     The composition of available-for-sale investment securities at March 31, 2005, is as follows:

     The fair value of investment securities will change from period to period with changes in interest rates. NCB does not consider the unrealized losses at March 31, 2005 to be other-than-temporary because they relate to interest rates.

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

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

     During the three months ended March 31, 2005, there were $2.0 million of available-for-sale securities sold with no gain or loss, compared to a gain of $3.5 million from $81.2 million mortgage-backed securities sold for the three months ended March 31, 2004.

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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, 2005, and December 31, 2004 are $3.7 billion and $3.5 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:

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, 2005 and December 31, 2004. The unpaid principal balance of the loans covered by the Agreement was $279.2 million as of March 31, 2005 compared with $280.6 million as of December 31, 2004. 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, 2005 the unpaid principal balance was $107.2 million. At December 31, 2004 the unpaid principal

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balance was $107.8 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 non-accrual loans and real estate owned, totaled $14.3 million and $17.8 million at March 31, 2005 and December 31, 2004, respectively. The decrease is principally due to the repayment of a $3.8 million loan to a cellular telephone company. The average balance of impaired loans was $17.1 million and $5.6 million for the three months ended March 31, 2005 and the three months ended March 31, 2004, respectively. Specific allowances of $1.4 million and $2.2 million were established for impaired loans at March 31, 2005 and December 31, 2004, respectively.

     Reserves at March 31, 2005 were deemed to be adequate to cover the estimated loss exposure related to the above loans.

     At March 31, 2005 and December 31, 2004, there were no commitments to lend additional funds to borrowers whose loans were impaired.

     At March 31, 2005 there was $7 thousand of real estate owned property, and there was $29 thousand of real estate owned property at December 31, 2004.

10. ALLOWANCES 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:

     The allowance for loan losses was 1.6% and 1.5% of loans and lease financing, excluding loans held for sale, at March 31, 2005 and December 31, 2004, respectively.

     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:

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11. OTHER ASSETS

     At March 31, 2005 and December 31, 2004, other assets consisted of the following:

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.

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     NCB, FSB’s capital exceeded the minimum capital requirements at March 31, 2005 and December 31, 2004, respectively. The following table summarizes NCB, FSB’s capital at March 31, 2005 and December 31, 2004 (dollars in thousands):

     The Office of Thrift Supervision regulations impose certain restrictions on NCB, FSB’s payment of dividends. At March 31, 2005, 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.

     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

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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.

     Issuance fees associated with the standby letters of credit generally range from 1.00% to 3.00% of the commitment amount. The standby letters of credit mature throughout 2005 to 2009.

     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, an asset and a corresponding liability of $6.4 million were recorded in other assets and other liabilities in the Consolidated Balance Sheet at March 31, 2005 representing the fair value of standby letters of credit either issued or modified subsequent to December 31, 2002. The corresponding amount at December 31, 2004 was also $6.4 million. 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.

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.

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     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 ended 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. At March 31, 2005, NCB is exposed to credit loss in the event of non-performance by its counterparties in the aggregate amount of $2.8 million 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 and 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.

     Forward loan sales commitments lock in the prices at which single-family residential loans, cooperative share loans and cooperative blanket 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 cooperative share loans and for up to a twelve month period for the origination of cooperative blanket loans. Some of the rate lock commitments for single-family residential and cooperative share loans will ultimately expire without being completed. The rate lock commitments for cooperative blanket loans rarely expire without being

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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 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):

14. 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, 2005 and 2004 (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, 2005 and 2004, 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 2005 sales of mortgage loans for securitization were $186.3 million and generated a total of $2.1 million in retained interests. In 2004, the proceeds from NCB’s sales of mortgage loans for securitization were $162.9 million and resulted in retained interests of $6.6 million.

     During the three months ended March 31, 2005 the proceeds from NCB’s 2005 non-securitized multifamily cooperative loan sales were $18.4 million and generated a total of $0.6 million in retained interest. There were no non-securitized multifamily cooperative loan sales for the three months ended March 31, 2004.

     During the three months ended March 31, 2005 NCB did not sell mortgage-backed securities. During the three months ended March 31, 2004 NCB sold mortgage-backed securities, generating proceeds of $81.2 million and retained interests $3.1 million, respectively.

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

     The amounts below reflect the sensitivity of the fair value of interest-only receivables to a 100, 200 and 300 basis points increase in interest rates 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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16. NEW ACCOUNTING STANDARDS

     On March 3, 2005, the FASB Staff issued FASB Staff Position (“FSP”) FIN 46(R)-5, Implicit Variable Interests under FASB Interpretation No. 46 (FIN 46R — Revised December 2003), Consolidation of Variable Interest Entities (“VIE”). This FSP requires a reporting enterprise to consider the impact of implicit variable interests in determining whether the reporting enterprise may absorb variability of the VIE or potential VIE. This staff position is effective in the second quarter of 2005 and is not expected to have a material impact on our consolidated financial statements.

     In December 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 03-3 (“SOP 03-3”) “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”. SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality be recognized at their fair value. The yield that may be accreted is limited to the excess of the investor’s estimate of undiscounted expected principal, interest, and other cash flows over the investor’s initial investment in the loan. The excess of contractual cash flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or valuation allowance. Any future excess of cash flows over the original expected cash flows is to be recognized as an adjustment of future yield. Future decreases in actual cash flow compared to the original expected cash flow are recognized as a valuation allowance and expensed immediately. Valuation allowances cannot be created nor “carried over” in the initial accounting for loans acquired in a transfer of loans with evidence of deterioration of credit quality since origination. However, valuation allowances for non-impaired loans acquired in a business combination can be carried over. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004, with early adoption encouraged. The Company does not believe the adoption of SOP 03-3 will have a material impact on the Company’s financial position or results of operations.

17. SUBSEQUENT EVENTS

     On April 15, 2005 NCB collected in full a $7.4 million impaired asset and recovered $1.9 million previously charged to losses on a $9.4 million loan facility to a non-profit continuing care provider.

     On May 4, 2005, a grocery chain with whom NCB had a $4.8 million loan filed for bankruptcy. The loan has been placed in non-accrual status.

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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 primarily 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 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 U.S. generally accepted accounting principles 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.

Results of Operations
For the three months ended March 31, 2005 compared to the three months ended March 31, 2004.

Overview

     NCB’s net income for the three months ended March 31, 2005 was $7.5 million. This was a 29.7% or $3.1 million decrease compared with $10.6 million for the three months ended March 31, 2004. The primary factors affecting this decrease in net income were a $3.5 million decrease in the gain on sale of investments available for sale and a $1.0 million increase in compensation and employee benefits, and a $1.2 million increase in the provision for loans losses offset by a $2.3 million increase in gain on the sale of loans.

     Total assets decreased 1.6% or $25.7 million to $1.59 billion at March 31, 2005 from $1.61 billion at December 31, 2004.

     The annualized return on average total assets was 1.9% and 3.0% for the three months ended March 31, 2005 and 2004, respectively. The annualized return on average members’ equity was 14.3% and 21.7% for the three months ended March 31, 2005 and 2004, respectively.

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Net Interest Income

     Net interest income for the three months ended March 31, 2005, increased $1.4 million or 17.6% to $9.2 million compared with $7.8 million for the three months ended March 31, 2004.

     For the three months ended March 31, 2005, interest income increased by 23.4% or $4.1 million, to $21.7 million compared with $17.6 million for the three months ended March 31, 2004. While average interest earning asset balances increased, the yield on total average earning assets also increased from 5.15% in 2004 to 5.59% in 2005.

     Interest income from real estate loans increased by $2.9 million, or 32.9% from $9.0 million for the three months ended March 31, 2004 to $11.9 million for the three months ended March 31, 2005. This was due to an increase in average balances of $195.7 million or 29.8% as well as a increase in yields from 5.44% in 2004 to 5.58% in 2005. Commercial loans and lease interest income saw an increase of $1.5 million or 20.4%. Average balances increased by $33.4 million as well as an increase in yields from 5.69% in 2004 to 6.43% in 2005. Interest income from investment securities and cash equivalents decreased by $0.3 million. This decrease was due to a $44.5 million or 22.2% decrease in average balances and a decline in yields from 2.78% in 2004 to 2.76% in 2005.

     Interest expense for the three months ended March 31, 2005 increased $2.8 million or 28.0% from $9.7 million in 2004 to $12.5 million in 2005. Interest expense on deposits increased $1.4 million or 48.9%. The overall rate on total interest bearing liabilities increased from 3.42% in 2004 to 3.77% in 2005. Additionally, there was a 24.7% growth in average deposit balances from March 31, 2004 to March 31, 2005. Interest expense on notes payable increased by $1.1 million or 19.8% due primarily to rates increasing from 4.78% to 5.03%. Included within interest expense on notes payable is $1.5 million and $1.6 million of hedge swap expense for the three months ended March 31, 2005 and 2004, respectively. Interest expense on subordinated debt increased $0.3 million or 18.6% due primarily to rates increasing from 3.60% to 4.33%.

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     See Table 1 and Table 2 for detailed information of the increases and decreases in interest income and interest expense.

Table 1
Changes in Net Interest Income
For the three months ended March 31, 2005
(dollars in thousands)

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Table 2
Rate Related Assets and Liabilities
For the three months ended March 31,
(dollars in thousands)