________________________________________
COOPERATIVE
BANKSHARES, INC.
________________________________________
Full-Service Banking for the New Century
ANNUAL REPORT
DECEMBER 31, 2001
COOPERATIVE BANKSHARES, INC.
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PROFILE
Cooperative Bankshares, Inc. (the "Company") is a registered
bank holding company incorporated in North Carolina in 1994.
The Company was formed for the purpose of serving as the
holding company for Cooperative Bank for Savings, Inc., SSB
("Cooperative Bank" or the "Bank"); a North Carolina
chartered savings bank. The Company's primary activities
consist of holding the stock of Cooperative Bank and
operating the business of the Bank. Accordingly, the
information set forth in this report, including financial
statements and related data, relates primarily to
Cooperative Bank.
Cooperative Bank was chartered in 1898. The Bank's
headquarters are located in Wilmington, North Carolina.
Cooperative operates 17 financial centers throughout the
coastal and inland communities of eastern North Carolina.
These centers extend from Corolla, located on the Outer
Banks of North Carolina, to Tabor City, located on the South
Carolina border. The Federal Deposit Insurance Corporation
("FDIC") insures the Bank's deposit accounts up to
applicable limits.
Through its financial centers, the Bank provides a wide
range of banking products, including interest bearing and
non-interest bearing checking accounts, certificates of
deposit and individual retirement accounts. It offers an
array of loan products: overdraft protection, commercial,
consumer, agricultural, real estate, residential mortgage
and home equity loans. Also offered are safe deposit boxes
and automated banking services through ATMs and Access24
Phone Banking. In addition, the Bank offers discount
brokerage services, annuity sales and mutual funds through a
third party arrangement with UVEST Investment Services.
The common stock of Cooperative Bankshares, Inc. is traded
on the NASDAQ National Market under the symbol "COOP".
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MISSION
It is the mission of Cooperative to provide the maximum in
safety and security for our depositors, an equitable rate of
return for our stockholders, and excellent service for our
customers, and to do so while operating in a fiscally sound
and conservative manner, with fair pricing of our products
and services, good working conditions, outstanding training
and opportunities for our staff, along with a high level of
corporate citizenship.
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TABLE OF CONTENTS
Selected Financial and Other Data......................... 2
President's Message....................................... 3
Management's Discussion & Analysis........................ 4
Independent Auditors' Report..............................15
Consolidated Statements of Financial Condition............16
Consolidated Statements of Operations.....................17
Consolidated Statements of Comprehensive Income...........18
Consolidated Statements of Stockholders' Equity...........19
Consolidated Statements of Cash Flows.....................20
Notes to Consolidated Financial Statements................22
Directors, Officers, and Financial Center Locations.......42
Corporate Information.....................................43
MANAGEMENT'S DISCUSSION & ANALYSIS
SELECTED FINANCIAL AND OTHER DATA
AT DECEMBER 31, 2001 2000 1999 1998 1997
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Dollars in Thousands
Selected Financial Condition Data:
Assets $ 458,114 $ 414,961 $ 410,146 $ 389,773 $ 369,121
Loans, net 373,458 347,486 334,744 321,324 286,692
Securities 47,970 35,027 45,261 44,749 54,904
FHLB stock 4,155 3,755 3,755 2,825 2,688
Deposits 339,830 327,312 304,834 301,656 288,691
Borrowed funds 83,097 55,101 75,106 55,109 50,226
Stockholders' equity 33,618 30,812 29,343 31,613 28,294
YEAR ENDED DECEMBER 31, 2001 2000 1999 1998 1997
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Dollars in Thousands
Selected Operations Data:
Interest income $ 31,117 $ 31,709 $ 28,449 $ 28,411 $ 26,093
Interest expense 18,916 19,305 16,422 17,212 15,732
Net interest income 12,201 12,404 12,027 11,199 10,361
Provision for loan losses 460 970 210 330 153
Noninterest income 2,040 1,670 1,228 1,180 790
Noninterest expenses 9,303 10,193 8,885 8,275 7,370
Income before income taxes 4,478 2,911 4,160 3,774 3,628
Net income 2,889 1,932 2,680 2,385 2,234
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Selectged Financial Ratios and Other Data:
Return on average assets 0.67% 0.47% 0.69% 0.62% 0.63%
Return on average equity 8.91% 6.35% 8.88% 7.86% 8.26%
Average stockholders' equity to
average assets 7.57% 7.38% 7.74% 7.95% 7.63%
Non-performing assets to total assets 0.84% 0.22% 0.35% 1.08% 0.08%
Allowance for loan losses to total loans 0.67% 0.62% 0.39% 0.35% 0.28%
Dividend payout ratio 19.49% 28.09% - - -
Per Share Data:
Earnings per:
Common share - basic $ 1.03 $ 0.71 $ 0.95 $ 0.79 $ 0.75
Common share - diluted $ 1.02 $ 0.69 $ 0.90 $ 0.74 $ 0.70
Cash dividends declared $ 0.20 $ 0.20 - - -
Tangible book value $ 11.86 $ 11.35 $ 10.92 $ 10.38 $ 9.48
Number of common shares outstanding 2,835,447 2,714,610 2,687,919 3,046,284 2,984,396
2
PRESIDENT'S MESSAGE
Net income for the year ended December 31, 2001 was $2,888,943 or $1.02 per
diluted share, a 49.6% increase over the same period last year. Net income for
the 12 months ended December 31, 2000 was $1,931,675, or $.69 per diluted share,
which included one-time restructuring charges of $463,572 (after tax). Total
assets at December 31, 2001 were $458.1 million as compared to $415.0 million at
December 31, 2000, a 10.4% increase in assets during the year. Stockholders'
equity was $33.6 million, or $11.86 per share, and represented 7.34% of assets.
During the year our Retail Banking Division originated 910 commercial and
consumer loans in the amount of $111.6 million as compared to 873 loans for
$52.1 million during the previous year. At December 31, 2001, loans made by the
Retail Banking Division constituted 46.9% of total loans as compared to 37.8% at
December 31, 2000. The Mortgage Loan Division originated 249 loans totaling
$44.6 million as compared to 174 loans totaling $22.7 million during the year
2000. The Mortgage Division also originated $29.3 million in brokered mortgage
loans during 2001, generating $386,500 in fee income, compared to $6.5 million
in brokered mortgage loans and $93,000 in fee income for the year 2000.
In April 2001, we opened our 17th financial center in Whiteville, North
Carolina giving us two banking centers in Columbus County. This center has
exceeded all of its first-year goals for growth in deposits.
During the past year we installed additional ATM's in Washington, Corolla,
Whiteville and downtown Wilmington, giving us a total of 11 ATM's.
During 2001 the company continued paying a quarterly cash dividend of $.05
per share to our stockholders, and it is our hope and intention to continue
paying such dividends in the future.
The cost cutting plan that was announced in October 2000 produced the
expected results as earnings improved each quarter in 2001.
In summary, the past year has been one that has been marked by continued
improvement in earnings and efficiencies. With the dramatic increase in retail
and commercial loans, our balance sheet is becoming increasingly more banklike.
By adding an additional office in Whiteville and four additional ATM's we have
increased the number of outlets to provide the people of Eastern North Carolina
with the best of community bank services available. With the continued
improvement in efficiencies as a result of our cost cutting during the prior
year, I am very confident about the future of our company. Thank you for your
support.
Sincerely yours,
Frederick Willetts, III
President
3
MANAGEMENT'S DISCUSSION & ANALYSIS
GENERAL
Cooperative Bankshares, Inc. (the "Company") is a registered bank holding
company incorporated in North Carolina in 1994. The Company was formed for the
purpose of serving as the holding company for Cooperative Bank for Savings,
Inc., SSB ("Cooperative Bank" or the "Bank"); a North Carolina chartered savings
bank. The Company's primary activities consist of holding the stock of
Cooperative Bank and operating the business of the Bank. Accordingly, the
information set forth in this report, including financial statements and related
data, relates primarily to Cooperative Bank.
The following management's discussion and analysis is presented to assist
in understanding the Company's financial condition and results of operations.
This discussion should be read in conjunction with the consolidated financial
statements and accompanying notes presented in this report.
CRITICAL ACCOUNTING POLICY
The Bank's most significant critical accounting policy is the determination
of its allowance for loan losses. A critical accounting policy is one that is
both very important to the portrayal of the Bank's financial condition and
results, and requires management's most difficult, subjective or complex
judgments. What makes these judgments difficult, subjective and/or complex are
due to the need to make estimates about the effects of matters that are
inherently uncertain. For further information on the allowance for loan losses,
see the "Financial Condition" in Management's Discussion and Analysis and Note 3
of the "Notes to Consolidated Financial Statements" included the Annual Report.
MANAGEMENT STRATEGY
Cooperative Bank's lending activities have traditionally concentrated on
the origination of loans for the purpose of constructing, financing or
refinancing residential properties. In recent years, however, the Bank has
emphasized origination of nonresidential real estate loans, equity lines of
credit, and secured and unsecured consumer and business loans. As of December
31, 2001 approximately $273 million, or 73%, of the Bank's loan portfolio
consisted of loans secured by residential properties which includes $34 million
of loans classified as construction and land development. This was down from
approximately $291 million, or 83% at December 31, 2000. The Bank originates
adjustable rate and fixed rate loans. As of December 31, 2001, adjustable rate
and fixed rate loans totaled approximately 63% and 37%, respectively, of the
Bank's total loan portfolio.
The Bank has chosen to begin selling a larger percentage of its fixed rate
mortgage loan originations through broker dealer arrangements. This enables the
Bank to invest its funds in commercial loans, while increasing fee income. This
is part of the continuing effort to restructure the balance sheet and operations
to be more reflective of a commercial bank.
In the past, the Bank has sold fixed rate, long term mortgage loans in the
secondary market as part of the asset/liability management program. In 2001, the
Bank sold $470,000 in loans in the secondary market. The Bank generally retains
the servicing of loans sold outside of the broker dealer arrangements, which
generally receives a fee payable monthly of up to 1/4% per annum of the unpaid
balance of each loan.
The growth in the loan portfolio has been concentrated in real
estate-backed construction and land development and commercial loans. The
anticipated effects of these loans is to increase the yield on the loan
portfolio. These loans generally involve a higher level of credit risk than
one-to-four family residential lending due to the concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions and the volatility of the collateral. This increased risk also causes
the allowance for loan losses to increase, which is the primary reason for the
increase in the allowance over the past two years.
INTEREST RATE SENSITIVITY ANALYSIS
Interest rate sensitivity refers to the change in interest spread resulting
from changes in interest rates. To the extent that interest income and interest
expense do not respond equally to changes in interest rates, or that all rates
do not change uniformly, earnings will be affected. Interest rate sensitivity,
at a point in time, can be analyzed using a static gap analysis that measures
the match in balances subject to repricing between interest-earning assets and
interest-bearing liabilities. Gap is considered positive when interest rate
sensitive assets exceed interest rate sensitive liabilities. Gap is considered
negative when interest rate sensitive liabilities exceed interest rate sensitive
assets. At December 31, 2001, Cooperative had a one-year negative gap position
of 7.3%. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest income
while a positive gap would tend to adversely affect net interest income. It is
important to note that certain shortcomings are inherent in static gap analysis.
Although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market interest
rates. For example, part of the Company's adjustable-rate mortgage loans are
indexed to the National Monthly Median Cost of Funds to SAIF-insured
institutions. This index is considered a lagging index that
4
MANAGEMENT'S DISCUSSION & ANALYSIS
may lag behind changes in market rates. The one-year or less interest-bearing
liabilities also include checking, savings, and money market deposit accounts.
Experience has shown that the Company sees relatively modest repricing of these
transaction accounts. Management takes this into consideration in determining
acceptable levels of interest rate risk.
The following table indicates the time periods in which interest-earning
assets and interest-bearing liabilities will mature or reprice in accordance
with their contractual terms. The table assumes prepayments and scheduled
principal amortization of fixed-rate loans and mortgage-backed securities, and
assumes that adjustable rate loans will reprice at contractual repricing
intervals.
INTEREST RATE SENSITIVITY ANALYSIS
Over One Over Five
One Year Through Through Over Ten
December 31, 2001 or Less Five Years Ten Years Years Total
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(Dollars in thousands)
Interest-earning assets:
Securities $ 5,058 $ 28,634 $ 8,795 $ 5,483 $ 47,970
Interest-bearing bank balances 1,586 -- -- -- 1,586
Federal Home Loan Bank stock 4,155 -- -- -- 4,155
Loan portfolio 239,125 100,306 21,133 15,417 375,981
--------- --------- --------- --------- ---------
Total $ 249,924 $ 128,940 $ 29,928 $ 20,900 $ 429,692
========= ========= ========= ========= =========
Interest-bearing liabilities:
Deposits $ 243,389 $ 70,980 $ 7,744 $ -- $ 322,113
Borrowed funds 40,003 33,011 10,016 67 83,097
--------- --------- --------- --------- ---------
Total $ 283,392 $ 103,991 $ 17,760 $ 67 $ 405,210
========= ========= ========= ========= =========
Interest rate sensitivity gap $ (33,468) $ 24,949 $ 12,168 $ 20,833 $ 24,482
========= ========= ========= ========= =========
Cumulative interest rate sensitivity gap $ (33,468) $ (8,519) $ 3,649 $ 24,482
========= ========= ========= =========
Cumulative ratio of interest-earning
assets to interest-bearing liabilities 88.2% 97.8% 100.9% 106.0%
========= ========= ========= =========
Ratio of cumulative gap to total assets (7.3%) (1.9%) 0.8% 5.3%
========= ========= ========= =========
MARKET RISK
The Company's primary market risk is interest rate risk. Interest rate risk
is the result of differing maturities or repricing intervals of interest earning
assets and interest bearing liabilities and the fact that rates on these
financial instruments do not change uniformly. These conditions may impact the
earnings generated by the Company's interest earning assets or the cost of its
interest bearing liabilities, thus directly impacting the Company's overall
earnings. The Company's management actively monitors and manages interest rate
risk. One way this is accomplished is through the development of and adherence
to the Company's asset/liability policy. This policy sets forth management's
strategy for matching the risk characteristics of the Company's interest earning
assets and liabilities so as to mitigate the effect of changes in the rate
environment.
5
MANAGEMENT'S DISCUSSION & ANALYSIS
One way to measure the Company's potential exposure to interest rate risk
is to estimate the effect of a change in rates on the Company's Economic Value
of Equity ("EVE"). At December 31, 2001, the negative estimated change in EVE is
significantly reduced in the rising rate environments as compared to the
estimated change at December 31, 2000. There are not significant changes to EVE
in declining rate environments from December 31, 2000, to December 31, 2001,
except for the 400 basis point decline in rates which had a significant increase
in EVE. The following table sets forth information relating to the Company's EVE
and the estimated changes under various interest rate change scenarios as of
December 31, 2001 (in thousands).
Market Risk Table
December 31, 2001
Change in Economic Estimated Estimated
Interest Rates Value of Equity $ Change % Change
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400 basis point rise $ 21,736 (11,259) -34%
300 basis point rise 24,654 (8,341) -25%
200 basis point rise 27,850 (5,145) -16%
100 basis point rise 31,624 (1,371) -4%
Base Scenario 32,995 - -
100 basis point decline 34,255 1,260 4%
200 basis point decline 31,898 (1,097) -3%
300 basis point decline 32,647 (348) -1%
400 basis point decline 37,140 4,145 13%
Computation of prospective effects of hypothetical interest rate changes,
such as the above computations, are based on numerous assumptions, including
relative levels of market interest rates, loan prepayments and deposit decay,
and should not be relied upon as indicative of actual results. Further, the
computations do not contemplate any actions management could undertake in
response to sudden changes in interest rates.
LIQUIDITY
The Company's goal is to maintain adequate liquidity to meet potential
funding needs of loan and deposit customers, pay operating expenses, and meet
regulatory liquidity requirements. Maturing securities, principal repayments of
loans and securities, deposits, income from operations and borrowings are the
main sources of liquidity. Scheduled loan repayments are a relatively
predictable source of funds, unlike deposits and loan prepayments that are
significantly influenced by general interest rates, economic conditions and
competition.
At December 31, 2001, the estimated market value of liquid assets (cash,
cash equivalents, and marketable securities) was approximately $60.5 million,
representing 14.3% of deposits and borrowed funds as compared to $52.8 million
or 13.8% of deposits and borrowed funds at December 31, 2000. Management
maintains a portfolio generally consisting of mortgage-backed securities and
securities with short maturities (within 5 years) and call dates, consistent
with the Bank's focus on liquidity. Investment securities available for sale are
recorded at their fair value, with the unrealized gain or loss included as a
component of shareholders' equity, net of deferred taxes.
The Company's securities portfolio consists of U.S. Government agency,
mortgage-backed and other permissible securities including preferred stock from
the Federal Home Loan Mortgage Corporation ("FHLMC") and a General Motors
Acceptance Corporation (GMAC) Note. The Federal National Mortgage Association
(FNMA) and FHLMC guarantee the mortgage-backed securities. Mortgage-backed
securities entitle the Company to receive a pro rata portion of the cash flows
from an identified pool of mortgages. Although mortgage-backed securities
generally offer lesser yields than the loans for which they are exchanged, they
present substantially lower credit risk by virtue of the guarantees that back
them. Mortgage-backed securities are more liquid than individual mortgage loans,
and may be used to collateralize borrowings or other obligations of the Company.
6
MANAGEMENT'S DISCUSSION & ANALYSIS
The mortgage-backed and related securities owned by the Company are subject
to repayment by the mortgagors of the underlying collateral at any time. These
repayments may be affected by a rising or declining interest rate environment.
During a rising or declining interest rate environment, repayments and the
interest rate caps may subject the Company's mortgage-backed and related
securities to yield and/or price volatility.
The Company's primary uses of liquidity are to fund loans and to purchase
investments. At December 31, 2001, outstanding off-balance sheet commitments to
extend credit totaled $30.3 million, and the undisbursed portion of construction
loans was $33.7 million. Management considers current liquidity levels adequate
to meet the Company's cash flow requirements.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Bank enters into agreements that obligate it to make future payments
under contracts, such as debt and lease agreements. In addition, the Bank
commits to lend funds in the future such as credit lines and loan commitments.
Below is a table of such contractual obligations and commitments at December 31,
2001 (in thousands).
Payments Due by Period
----------------------------------------------------
Less
than 1 1-3 4-5 Over 5
Contractual Obligations Total year years years years
----------------------------------------------------
Borrowed Funds $ 83,097 $ 35,000 $ 25,000 $ -- $ 23,097
Lease Obligations 1,495 95 186 169 1,045
Deposits 339,830 296,739 43,055 -- 36
----------------------------------------------------
Total Contractual Cash Obligations $424,422 $331,834 $ 68,241 $ 169 $ 24,178
====================================================
Amount of Commitment Expiration
Per Period
-----------------------------------------------------
Total Less
Amounts than 1 1-3 4-5 Over 5
Other Commitments Committed year years years years
-----------------------------------------------------
Undisbursed portion of home equity
collateralized primarily by junior liens
on 1-4 family properties $12,031 $ -- $ -- $ -- $12,031
Other commitments and credit lines 15,755 10,356 3,689 111 1,599
Undisbursed portion of construction loans 33,728 33,728 -- -- --
Fixed-rate mortgage loan commitments 618 618 -- -- --
Adjustable-rate mortgage loan
commitments 1,881 1,881 -- -- --
----------------------------------------------------`
Total Commitments $64,013 $46,583 $ 3,689 $ 111 $13,630
====================================================
CAPITAL
Stockholders' equity at December 31, 2001, was $33.6 million, up $2.8
million, or 9.1%, from $30.8 million at December 31, 2000. The improved capital
position during the year 2001 reflects the impact of earnings retention after
the declaration of cash dividends of $563,034, or $0.20 per share, and the
exercising of 141,537 stock options. Stockholders' equity at December 31, 2001
and December 31, 2000 includes unrealized gains net of tax of $188,000 and
$30,000, respectively, on securities available for sale.
Under the capital regulations of the FDIC, the Bank must satisfy minimum
leverage ratio requirements and risk-based capital requirements. Banks
supervised by the FDIC must maintain a minimum leverage ratio of core (Tier I)
capital to average adjusted assets ranging from 3% to 5%. At December 31, 2001,
the Bank's leverage capital ratio was 7.47%. The FDIC's risk-based capital rules
require banks supervised by the FDIC to maintain risk-
7
MANAGEMENT'S DISCUSSION & ANALYSIS
based capital to risk-weighted assets of at least 8.00%. Risk-based capital for
the Bank is defined as Tier I capital plus the balance of allowance for loan
losses. At December 31, 2001, the Bank had a ratio of qualifying total capital
to risk-weighted assets of 11.00%.
The Company, as a bank holding company, is also subject, on a consolidated
basis, to the capital adequacy guidelines of the Board of Governors of the
Federal Reserve (the "Federal Reserve Board"). The capital requirements of the
Federal Reserve Board are similar to those of the FDIC governing the Bank.
The Company currently exceeds all of its capital requirements. Management
expects the Company to continue to exceed these capital requirements without
altering current operations or strategies. For further information, see Note 7
of Notes to Consolidated Financial Statements.
On December 20, 2001, the Company's Board of Directors approved a quarterly
cash dividend on its common stock of $.05 per share. The dividend was payable
January 16, 2002, to shareholders of record on January 2, 2002. Any future
payment of dividends is dependent on the financial condition and capital needs
of the Company, requirements of regulatory agencies, and economic conditions in
the marketplace.
RELATED PARTY TRANSACTIONS
The Bank has had, and expects to have in the future, banking transactions
in the ordinary course of business with several directors, officers and their
associates ("Related Parties") on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with others. Those transactions neither involve more than normal
risk of collectibility, nor present any unfavorable features. The one exception
is officers can participate in the Bank's employee loan program which offers a
six month adjustable rate that is 1% above the Bank's cost of funds rounded up
to the next 1/4%. Only the employees' primary residence can be used as
collateral and the interest rate is the only favorable term. Officers do not get
preferential treatment in this program over other employees. For further
information, see Note 3 of Notes to Consolidated Financial Statements included
in the Annual Report and the Proxy.
8
MANAGEMENT'S DISCUSSION & ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 2001 COMPARED TO DECEMBER 31, 2000
FINANCIAL CONDITION
The Company's total assets increased 10.4% to $458.1 million at December
31, 2001, as compared to $415.0 million at December 31, 2000. The major changes
in the assets are as follows: a decrease of $5.9 million (32.2%) in cash and
cash equivalents, an increase of $26.9 million (167.7%) in securities available
for sale, a decrease of $14.0 million (73.7%) in held to maturity securities, an
increase of $26.0 million (7.5%) in net loans receivable, and a $9.1 million
(722.6%) increase in other assets. At December 31, 2001 and 2000, the investment
portfolio totaled $52.1 million and $38.8 million, respectively, an increase of
$13.3 million or 34.4 percent. On January 1, 2001, the Company transferred
held-to-maturity investment securities with an amortized cost of approximately
$5,978,000 to the available-for-sale category at fair value as allowed by SFAS
No. 133. The unrealized loss at the time of transfer was approximately $32,000
before taxes. The Bank funded the increase in securities, loans and other assets
with a $12.5 million (3.8%) increase in retail deposits, a $28.0 million (50.8%)
increase in borrowed funds and other available liquid assets. The increase in
other assets was due to an increase in cash surrender value of bank owned life
insurance (BOLI) of $8.1 million and a $600,000 increase in prepaid maintenance
due to the purchase of a 5 year maintenance agreement on the core processing
software. Although the Company has historically concentrated its lending
activities on the origination of loans for the purpose of financing or
refinancing residential properties, it is now actively pursuing construction,
land development, consumer, and business lending.
The Company's nonperforming assets (nonaccrual loans, accruing loans 90
days or more delinquent and foreclosed real estate) were $3.8 million, or 0.84%
of assets, at December 31, 2001, compared to $925,000 or 0.22% of assets, at
December 31, 2000. The Company usually assumes an aggressive position in
collecting delinquent loans and disposing of foreclosed assets to minimize
balances of nonperforming assets and continues to evaluate the loan and real
estate portfolios to provide loss reserves as considered necessary. In light of
what happened on September 11, 2001, and the economic conditions in general, the
Mortgage Division has taken the approach to work with our borrowers and help
them through these uncertain times which is part of the reason for the increase
in nonperforming assets. Of the $3.1 million in nonaccrual and accruing loans 90
days or more delinquent, $2.6 million is secured by 1-4 family residential
property, which have historically experienced low charge offs due to the
adequacy of the collateral. Therefore, while there can be no guarantee, in the
opinion of management, the allowance for loan losses of $2.5 million at December
31, 2001 is adequate to cover probable losses inherent in the loan portfolio.
Management considers a variety of factors in establishing the appropriate
levels for the provision and the allowance for loan losses. Consideration is
given to, among other things, the impact of current economic conditions, the
diversification of the loan portfolio, historical loss experience, the review of
loans by the loan review personnel, the individual borrower's financial and
managerial strengths, and the adequacy of underlying collateral.
The process used to allocate the allowance for loan losses considers, among
other factors, whether the borrower is a mortgage, retail or commercial
customer, whether the loan is secured or unsecured, and whether the loan is an
open or closed-end agreement. Generally, loans are reviewed and risk graded
among groups of loans with similar characteristics. An independent third party
annually reviews our risk grade for appropriateness. The probable loss
projections for each risk grade group are the basis for the allowance
allocation. The loss estimates are based on prior experience, general risk
associated with each loan group and current economic conditions. The unallocated
allowance for loan losses primarily represents the impact of certain conditions
that were not considered in allocating the allowance to the specific components
of the loan portfolio.
At December 31, 2001 deposits had increased $12.5 million (3.8%) to $339.8
million as compared to $327.3 million at December 31, 2000. With the focus to
restructure the balance sheet to be more reflective of a commercial bank,
management took an aggressive position in attracting noninterest bearing demand
deposit accounts. Noninterest bearing demand accounts increased $5.0 million
(40.0%) to $17.7 million as compared to $12.7 million at December 31, 2000.
During the first six months of 2001, the Bank had excess liquidity which it
invested in various securities to increase yield. During the second six months
of 2001, loans increased $23 million while deposits increased only $1 million.
To fund this loan growth and to purchase $8.1 million in BOLI, the Bank received
$28.0 million in borrowed funds. Borrowed funds, collateralized through an
agreement with the Federal Home Loan Bank (FHLB) for advances, are secured by
the Bank's investment in FHLB stock and qualifying first mortgage loans. At
9
MANAGEMENT'S DISCUSSION & ANALYSIS
December 31, 2001, $35 million in borrowed funds mature in 1 year and the
remaining amounts mature in 2 to 10 years. For further information, see Note 6
of Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The net income of the Company depends primarily upon net interest income.
Net interest income is the difference between the interest earned on loans,
securities and interest-bearing deposits in other banks offset by the cost of
funds, consisting principally of the interest paid on deposits and borrowings.
The Company's operations are materially affected by general economic conditions,
the monetary and fiscal policies of the Federal government, and the policies of
regulatory authorities.
NET INCOME
Net income increased 49.6% to $2.9 million for the year 2001, as compared
to $1.9 million in 2000 and $2.7 million in 1999. The following analysis of the
Bank's results of operations will explain the changes that had an effect on net
income for the three years under review.
INTEREST INCOME
Interest income amounted to $31.1 million during 2001, a $592,000 (1.9%)
decrease from 2000 levels, which increased $3.3 million (11.5%) from the 1999
levels. Interest income reduction during 2001 resulted from lower yields on
earning assets. The average balance of interest-earning assets increased 3.0%
but was more than offset by the yield decreasing 37 basis points as compared to
the same period a year ago. The yield fell because of the action the Federal
Reserve took to reduce interest rates in hopes to spur the economy. Their
actions reduced the prime rate to which many of our loans are tied. During 2000,
the increase in interest income was due to a 6.0% increase in the average
balance of interest-earning assets and a 39 basis point increase in the average
yield as compared to 1999. The yield on average interest-earning assets for the
year 2001 decreased to 7.55% as compared to 7.92% for 2000 and 7.53% for 1999.
INTEREST EXPENSE
Interest expense amounted to $18.9 million during 2001, a $388,000 (2.0%)
decrease from 2000 levels, compared to a $2.9 million (17.6%) increase from 1999
to 2000. The decrease in interest expense during 2001 resulted from a lower cost
of interest-bearing liabilities. During 2001, the average balance of
interest-bearing liabilities increased 3.2% but was more than offset by the cost
decreasing 26 basis points as compared to 2000. During 2000 the increase in
interest expense was due to a 53 basis point increase in the average rate paid
and a 5.6% increase in the average balance of interest-bearing liabilities as
compared to 1999. The average cost on interest-bearing liabilities for the year
2001 decreased to 4.97% as compared to 5.23% for 2000 and 4.70% for 1999.
NET INTEREST INCOME
Net interest income totaled $12.2 million during 2001, a decrease of
$203,000 or 1.6% over 2000, when net interest income was $12.4 million. During
2000, net interest income grew $377,000 or 3.1% over the $12.0 million recorded
during 1999. The Average Yield/Cost Analysis table analyzes the interest-earning
assets and interest-bearing liabilities for the three years ending December 31,
2001. The Rate/Volume Analysis table identifies the causes for changes in
interest income and interest expense for 2001 and 2000. The interest rate spread
was 2.53% for 2001, compared to 2.69% for 2000 and 2.83% for 1999. The declining
interest rate spread can be attributed to the fact that more assets reprice
within 30 days as compared to liabilities, therefore the spread contracted in
2001 due to the rapidly declining interest rate environment. Once interest rates
stabilize, management expects the spread between the average yield on
interest-earning assets and the average cost on interest-bearing liabilities to
improve. The net yield on interest-earning assets was 2.96% for 2001 compared to
3.10% for 2000 and 3.19% for 1999.
During 2001, the Bank provided a retirement benefit for its Board of
Directors, President and Executive Vice President. In addition, the Directors
can now defer their Board compensation. These benefits are funded through the
purchase of BOLI, which should enable the Bank to provide these benefits without
a reduction to net income. This transaction will have a negative impact on net
interest income of approximately $350,000 because it was funded with borrowed
funds. Noninterest income should be positively affected by approximately
$250,000. However, income from the BOLI is not taxable, resulting in an
anticipated net increase in net income of approximately $35,000.
10
MANAGEMENT'S DISCUSSION & ANALYSIS
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the Company's average
balance sheets and reflects the average yield on earning assets and average cost
of interest-bearing liabilities for the periods indicated. Such yields and costs
are derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. The average loan portfolio
balances include nonaccrual loans.
For the year ended
----------------------------------------------------------------------
DECEMBER 31, 2001 DECEMBER 31, 2000
--------------------------------- ---------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
ASSETS
Interest-earning assets:
Interest-bearing deposits in
other banks $ 7,648 $ 271 3.54% $ 9,528 $ 390 4.09%
Securities:
Available for sale 36,671 2,212 6.03% 21,619 1,267 5.86%
Held to maturity 7,452 400 5.37% 18,385 1,066 5.80%
FHLB stock 3,761 254 6.75% 3,755 291 7.75%
Loan portfolio 356,540 27,980 7.85% 346,848 28,695 8.27%
-------- ------- ---- -------- ------- ----
Total interest-earning assets 412,072 31,117 7.55% 400,135 31,709 7.92%
Non-interest earning assets 16,676 ------- 11,665 -------
-------- --------
Total assets $428,748 $411,800
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $319,777 $15,353 4.80% $303,379 $15,062 4.96%
Borrowed funds 60,943 3,563 5.85% 65,470 4,243 6.48%
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 380,720 18,916 4.97% 368,849 19,305 5.23%
Non-interest bearing liabilities 15,588 ------- 12,549 -------
-------- --------
Total liabilities 396,308 381,398
Stockholders' equity 32,440 30,402
-------- --------
Total liabilities and stockholders'
equity $428,748 $411,800
======== ========
Net interest income $12,201 $12,404
======= =======
Interest rate spread 2.58% 2.69%
====== ======
Net yield on interest-earning assets 2.96% 3.10%
====== ======
Percentage of average interest-earning
assets to average interest-bearing
liabilities 108.2% 108.5%
====== ======
For the year ended
--------------------------------
DECEMBER 31, 1999
--------------------------------
(DOLLARS IN THOUSANDS) Average
Average Yield/
Balance Interest Cost
-------- -------- -------
ASSETS
Interest-earning assets:
Interest-bearing deposits in
other banks $ 10,042 $379 3.77%
Securities:
Available for sale 30,210 1,868 6.18%
Held to maturity 14,769 694 4.70%
FHLB stock 3,087 234 7.58%
Loan portfolio 319,480 25,274 7.91%
-------- ------- -----
Total interest-earning assets 377,588 28,449 7.53%
Non-interest earning assets 12,392 -------
--------
Total assets $389,980
========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits $292,174 $12,838 4.39%
Borrowed funds 57,036 3,584 6.28%
-------- ------- -----
Total interest-bearing liabilities 349,210 16,422 4.70%
Non-interest bearing liabilities 10,598 -------
--------
Total liabilities 359,808
Stockholders' equity 30,172
--------
Total liabilities and stockholders'
equity $389,980
========
Net interest income $12,027
=======
Interest rate spread 2.83%
======
Net yield on interest-earning assets 3.19%
======
Percentage of average interest-earning
assets to average interest-bearing
liabilities 108.1%
======
11
MANAGEMENT'S DISCUSSION & ANALYSIS
RATE/VOLUME ANALYSIS
The table below provides information regarding changes in interest income
and interest expense for the period indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (changes in volume
multiplied by old rate) and (ii) changes in rates (change in rate multiplied by
old volume). The changes attributable to changes in rate-volume have been
allocated to the other categories based on relative absolute values.
For the year ended For the year ended
December 31, 2000 vs. December 31, 2001 December 31, 1999 vs. December 31, 2000
Increase (Decrease) Increase (Decrease)
Due to Due to
(DOLLARS IN THOUSANDS) ---------------------------------- -----------------------------------
Volume Rate Total Volume Rate Total
------- -------- -------- --------- ------ ------
Interest income:
Interest-bearing deposits in other banks $ (72) $ (47) $ (119) $ (21) $ 32 $ 11
Securities:
Available for sale 906 39 945 (508) (93) (601)
Held to maturity (593) (73) (666) 189 183 372
FHLB stock - (37) (37) 52 5 57
Loan portfolio 788 (1,503) (715) 2,230 1,191 3,421
------ ------- ------ ------ ------ ------
Total interest-earning assets 1,029 (1,621) (592) 1,942 1,318 3,260
------ ------- ------ ------ ------ ------
Interest expense:
Deposits 797 (506) 291 507 1,717 2,224
Borrowed funds (282) (398) (680) 543 116 659
------ ------- ------ ------ ------ ------
Total interest-bearing liabilities 515 (904) (389) 1,050 1,833 2,883
------ ------- ------ ------ ------ ------
Net interest income $ 514 $ (717) $ (203) $ 892 $ (515) $ 377
====== ======= ====== ====== ====== ======
PROVISION FOR LOAN LOSSES
The provision for loan losses charged to operations was $460,000 during
2001, compared to $970,000 during 2000 and $210,000 during 1999. The provision
for 2000 included an increase of approximately $670,000 made in response to a
detailed review of the Bank's loan portfolio. Management's decision to increase
the loan loss reserve was considered appropriate in light of the successful
expansion in the commercial loan portfolio and was not in response to any
significant increase in non-performing assets. While commercial loans typically
earn a higher yield than traditional residential mortgage loans, they pose an
incrementally higher level of credit risk to the Company. A review of the
portfolio during the first quarter of 2000 highlighted this trend in the
portfolio and prompted management to make this provision. The commercial loan
portfolio continues to expand which is why the provision for loan losses
continues to increase. Nonperforming assets at December 31, 2001 were $3.8
million compared to $925,000 at December 31, 2000 and $1.4 million at December
31, 1999. Net charge-offs for 2001 were $97,000 compared to $117,000 during 2000
and $82,000 during 1999. At December 31, 2001, the allowance for loan losses was
0.67% of net loans as compared to 0.62% for 2000 and 0.39% for 1999. The
allowance for loan losses increased to $2.5 million at December 31, 2001
compared to $2.2 million at December 31, 2000 and $1.3 million at December 31,
1999. Management considers this level to be appropriate based on lending volume,
the current level and types of delinquencies and other nonperforming assets,
historical charge off patterns, overall economic conditions and other factors.
Future increases to the allowance may be necessary, however, due to changes in
loan composition or loan volume, changes in economic or market area conditions
and other factors. Additionally, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for loan losses. Such agencies may require the recognition of additions to the
allowance based on their judgments of information available to them at the time
of their examination.
NONINTEREST INCOME
Total noninterest income increased to $2.0 million during 2001, an increase
of $371,000 or 22.2% over 2000. This compares to $1.7 million and $1.3 million
during 2000 and 1999, respectively. The major component in the year 2001 that
had the most impact on noninterest income was the sale of securities resulting
in net gains of $125,000 versus a loss on sale of securities of $287,000 in
2000. These gains were realized as the investment
12
MANAGEMENT'S DISCUSSION & ANALYSIS
portfolio was being managed during the year of rapidly declining interest rates.
Management has not budgeted any gains on sale of securities in the future.
Service charges and fees on loans increased to $731,000 (63.6%) during the year
2001 as compared to $447,000 (38.7%) for 2000 and $322,000 in 1999. The increase
in service charges and fees on loans for 2001 was mainly due to an increase in
loan settlement service fees for loans processed for others. This program began
in May 2000 and the volume has increased in 2001 due to the favorable rate
environment. Deposit-related fees increased to $967,000 (16.9%) during the year
2001 as compared to $827,000 (18.1%) for 2000 and $701,000 in 1999. The increase
in deposit-related fees can be attributed to an increase in the volume of
checking accounts and a change in the fee structure during the year 2000, which
was in place for the entire year of 2001. Other income increased to $205,000
(106.1%) during the year 2001 as compared to $100,000 (39.5%) for 2000 and
$71,000 in 1999. The majority of the increase can be attributed to the increase
in the cash surrender value of the BOLI that was purchased in 2001.
NONINTEREST EXPENSE
Total noninterest expense was $9.3 million during the year 2001, a decrease
of $890,000 or 8.7% from 2000. The major decrease in noninterest expense during
the year 2001 can be attributed to a modification to the defined benefit plan in
2000 and a onetime offering of a special early retirement benefit to certain
employees at December 31, 2000. With a modification to the defined benefit plan
in 2000, the Company expensed $35,000 in 2001 as compared to $304,000 in 2000
and $120,000 in 1999. As a result of this change, the Bank offered a special
early retirement benefit to certain employees meeting the eligibility
requirements, resulting in a one-time charge of $754,000 to compensation and
fringe benefits in 2000. The Bank's occupancy and equipment expense was $2.1
million during 2001, an increase of 4.0% as compared to $2.0 million in 2000 and
$1.9 million in 1999. The increase in the years 2001 and 2000 can be attributed
to additional maintenance necessary to keep the buildings and equipment in good
repair, increases in property tax, increases in the cost of data processing
services, and normal increases in utility expenses. Advertising cost for the
year 2001 was $278,000, a decrease of 30.2% as compared to $398,000 in 2000 and
$445,000 in 1999. The reduction in advertising can be attributed to a more
conservative advertising policy. Other operating expense was $1.8 million, an
increase of 5.0% as compared to $1.7 million in 2000 and $1.8 million in 1999.
The majority of the increase can be attributed to credits the Bank received in
2000 for phone lines for data processing. No such credits were received in 2001
and 1999.
INCOME TAXES
The effective tax rate for the years ended December 31, 2001, 2000 and 1999
was 35.5%, 33.6% and 35.6% respectively. The increase in the effective tax rate
in 2001 over 2000 was due to lower relative levels of state tax-exempt income.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the discussion
contains forward-looking statements that involve risks and uncertainties.
Economic circumstances, the Company's operations, and the Company's actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein, but also include changes in the economy and
interest rates in the nation, changes in the Company's regulatory environment
and the Company's market area generally.
13
MANAGEMENT'S DISCUSSION & ANALYSIS
SELECTED QUARTERLY DATA
The following table contains selected financial data for the Company on a
quarterly basis for the previous eight quarters.
2001
Fourth Third Second First
- ----------------------------------------------------------------------------------------------
Dollars in Thousands
Selected Quarter-End Balances:
Assets $ 458,114 $ 443,781 $ 427,992 $ 417,408
Loans, net 373,458 364,306 351,104 349,136
Securities 47,970 47,441 51,650 42,767
FHLB stock 4,155 3,755 3,755 3,755
Deposits 339,830 340,615 338,985 328,566
Borrowed funds 83,097 68,098 55,099 55,100
Stockholders' equity 33,618 33,010 31,873 31,375
- ----------------------------------------------------------------------------------------------
Dollars in Thousands
Selected Operations Data:
Interest income $ 7,505 $ 7,870 $ 7,825 $ 7,918
Interest expense 4,375 4,747 4,823 4,972
Net interest income 3,130 3,123 3,002 2,946
Provision for loan losses 160 120 90 90
Noninterest income 630 533 462 415
Noninterest expenses 2,362 2,292 2,275 2,374
Income before income taxes 1,238 1,244 1,099 897
Net income 806 805 703 574
- ----------------------------------------------------------------------------------------------
Selected Financial Ratios and Other Data:
Return on average assets 0.72% 0.74% 0.67% 0.56%
Return on average equity 9.59% 9.87% 8.77% 7.31%
Average stockholders' equity to average
assets 7.52% 7.53% 7.63% 7.59%
Per Share Data:
Earnings per:
Common share - basic $ 0.29 $ 0.29 $ 0.25 $ 0.21
Common share - diluted $ 0.28 $ 0.28 $ 0.25 $ 0.20
Cash dividends declared $ 0.05 $ 0.05 $ 0.05 $ 0.05
Tangible book value $ 11.86 $ 11.69 $ 11.38 $ 11.20
Number of common shares outstanding 2,835,447 2,823,271 2,800,975 2,800,975
2000
Fourth Third Second First
- -----------------------------------------------------------------------------------------------
Selected Quarter-End Balances:
Assets $ 414,961 $ 414,720 $ 420,735 $ 410,465
Loans, net 347,486 348,872 351,678 343,222
Securities 35,027 39,829 38,683 38,619
FHLB stock 3,755 3,755 3,755 3,755
Deposits 327,312 319,647 321,167 316,412
Borrowed funds 55,101 63,103 68,104 63,105
Stockholders' equity 30,812 30,713 30,021 29,418
- -----------------------------------------------------------------------------------------------
Dollars in Thousands
Selected Operations Data:
Interest income $ 8,064 $ 8,060 $ 7,925 $ 7,660
Interest expense 5,088 5,005 4,744 4,468
Net interest income 2,976 3,055 3,181 3,192
Provision for loan losses 90 90 90 700
Noninterest income 410 335 332 593
Noninterest expenses 3,016 2,162 2,359 2,656
Income before income taxes 280 1,138 1,064 429
Net income 235 728 695 274
- -----------------------------------------------------------------------------------------------
Selected Financial Ratios and Other Data:
Return on average assets 0.23% 0.70% 0.67% 0.27%
Return on average equity 3.01% 9.52% 9.28% 3.66%
Average stockholders' equity to average
assets 7.56% 7.39% 7.25% 7.33%
Per Share Data:
Earnings per:
Common share - basic $ 0.08 $ 0.27 $ 0.26 $ 0.10
Common share - diluted $ 0.08 $ 0.26 $ 0.25 $ 0.10
Cash dividends declared $ 0.05 $ 0.05 $ 0.05 $ 0.05
Tangible book value $ 11.35 $ 11.31 $ 11.06 $ 10.86
Number of common shares outstanding 2,714,610 2,714,610 2,714,110 2,709,078
14
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cooperative Bankshares, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Cooperative Bankshares, Inc. and subsidiary as of December 31, 2001 and 2000,
and the related consolidated statements of operations, comprehensive income,
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The accompanying consolidated
financial statements of Cooperative Bankshares, Inc. and subsidiary for the year
ended December 31, 1999 were audited by other auditors whose report thereon
dated January 21, 2000 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 2001 and 2000 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Cooperative Bankshares, Inc. and subsidiary as of December 31, 2001 and 2000,
and the results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ KPMG LLP
Raleigh, North Carolina
January 16, 2002, except as to note 16,
which is as of February 25, 2002
15
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2001 and 2000
2001 2000
------------ ------------
ASSETS
Cash and due from banks, noninterest-bearing $ 10,709,799 3,904,275
Interest-bearing deposits in other banks 1,585,779 14,244,161
------------ ------------
Total cash and cash equivalents 12,295,578 18,148,436
Securities:
Available for sale (amortized cost of $42,661,527 in 2001
and $16,000,677 in 2000) 42,970,180 16,049,376
Held to maturity (estimated market value of $5,282,815
in 2001 and $18,553,526 in 2000) 5,000,000 18,977,776
FHLB stock 4,154,900 3,755,300
Loans 375,980,628 349,645,598
Less allowance for loan losses 2,522,737 2,159,663
------------ ------------
Net loans 373,457,891 347,485,935
Other real estate owned 759,272 234,711
Accrued interest receivable 2,637,367 2,776,404
Premises and equipment, net 6,471,715 6,272,610
Prepaid expenses and other assets 10,367,162 1,260,232
------------ ------------
Total assets $458,114,065 414,960,780
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $339,830,052 327,312,324
Borrowed funds 83,097,156 55,101,477
Escrow deposits 220,944 560,775
Accrued interest payable 264,391 300,396
Accrued expenses and other liabilities 1,083,242 873,629
------------ ------------
Total liabilities 424,495,785 384,148,601
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value: 3,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $1 par value: 7,000,000 shares authorized,
2,835,447 and 2,714,610 issued and outstanding 2,835,447 2,714,610
Additional paid-in capital 2,435,720 2,234,936
Accumulated other comprehensive income 188,278 29,707
Retained earnings 28,158,835 25,832,926
------------ ------------
Total stockholders' equity 33,618,280 30,812,179
------------ ------------
Total liabilities and stockholders' equity $458,114,065 414,960,780
============ ============
See accompanying notes to consolidated financial statements.
16
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- -----------
Interest income:
Loans $27,980,414 28,694,889 25,274,397
Securities 2,611,299 2,332,743 2,561,805
Other 271,767 390,285 379,476
Dividends on FHLB stock 253,918 291,036 233,730
----------- ----------- -----------
Total interest income 31,117,398 31,708,953 28,449,408
----------- ----------- -----------
Interest expense:
Deposits 15,352,845 15,061,870 12,837,966
Borrowed funds 3,563,469 4,242,721 3,583,825
----------- ----------- -----------
Total interest expense 18,916,314 19,304,591 16,421,791
----------- ----------- -----------
Net interest income 12,201,084 12,404,362 12,027,617
Provision for loan losses 460,000 970,000 210,000
----------- ----------- -----------
Net interest income after provision for
loan losses 11,741,084 11,434,362 11,817,617
----------- ----------- -----------
Noninterest income:
Gain on sale of loans 11,150 245 161,365
Net gain (loss) on sale of securities 125,172 (287,282) 938
Service charges and fees on loans 731,338 446,922 322,146
Deposit-related fees 967,171 827,432 700,811
Gain on sale of branch -- 582,583 --
Other income 205,428 99,694 71,471
----------- ----------- -----------
Total noninterest income 2,040,259 1,669,594 1,256,731
----------- ----------- -----------
Noninterest expenses:
Compensation and fringe benefits 5,124,945 6,046,774 4,670,391
Occupancy and equipment 2,073,635 1,994,560 1,939,797
Advertising 277,758 397,662 444,521
Real estate owned expenses and losses 22,053 36,031 29,123
Other 1,804,761 1,718,160 1,830,495
----------- ----------- -----------
Total other operating expenses 9,303,152 10,193,187 8,914,327
----------- ----------- -----------
Income before income taxes 4,478,191 2,910,679 4,160,021
Income tax expense 1,589,248 979,004 1,479,591
----------- ----------- -----------
Net income $ 2,888,943 1,931,675 2,680,430
=========== =========== ===========
Net income per share:
Basic $ 1.03 .71 .95
=========== =========== ===========
Diluted 1.02 .69 .90
=========== =========== ===========
Weighted average common shares outstanding:
Basic 2,797,317 2,714,216 2,819,846
=========== =========== ===========
Diluted 2,823,191 2,805,611 2,974,043
=========== =========== ===========
See accompanying notes to consolidated financial statements.
17
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------- ---------- ----------
Net income $ 2,888,943 1,931,675 2,680,430
Other comprehensive income (loss):
Unrealized gain (loss) arising during the year 385,127 286,808 (776,995)
Tax (expense) benefit (150,201) (111,855) 303,028
Reclassification to realized (gain) loss (125,172) 287,282 (938)
Tax expense (benefit) 48,817 (112,040) 366
----------- ---------- ----------
Other comprehensive income (loss) 158,571 350,195 (474,539)
----------- ---------- ----------
Comprehensive income $ 3,047,514 2,281,870 2,205,891
=========== ========== ==========
See accompanying notes to consolidated financial statements.
18
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE TOTAL
COMMON PAID-IN INCOME (LOSS), RETAINED STOCKHOLDERS'
STOCK CAPITAL NET EARNINGS EQUITY
------------ ----------- ------------- ------------ -----------
Balance, December 31, 1998 $ 3,046,284 6,649,374 154,051 21,763,441 31,613,150
Exercise of stock options 23,424 28,375 -- -- 51,799
Tax benefit of stock option exercise -- 66,998 -- -- 66,998
Repurchase of stock (381,789 shares) (381,789) (4,212,749) -- -- (4,594,538)
Other comprehensive loss, net of taxes -- -- (474,539) -- (474,539)
Net income for year -- -- -- 2,680,430 2,680,430
------------ ----------- --------- ------------ -----------
Balance, December 31, 1999 2,687,919 2,531,998 (320,488) 24,443,871 29,343,300
Exercise of stock options 73,076 132,959 -- -- 206,035
Tax benefit of stock option exercise -- 4,251 -- -- 4,251
Repurchase of stock (46,385 shares) (46,385) (434,272) -- -- (480,657)
Other comprehensive income, net of taxes -- -- 350,195 -- 350,195
Net income for year -- -- -- 1,931,675 1,931,675
Cash dividends ($.20 per share) -- -- -- (542,620) (542,620)
------------ ----------- --------- ------------ -----------
Balance, December 31, 2000 2,714,610 2,234,936 29,707 25,832,926 30,812,179
Exercise of stock options 141,537 392,364 -- -- 533,901
Tax benefit of stock option exercise -- 60,372 -- -- 60,372
Stock traded to exercise options
(20,700 shares) (20,700) (251,952) -- -- (272,652)
Other comprehensive income, net of taxes -- -- 158,571 -- 158,571
Net income for year -- -- -- 2,888,943 2,888,943
Cash dividends ($.20 per share) -- -- -- (563,034) (563,034)
------------ ----------- --------- ------------ -----------
Balance, December 31, 2001 $ 2,835,447 2,435,720 188,278 28,158,835 33,618,280
============ =========== ========= ============ ===========
See accompanying notes to consolidated financial statements.
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------ ------------ -----------
Net income $ 2,888,943 1,931,675 2,680,430
Adjustments to reconcile net income to net cash
provided by operating activities:
Net accretion and amortization 45,494 15,085 117,717
Depreciation 669,842 639,291 664,189
Net (gain) loss on sale of securities (125,172) 287,282 (938)
Gain on sale of loans (11,150) (245) (161,365)
Benefit from deferred income taxes (276,589) (695,383) (280,431)
Loss (gain) on sales of premises and equipment 8,621 (130) 7,783
Gain on sale of branch office -- (582,583) --
Loss on sales of foreclosed real estate 3,793 22,681 16,974
Valuation losses on foreclosed real estate 36,330 -- 10,000
Provision for loan losses 460,000 970,000 210,000
Proceeds from sales of loans 506,245 44,560 39,923,328
Changes in assets and liabilities:
Accrued interest receivable 139,037 (309,675) (184,802)
Prepaid expenses and other assets (843,020) 890,265 (924,337)
Accrued interest payable (36,005) (169,702) 80,599
Accrued expenses and other liabilities 269,985 496,507 135,275
------------ ------------ -----------
Net cash provided by operating activities 3,736,354 3,539,628 42,294,422
------------ ------------ -----------
Purchases of securities available for sale (82,123,753) (10,000,000) (1,999,375)
Purchases of securities held to maturity -- (986,604) (5,000,000)
Proceeds from maturity of securities available for sale 16,000,000 5,000,000 --
Proceeds from sale of securities available for sale 43,107,351 16,277,957 2,000,938
Proceeds from maturities of securities held to maturity 8,000,000 -- --
Proceeds from maturities of securities available for sale 2,413,006 213,783 3,600,089
Loan originations, net of principal repayments (28,078,369) (15,451,318) (51,386,357)
Proceeds from disposals of foreclosed real estate 643,413 353,420 193,452
Purchases of premises and equipment (902,513) (789,299) (544,567)
Proceeds from sales of premises and equipment 3,518 68,154 500
Net cash paid related to sale of branch office -- (5,156,761) --
Net expenditures on foreclosed real estate (35,352) (14,985) (30,880)
Purchases of FHLB stock (399,600) -- (927,300)
Purchases of life insurance (8,088,704) -- --
------------ ------------ -----------
Net cash used in investing activities (49,461,003) (10,485,653) (54,093,500)
------------ ------------ -----------
Net increase in deposits 12,517,728 29,576,608 3,178,251
Proceeds from borrowed funds 49,000,000 61,000,000 52,000,000
Principal payments on borrowed funds (21,004,321) (81,004,090) (32,003,872)
Proceeds from issuance of common stock, net 261,249 206,035 51,799
Purchase and retirement of common stock -- (480,657) (4,594,538)
Dividends paid (563,034) (406,890) --
Net change in escrow deposits (339,831) 218,071 11,976
------------ ------------ -----------
Net cash provided by financing activities 39,871,791 9,109,077 18,643,616
------------ ------------ -----------
Increase (decrease) in cash and
cash equivalents (5,852,858) 2,163,052 6,844,538
Cash and cash equivalents:
Beginning of year 18,148,436 15,985,384 9,140,846
------------ ------------ -----------
End of year $ 12,295,578 18,148,436 15,985,384
============ ============ ===========
(Continued)
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------ ---------- ----------
Cash paid for:
Interest $18,952,319 19,305,008 16,450,109
Income taxes 1,699,583 1,739,500 1,724,000
Summary of noncash investing and financing activities:
Transfer from loans to other real estate owned 1,151,318 351,201 330,014
Transfer of premises and equipment to other real
real estate owned 21,427 -- --
Loans to facilitate the sale of foreclosed
real estate -- -- 2,355,000
Unrealized gains (losses) on securities available
for sale, net of taxes 158,571 350,195 (474,539)
Transfer of securities from held to maturity to
available for sale at fair value 5,946,000 -- --
See accompanying notes to consolidated financial statements.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
(1) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and transactions
of Cooperative Bankshares, Inc. (the Company), a bank holding company
incorporated under the laws of the State of North Carolina, and its wholly
owned subsidiary, Cooperative Bank for Savings, Inc., SSB (the Bank), and
the Bank's wholly owned subsidiary CS&L Services, Inc. All significant
intercompany transactions have been eliminated.
NATURE OF OPERATIONS
The Company operates 17 offices (including 16 full service branches) in
Eastern North Carolina and offers a wide range of banking services
including deposits, bank cards, and alternative investment products. The
funds are used for the extension of credit through home loans, commercial
loans, consumer loans, and other installment credit such as home equity
loans, auto and boat loans, and check reserves. The Company's primary
source of revenue is interest income from its loan and securities
portfolios.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities in the financial statements and accompanying notes. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain items included in prior years' financial statements have been
reclassified to conform to the current year presentation. These
reclassifications have no effect on the net income or stockholders' equity
as previously reported.
SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are summarized below:
(a) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand and time deposits (with
original maturities of ninety days or less) at other institutions.
Federal regulations require institutions to set aside specified
amounts of cash as reserves against transaction and time deposits. As
of December 31, 2001, the daily average gross reserve requirement was
$651,000.
(Continued)
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
(b) SECURITIES
Investments in certain securities are classified into three
categories and accounted for as follows: (1) debt securities that
the entity has the positive intent and the ability to hold to
maturity are classified as held to maturity and reported at
amortized cost; (2) debt and equity securities that are bought
and held principally for the purpose of selling them in the near
term are classified as trading securities and reported at fair
value, with unrealized gains and losses included in earnings; (3)
debt and equity securities not classified as either held to
maturity securities or trading securities are classified as
available for sale securities and reported at fair value, with
unrealized gains and losses excluded from net income and reported
as other comprehensive income and included as a separate
component of stockholders' equity.
Premiums are amortized and discounts are accreted using the
effective interest method over the remaining terms of the related
securities. Gains and losses on the sales of securities are
determined using the specific-identification method and are
included in noninterest income at the time of sale.
(c) FHLB STOCK
The Company, as a member of the Federal Home Loan Bank (FHLB)
System, is required to maintain an investment in capital stock of
the FHLB of Atlanta in an amount equal to the greater of 1% of
its outstanding home loans or 5% of its outstanding FHLB
advances. No ready market exists for FHLB stock, and it has no
quoted market value. The FHLB stock is carried at cost.
(d) LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses, unearned discounts and net deferred
loan origination fees and costs. Interest income on loans is
recorded on the accrual basis based upon the principal amount
outstanding. Deferred loan fees and costs and unearned discounts
are amortized to interest income over the contractual life of the
loan using the interest method.
The Company evaluates its loan portfolio in accordance with
Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan" as amended by
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosure". Under these standards, a loan
is considered impaired, based on current information and events,
if it is probable that the Company will be unable to collect the
scheduled payments of principal and interest when due according
to the contractual terms of the loan agreement. Uncollateralized
loans are measured for impairment based on the present value of
expected future cash flows discounted at the original contractual
interest rate, while all collateral-dependent loans are measured
for impairment based on the fair value of the collateral. As
permitted by the statement, smaller-balance homogeneous loans
which consist primarily of residential mortgages and consumer
loans are evaluated collectively and reserves are established
based on historical loss experience.
The Company uses several factors in determining if a loan is
impaired. The internal asset classification procedures include a
thorough review of significant loans and lending relationships
and the accumulation of related data. This data includes loan
payment status, borrowers' financial data and borrowers'
operating factors such as cash flows and operating income or
loss.
(Continued)
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
The allowance for loan losses is established through a provision
charged to income. The allowance is an amount that management believes
will be adequate to absorb probable losses on existing loans, based on
the evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio quality, review
of specific problem loans, and current economic conditions and trends
that may affect the borrowers' ability to pay. It is possible that
such factors in management's evaluations of the adequacy of the
allowance for loan losses will change. Thus, future additions to the
allowance may be necessary based on the impact of changes in economic
conditions.
Additionally, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance
for loan losses. Such agencies may require the recognition of
additions to the allowance based on their judgments of information
available to them at the time of their examination.
(e) INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS
Loans, including impaired loans, are generally classified as
nonaccrual if they are past due for a payment of principal or interest
for a period of more than 90 days, unless such loans are well-secured
and in the process of collection. Loans that are on a current payment
status or past due less than 90 days may also be classified as
nonaccrual if repayment in full of principal and/or interest is in
doubt. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only
to the extent cash payments are received.
Loans may be returned to accrual status when all principal and
interest amounts contractually due (including arrearages) are
reasonably assured of repayment within an acceptable period of time,
and there is a sustained period of repayment performance (generally a
minimum of six months) by the borrower, in accordance with the
contractual terms of interest and principal.
When the future collectibility of the recorded loan balance is
expected, interest income may be recognized on a cash basis. In the
case where a nonaccrual loan had been partially charged-off,
recognition of interest on a cash basis is limited to that which would
have been recognized on the recorded loan balance at the contractual
interest rate. Receipts in excess of that amount are recorded as
recoveries to the allowance for loan losses until prior charge-offs
have been fully recovered.
(f) TRANSFERS AND SERVICING OF FINANCIAL ASSETS
There were $470,400 in loans sold in 2001 with retained servicing
rights. The recorded balance of the rights to service mortgage loans
for others was $3,898 at December 31, 2001 and is included in other
assets. There were no loan sales in 2000 with retained servicing
rights. Fees on loans sold in 1999 are considered to adequately
compensate the Company; therefore, no servicing assets were recorded
on those sales.
(Continued)
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
Servicing loans for others generally consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to
investors and foreclosure processing. Loan servicing income is
recorded on the cash basis less the amortized amount for retained
servicing rights and includes servicing fees from investors and
certain charges collected from borrowers, such as late payment fees.
(g) OTHER REAL ESTATE OWNED
Other real estate owned is recorded initially at the lower of the loan
balance or estimated fair value of the property less estimated costs
to sell at the date of foreclosure and subsequently reduced by
additional allowances which are charged to earnings if the estimated
fair value declines below its initial value plus any capitalized
costs. Costs related to the improvement of the property are
capitalized, whereas those related to holding the property are
expensed.
(h) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated
depreciation and amortization. The provision for depreciation is
computed using the straight-line method over the estimated useful
lives of the various classes of assets. Useful lives range from 15 to
40 years for buildings and 5 to 10 years for furniture and equipment.
The cost of leasehold improvements is amortized on the straight-line
method over the lesser of the lives of the improvements or the terms
of the leases. Repairs and maintenance are charged to expense as
incurred.
(i) INCOME TAXES
Deferred tax asset and liability balances are determined by
application to temporary differences of the tax rate expected to be in
effect when taxes become payable or receivable. Temporary differences
are differences between the tax basis of assets and liabilities and
their reported amounts in the consolidated financial statements that
will result in taxable or deductible amounts in future years.
(j) COMPREHENSIVE INCOME
The Company reports as comprehensive income all changes in
stockholders' equity during the year from nonowner sources. Other
comprehensive income refers to all components (revenues, expenses,
gains, and losses) of comprehensive income that are excluded from net
income. The Company's only component of other comprehensive income is
unrealized gains and losses on securities available for sale.
(k) SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", requires that public business enterprises report certain
information about operating segments. It also requires that the public
business enterprises report related disclosures and descriptive
information about products and services provided by significant
segments, geographic areas, and major customers, differences between
the measurements used in reporting segments and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
(Continued)
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
The Company has determined that it operates primarily in one operating
segment, the providing of general commercial financial services to
customers located in the single geographic area of Eastern North
Carolina. The various products are those generally offered by
community banks, and the allocation of resources is based on the
overall performance of the institution, versus the individual branches
or products.
(l) NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The statement is
effective for fiscal years beginning after June 15, 2000, with earlier
adoption permitted, as amended by SFAS No. 137. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments and for hedging activities. The statement requires an
entity to recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at
fair value. On January 1, 2001, the Company transferred
held-to-maturity investment securities with an amortized cost of
approximately $5,978,000 to the available-for-sale category at fair
value as allowed by SFAS No. 133. The unrealized loss at the time of
transfer was approximately $32,000 before tax. Such transfers from the
held-to-maturity category at the date of initial adoption shall not
call into question the Company's intent to hold other debt securities
to maturity in the future. The Company does not engage in any hedging
activities, and, other than the aforementioned transfer of securities,
the adoption of the statement had no material impact on the Company's
consolidated financial statements.
The Financial Accounting Standards Board (FASB) has issued SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a Replacement of FASB Statement No.
125." It revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires
certain disclosures, but it carries over most of SFAS No. 125's
provisions without reconsideration. This statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. This statement is
effective for recognition and reclassification of collateral and
disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. The Company adopted this
statement during 2001 with no material impact to the Company.
On July 1, 2001, the Company adopted SFAS No. 141, "Business
Combinations". This Statement improves the transparency of the
accounting and reporting for business combinations by requiring that
all business combinations be accounted for under a single method--the
purchase method. Use of the pooling-of-interests method is no longer
permitted. SFAS No. 141 requires that the purchase method be used for
business combinations initiated after June 30, 2001.
The FASB has issued SFAS No. 142 "Goodwill and Other Intangible
Assets". This Statement requires that goodwill no longer be amortized
to earnings, but instead be reviewed for impairment. This change
provides investors with greater transparency regarding the economic
value of goodwill and its impact on earnings. The amortization of
goodwill ceases upon adoption of the Statement, which will be January
1, 2002. Management of the Company anticipates that due to the fact
that it does not have goodwill or other intangible assets, the
adoption of SFAS No. 142 will not have a material effect on the
Company.
(Continued)
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
(2) SECURITIES
Securities as of December 31, 2001 and 2000 are summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------ ---------- ---------- -----------
2001:
SECURITIES AVAILABLE FOR SALE:
U.S. Government and agency
securities $ 25,600,964 268,987 112,134 25,757,817
Mortgage-backed securities 11,070,696 120,060 67,456 11,123,300
Marketable equity securities 4,984,950 114,425 -- 5,099,375
Corporate bond 1,004,917 -- 15,229 989,688
------------- ------------ --------- ------------
Total $ 42,661,527 503,472 194,819 42,970,180
============= =========== ========= ============
SECURITIES HELD TO MATURITY:
U.S. Government and agency
securities $ 5,000,000 282,815 -- 5,282,815
============= =========== ========= ============
2000:
SECURITIES AVAILABLE FOR SALE:
U.S. Government and agency
securities $ 16,000,677 52,449 3,750 16,049,376
============= =========== ========= ============
SECURITIES HELD TO MATURITY:
U.S. Government and agency
securities $ 18,014,900 -- 447,085 17,567,815
Mortgage-backed securities 962,876 22,835 -- 985,711
------------- ----------- --------- ------------
Total $ 18,977,776 22,835 447,085 18,553,526
============= =========== ========= ============
(Continued)
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
The maturities of securities at December 31, 2001 are summarized as
follows:
AMORTIZED ESTIMATED
COST MARKET VALUE
----------- ------------
Held to maturity:
After 1 year through 5 years $ 5,000,000 5,282,815
=========== ===========
Available for sale:
After 1 year through 5 years $18,001,194 18,146,878
After 5 years through 10 years 8,604,687 8,600,627
Marketable equity securities 4,984,950 5,099,375
Mortgage-backed securities 11,070,696 11,123,300
----------- -----------
$42,661,527 42,970,180
=========== ===========
Expected maturities for mortgage-backed securities will differ from
contractual maturities because borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
For the three years ended December 31, 2001, sales of investment securities
resulted in gross realized gains of $125,172 in 2001, gross realized gains
of $4,697 and gross realized losses of $291,979 in 2000, and gross realized
gains of $938 in 1999.
Investment securities having an aggregate carrying value of $11,592,502 at
December 31, 2001 were pledged to secure public funds on deposit.
(Continued)
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
(3) LOANS
Loans at December 31, 2001 and 2000 are summarized as follows (in
thousands):
2001 2000
--------- ---------
Real estate:
Construction and land development $ 62,142 37,542
Mortgage:
1-4 family residential 209,622 234,383
Multi-family residential 15,626 17,081
Commercial 55,664 31,300
Equity line 13,131 11,954
Other 254 174
--------- ---------
Total real estate loans 356,439 332,434
Commercial, industrial and agricultural 13,430 10,970
Consumer 7,285 7,236
--------- ---------
Total gross loans 377,154 350,640
Unamortized net deferred fees (1,173) (994)
--------- ---------
Loans $ 375,981 349,646
========= =========
In the normal course of business, the Company originates loans to related
parties. Related parties include directors, executive officers, principal
shareholders of equity securities, or any associate of such persons. The
activity with respect to related party loans is summarized below for the
year ending December 31, 2001:
Balance at beginning of year $ 2,441,071
New loans 4,460,447
Repayments (1,017,766)
-----------
Balance at end of year $ 5,883,752
===========
Activity in the allowance for loan losses for the years ended December 31,
2001, 2000 and 1999 is summarized as follows:
2001 2000 1999
----------- ----------- -----------
Balance at beginning of year $ 2,159,663 1,306,381 1,178,242
Provision for loan losses 460,000 970,000 210,000
Loans charged-off (105,775) (146,474) (94,034)
Recoveries 8,849 29,756 12,173
----------- ----------- -----------
Balance at end of year $ 2,522,737 2,159,663 1,306,381
=========== =========== ===========
(Continued)
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
The following is a summary of nonperforming assets at December 31, 2001 and
2000 (in thousands):
2001 2000
------ ------
Loans 90 days past due and still accruing interest $2,563 358
Nonaccrual loans 505 333
Other real estate owned 759 234
------ ------
Total $3,827 925
====== ======
At December 31, 2001 and 2000, the recorded investment in loans considered
impaired in accordance with SFAS No. 114 totaled $505,378 and $332,779,
respectively, with no corresponding valuation allowances. For the years
ended December 31, 2001, 2000 and 1999, the average recorded investment in
impaired loans was approximately $513,000, $204,000 and $130,000,
respectively. The amount of interest recognized on impaired loans during
the portion of the year that they were impaired was not material.
In the normal course of business, the Company enters into off-balance sheet
commitments to extend credit. The Company maintains the same credit
policies in making off-balance sheet commitments as it does for its
on-balance sheet instruments. Commitments to extend credit are agreements
to lend which generally have fixed expiration dates or other termination
clauses and may require a fee.
The following table summarizes the Company's outstanding off-balance sheet
commitments to extend credit at December 31, 2001 and 2000 (in thousands):
2001 2000
------- -------
Undisbursed portion of home equity lines of credit
collateralized primarily by junior liens on
1-4 family properties $12,031 10,475
Other commitments and credit lines 15,755 12,233
Fixed-rate mortgage loan commitments 618 100
Adjustable-rate mortgage loan commitments 1,881 1,158
------- -------
Total $30,285 23,966
======= =======
As commitments may expire unused, the total commitment amount does not
necessarily represent future cash requirements.
The Company, through its normal lending activity, originates and maintains
loans which are substantially concentrated in Eastern North Carolina, where
its offices are located. The Company's policy calls for collateral or other
forms of repayment assurance to be received from the borrower at the time
of loan origination. Such collateral or other form of repayment assurance
is subject to changes in economic value due to various factors beyond the
control of the Company and such changes could be significant.
The Company originates both adjustable and fixed interest rate loans. The
adjustable-rate loans have interest rate adjustment limitations and are
indexed to various nationally recognized indexes or financial instruments.
Future market factors may affect the correlation of the interest rate
adjustment with rates the Company pays on the short term deposits that have
been primarily utilized to fund these loans.
(Continued)
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
Mortgage loans serviced for others approximated $56,041,406, $74,140,415
and $84,128,060 at December 31, 2001, 2000 and 1999, respectively.
(4) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2001 and 2000 are summarized as
follows:
2001 2000
------------ ------------
Land $ 1,983,684 1,983,684
Buildings 5,523,756 5,460,049
Leasehold improvements 307,994 307,994
Furniture and equipment 5,786,263 5,086,359
------------ ------------
13,601,697 12,838,086
Less accumulated depreciation and amortization (7,129,982) (6,565,476)
------------ ------------
Premises and equipment, net $ 6,471,715 6,272,610
============ ============
(5) DEPOSITS
Deposits at December 31, 2001 and 2000, are summarized as follows (in
thousands):
2001 2000
-------- --------
Demand $ 17,716 12,650
Checking with interest 18,523 18,474
Money market accounts 24,862 22,236
Savings 20,175 21,363
Time deposits of $100 or more 74,610 63,020
Other time deposits 183,944 189,569
-------- --------
Total $339,830 327,312
======== ========
At December 31, 2001, the scheduled maturities of time deposits were (in
thousands):
2002 $215,463
2003 41,611
2004 1,444
2005 --
2006 --
Thereafter 36
--------
Total time deposits $258,554
========
(Continued)
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
(6) BORROWED FUNDS
Borrowed funds and the corresponding weighted average rates (WAR) at
December 31, 2001 and 2000 are summarized as follows:
2001 WAR 2000 WAR
----------- --- ----------- ---
Advances from FHLB $83,000,000 4.59% $55,000,000 6.23%
Affordable Housing Program
Advances from FHLB 97,156 3.50% 101,477 3.50%
----------- -----------
Total $83,097,156 $55,101,477
=========== ===========
Pursuant to a collateral agreement with the FHLB, advances are
collateralized by all the Company's FHLB stock and qualifying first
mortgage loans. The balance of qualifying first mortgage loans as of
December 31, 2001 was approximately $126,571,000. This agreement with the
FHLB provides for a line of credit up to 25% of the Bank's assets. The
maximum month end balances were $83 million, $75 million and $75 million
during the years ended December 31, 2001, 2000 and 1999. Annual principal
maturities of Federal Home Bank advances for the years subsequent to
December 31, 2001 are as follows:
2002 $ 35,000,000
2003 20,000,000
2004 5,000,000
2010 10,000,000
2011 13,000,000
----------------
$ 83,000,000
================
The Affordable Housing Program advances are funds advanced by the FHLB for
the Company to lend to borrowers who might not otherwise qualify for a home
mortgage. These advances have an interest rate of 3.50% and mature at
various times between November 2015 and January 2016.
(7) REGULATORY MATTERS AND CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements
administered by federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements. Quantitative measures established by regulation to ensure
capital adequacy require the Company to maintain minimum amounts and
ratios, as set forth in the table below. Management believes, as of
December 31, 2001, that the Company meets all capital adequacy requirements
to which it is subject. The Company's only significant asset is its
investment in Cooperative Bank for Savings, Inc. SSB. Consequently, the
information concerning capital ratios is essentially the same for the
Company and the Bank.
(Continued)
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
As of December 31, 2001 and 2000, the most recent notification from the
FDIC categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum amounts and ratios, as set forth
in the table below. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the
table below (dollars in thousands) as of December 31:
MINIMUM RATIO TO MAINTAIN
WELL-CAPITALIZED STATUS
--------------------------
2001 2000 2001 2000
---------- --------- -------- -------
Risk-based capital:
Tier I capital $ 33,428 30,781
Total capital 35,951 32,941
Risk-adjusted assets 326,820 268,061
Quarterly average
tangible assets 447,214 412,312
Tier I capital ratio 10.23% 11.48% 6.00% 6.00%
Total capital ratio 11.00% 12.29% 10.00% 10.00%
Leverage capital ratio 7.47% 7.47% 5.00% 5.00%
A liquidation account was established at the time of conversion to a stock
institution in an amount equal to the total net worth of the Bank as of
March 31, 1991. Each eligible deposit account holder is entitled to a
proportionate share of this account in the event of a complete liquidation
of the Bank, and only in such an event. This share will be reduced if the
account holder's eligible deposits fall below the amount on the date of
record and will cease to exist if the account is closed. The liquidation
account will never be increased despite any increase after the conversion
in the related eligible deposit of an account holder. The liquidation
account was approximately $2,509,453 at December 31, 2001.
The Bank may not declare or pay a cash dividend, or repurchase any of its
capital stock, if the effect would cause the regulatory net worth of the
Bank to fall below the amount required for the liquidation account
established in connection with the conversion, or to an amount which is
less than the minimum required by the FDIC and the North Carolina Office of
the Commissioner of Banks.
(8) BENEFIT PLANS
The Company participates in a qualified, noncontributory, defined-benefit,
multi-employer retirement plan (the Plan) covering substantially all of its
employees. The benefits are based on each employee's years of service and
the employee's compensation during the last five years of employment.
(Continued)
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
Under the multi-employer plan, the Company is required to contribute its
share of the Plan's total pension liability as determined by the plan
administrator. Expenses related to this Plan were $34,537, $303,803 and
$120,361 for the years 2001, 2000 and 1999, respectively.
During 2000, the Company made certain changes to its defined benefit plan.
As a result of these changes, three executives of the Company decided to
take early retirement. The Company established a deferred compensation plan
for these executives, which resulted in a pre-tax charge of approximately
$686,000.
The Company maintains a combined ESOP and 401(k) plan (the KSOP). Employees
are able to contribute up to 15% of their eligible annual compensation to
the KSOP subject to Internal Revenue Service limitations. The Company
matches employee contributions up to a limit determined annually by the
Board of Directors. The Board established the match at 50% up to the first
6% of the employee contribution for 2001 and 2000 and 100% of the first 6%
for 1999.
The compensation expense incurred by the Company for the KSOP was $78,585,
$107,784 and $175,638 for the years ended December 31, 2001, 2000 and 1999,
respectively.
(9) EARNINGS PER SHARE
The following table provides a reconciliation of income available to common
stockholders and the average number of shares outstanding for the years
ended December 31, 2001, 2000 and 1999:
2001 2000 1999
---------- ---------- ----------
Net income (numerator) $2,888,943 1,931,675 2,680,430
========== ========== ==========
Shares for basic EPS (denominator) 2,797,317 2,714,216 2,819,846
Dilutive effect of stock options 25,874 91,395 154,197
---------- ---------- ----------
Shares for diluted EPS (denominator) 2,823,191 2,805,611 2,974,043
========== ========== ==========
For the year ended December 31, 2001 and 2000, there were 14,204 and
114,043, respectively, of options outstanding that were antidilutive since
the exercise price exceeds the average market price for the year. These
options have been omitted from the 2001 calculation of the dilutive effect
of stock options.
(10) INCOME TAXES
Income tax expense consists of the following components for the years ended
December 31, 2001, 2000 and 1999:
2001 2000 1999
----------- ----------- -----------
Current tax expense $ 1,865,837 1,674,387 1,760,022
Deferred tax benefit (276,589) (695,383) (280,431)
----------- ----------- -----------
Total tax expense $ 1,589,248 979,004 1,479,591
=========== =========== ===========
(Continued)
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
For the year ended December 31, 2001, current tax expense consisted of
$1,651,815 in federal tax expense and $214,022 in state tax expense.
Deferred tax benefit for the year ended December 31, 2001, consisted of
$227,083 in federal tax benefit and $49,506 in state tax benefit. For the
year ended December 31, 2000, current tax expense consisted of $1,525,540
in federal tax expense and $148,847 in state tax expense. Deferred tax
benefit for the year ended December 31, 2000, consisted of $570,120 in
federal tax benefit and $125,263 in state tax benefit.
The components of the net deferred tax asset at December 31, 2001 and 2000
are as follows:
2001 2000
---------- ----------
Deferred tax assets:
Allowance for loan losses $ 972,515 693,368
Accrued pension cost 207,118 264,315
---------- ----------
Total 1,179,633 957,683
---------- ----------
Deferred tax liabilities:
Deferred loan fees 167,046 220,418
FHLB stock 190,467 190,467
Excess of book over tax basis of equipment 204,231 208,930
Unrealized gain on securities available for sale 120,376 18,992
Other 5,618 2,186
---------- ----------
Total 687,738 640,993
---------- ----------
Net deferred tax asset $ 491,895 316,690
========== ==========
The Company has no valuation allowance at December 31, 2001 or 2000 because
management has determined that it is more likely than not that the results
of future operations will generate sufficient taxable income to realize the
deferred tax assets.
Reconciliations of income taxes computed at the statutory federal income
tax rate (34%) to the provisions for income tax for the years ended
December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
----------- ----------- -----------
Income taxes at federal tax rate $ 1,522,585 989,631 1,414,407
Increase (decrease) resulting from:
State income taxes, net of federal income
tax benefit 108,581 15,565 108,200
Cash surrender value of bank owned
life insurance (34,035) -- --
Other (7,883) (26,192) (43,016)
----------- ----------- -----------
Total $ 1,589,248 979,004 1,479,591
=========== =========== ===========
(Continued)
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
Retained earnings at December 31, 2001 and 2000 includes approximately
$5,170,000 representing pre-1988 tax bad debt reserve base year amounts for
which no deferred income tax liability has been provided since these
reserves are not expected to reverse and may never reverse. Circumstances
that would require an accrual of a portion or all of this unrecorded tax
liability are a reduction in qualifying loan levels relative to the end of
1987, failure to meet the definition of a bank, dividend payments in excess
of accumulated tax earnings and profits, or other distributions,
dissolution, liquidation or redemption of the Bank's stock.
(11) STOCK OPTION PLAN
The Company has a Stock Option Plan (the Option Plan) for selected
employees of the Company and for nonemployee directors. The purpose of the
Option Plan is to attract and retain the best available personnel for
positions of substantial responsibility and to provide additional incentive
to key employees and directors by facilitating their purchase of a stock
interest in the Company.
The Option Plan provides for a term of ten years, after which no awards may
be made, unless earlier terminated by the Board of Directors pursuant to
the Option Plan. The option exercise price is the market price of the
common stock on the date the option is granted. Options are fully vested
and exercisable upon being granted.
A summary of the status of the Option Plan as of December 31, 2001, 2000
and 1999, and changes during the years then ended is presented below:
2001 2000 1999
------------------------ ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OPTION PRICE NUMBER OPTION PRICE NUMBER OPTION PRICE
-------- ----------- -------- ------------ ------- ------------
Options
outstanding,
beginning of
year 246,457 $ 6.85 281,118 $ 5.03 225,542 $ 2.96
Granted 18,000 13.38 38,415 10.58 79,000 11.05
Exercised (141,537) 3.77 (73,076) 2.82 (23,424) 2.21
Forfeited (4,977) 10.86 -- -- -- --
-------- --------- -------- -------- ------- -------
Options
outstanding,
end of year 117,943 $ 11.37 246,457 $ 6.85 281,118 $ 5.03
======== ========= ======== ======== ======== =======
(Continued)
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
On January 1, 1996 the Company adopted SFAS No. 123, "Accounting for Stock
Based Compensation". As permitted by SFAS No. 123, the Company has chosen
to continue to apply APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, no compensation cost
has been recognized for options granted under the Option Plan. Had
compensation cost for the Company's Option Plan been determined based on
the fair value at the grant dates for awards under the Option Plan
consistent with the method of SFAS No. 123, the Company's net income and
net income per share would have been reduced to the pro forma amounts
indicated below.
2001 2000 1999
------------------------ ----------------------- ------------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
---------- --------- --------- --------- --------- ---------
Net income $2,888,943 2,859,846 1,931,675 1,884,770 2,680,430 2,513,362
Net income per
share - basic 1.03 1.02 .71 .69 .95 .89
Net income per
share - diluted 1.02 1.01 .69 .67 .90 .85
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2001 and 2000. The weighted average fair
values of options granted in 2001, 2000 and 1999 were $2.65, $1.85 and
$3.42, respectively.
2001 2000 1999
--------- --------- --------
Risk-free interest rate 4.86% 6.00% 6.25%
Dividend yield 1.85% 2.0% 0%
Expected volatility 20% 20% 17.8%
Expected lives (in years) 8 5 5
(Continued)
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
The following table summarizes additional information about the Option Plan
at December 31, 2001:
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE
-------------- ----------- ------------ -----------
$ 7.50 10,000 2.25 years 10,000
10.50 5,424 5.25 years 5,424
10.94 9,000 7.70 years 9,000
11.00 10,315 8.00 years 10,315
11.00 500 .40 years 500
11.00 500 .20 years 500
11.06 60,000 7.50 years 60,000
11.50 8,000 10 years 8,000
14.88 10,000 9.10 years 10,000
19.50 4,204 6.00 years 4,204
------------ ------------- --------
117,943 7.20 years 117,943
============ ============= ========
(12) PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of Cooperative Bankshares, Inc., the parent
company, at December 31, 2001 and 2000 and for the years ended December 31,
2001, 2000 and 1999 is presented below:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
2001 2000
---------------- ------------
Assets:
Cash $ 1,753 1,170
Equity investment in subsidiary 33,616,593 30,811,081
Other assets 141,772 135,730
---------------- ------------
$ 33,760,118 30,947,981
================ ============
Liabilities and stockholders' equity:
Other liabilities $ 141,838 135,802
Stockholders' equity 33,618,280 30,812,179
---------------- ------------
$ 33,760,118 30,947,981
================ ============
(Continued)
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
CONDENSED STATEMENTS OF OPERATIONS
2001 2000 1999
---------------- ---------------- ----------------
Dividends from subsidiary $ 347,309 825,242 4,556,645
Equity in undistributed net income of subsidiary 2,586,569 1,114,286 (1,852,795)
Miscellaneous expenses (44,935) (7,853) (23,420)
---------------- ---------------- ----------------
$ 2,888,943 1,931,675 2,680,430
================ ================ ================
CONDENSED STATEMENTS OF CASH FLOWS
2001 2000 1999
---------------- ---------------- ----------------
Operating activities:
Net income $ 2,888,943 1,931,675 2,680,430
Equity in undistributed net income of
subsidiary (2,586,569) (1,114,286) 1,852,795
Change in other assets -- (135,730) --
Change in other liabilities (6) 72 --
Amortization of deferred organization costs -- -- 8,841
---------------- ---------------- ----------------
Net cash provided by (used in) 302,368 681,731 4,542,066
operating activities
Financing activities:
Proceeds from issuance of common stock, net 261,249 206,035 51,799
Purchase and retirement of common stock -- (480,657) (4,594,538)
Cash dividends paid (563,034) (406,890) --
---------------- ---------------- ----------------
Net cash used in financing activities (301,785) (681,512) (4,542,739)
---------------- ---------------- ----------------
Increase (decrease) in cash and cash
equivalents 583 219 (673)
Cash and cash equivalents, beginning of year 1,170 951 1,624
---------------- ---------------- ----------------
Cash and cash equivalents, end of year $ 1,753 1,170 951
================ ================ ================
(Continued)
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments". The estimated fair
value amounts have been determined by the Company using the methods and
assumptions described below. However, considerable judgment is required to
interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value.
CASH AND CASH EQUIVALENTS
The carrying amount is a reasonable estimate of fair value.
SECURITIES
For investments in debt securities, fair values are based on quoted
market prices or dealer quotes. For other securities, fair value
equals quoted market price, if available. If a quoted market price is
not available, fair value is estimated using quoted market prices for
similar securities.
FHLB STOCK
The carrying amount is a reasonable estimate of fair value.
LOANS
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
ACCRUED INTEREST
The carrying amount is a reasonable estimate of fair value.
DEPOSITS
The fair value of NOW, savings, and money market deposit accounts is
the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
BORROWED FUNDS
Borrowed funds consist of FHLB borrowings with varying maturities. The
fair values of these liabilities are estimated using the discounted
values of the contractual cash flows. The discount rate is estimated
using the rates currently in effect for similar borrowings.
(Continued)
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of off-balance sheet financial instruments is
considered immaterial. As discussed in note 3, these off-balance sheet
financial instruments are commitments to extend credit and are either
short term in nature or subject to immediate repricing.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 2001 and 2000 are as follows (in thousands):
2001 2000
----------------------------------- -------------------------------
CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR
AMOUNT VALUE AMOUNT VALUE
--------------- ---------------- ------------- ----------------
Financial assets:
Cash and cash
equivalents $ 12,296 12,296 18,148 18,148
Securities:
Available for sale 42,970 42,970 16,049 16,049
Held to maturity 5,000 5,283 18,978 18,554
Loans, net 373,458 376,503 347,486 348,179
FHLB stock 4,155 4,155 3,755 3,755
Accrued interest
receivable 2,637 2,637 2,776 2,776
Financial liabilities:
Deposits 339,830 340,320 327,312 324,987
Borrowed funds 83,097 86,451 55,101 53,391
Accrued interest
payable 264 264 300 300
(14) STOCK REPURCHASE PLAN
On October 21, 1999 the Company's Board of Directors approved a Stock
Repurchase Program authorizing the Company to repurchase up to 138,000
shares, or approximately 5% of the then outstanding shares of common stock.
The Company did not purchase any shares pursuant to the program during
2001. During 2000, the Company purchased 46,385 shares at an average cost
of $10.36 per share pursuant to the program.
(15) BRANCH SALE
During February 2000, the Company sold the Robersonville, N. C. branch with
$7.1 million in deposits to Southern Bank & Trust Company. A gain of
$582,583 was realized on the sale.
(16) SUBSEQUENT EVENT
On February 25, 2002, the Company sold a parcel of real estate, resulting
in a gain of approximately $450,000 (unaudited).
41
DIRECTORS, OFFICERS AND FINANCIAL CENTERS
BOARD OF DIRECTORS
Cooperative Bankshares, Inc.
Cooperative Bank For Savings, Inc., SSB
FREDERICK WILLETTS, III James D. Hundley, M.D.
CHAIRMAN, PRESIDENT & CEO President, Wilmington Orthopaedic Group P.A.
Paul G. Burton H. T. King, III
President, Burton Steel Company President, Hanover Iron Works, Inc.
Russell M. Carter R. Allen Rippy
President, Atlantic Corporation Vice President, Rippy Cadillac Oldsmobile, Inc.
F. Peter Fensel, Jr. O. Richard Wright, Jr.
President, F. P. Fensel Supply Company Attorney McGougan, Wright, Worley, Harper & Bullard
OFFICERS OF COOPERATIVE BANK
Frederick Willetts, III Chairman, President-Chief Executive Officer
O. C. Burrell, Jr. Executive Vice President-Chief Operating Officer
Dickson B. Bridger Senior Vice President-Mortgage Lending
Todd L. Sammons, CPA Senior Vice President-Chief Financial Officer
Sandra B. Carr Vice President-Retail Banking Operations
Linda B. Garland Vice President-Marketing/ Corporate Secretary
Raymond A. Martin Vice President-Information Services
Donna H. Mitchell Vice President-Mortgage Operations
John P. Payne, CPA General Auditor
Susie K. Register Vice President-Mortgage Servicing/Processing
Dare C. Rhodes Vice President-Human Resources
Phillip T. Whittington, Jr. Vice President-Commercial Lending
FINANCIAL CENTER LOCATIONS
Beaufort Tabor City
Belhaven Wallace
Elizabethtown Washington (2)
Jacksonville (2) Whiteville
Kill Devil Hills Wilmington (4)
Morehead City
Corolla -Loan Production Office
42
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Cooperative Bankshares, Inc.
201 Market Street
P.O. Box 600
Wilmington, North Carolina 28402
(910) 343-0181
TRANSFER AGENT SPECIAL COUNSEL
First Citizens Bank Stradley Ronon
Corporate Trust Department Kantarian & Bronstein, LLP
P.O. Box 29522 1220 19th Street, NW Suite 700
Raleigh, North Carolina 27626-0522 Washington, DC 20036
ANNUAL MEETING FORM 10-K
The Annual Meeting of Stockholders of Cooperative Copies of Form 10-K may be obtained without
Bankshares, Inc. will be held: charge by writing to Linda B. Garland at the
HILTON WILMINGTON RIVERSIDE, Corporate Headquarters address.
301 NORTH WATER STREET, WILMINGTON, NC 28401
APRIL 26, 2002 AT 11:00 A.M.
All stockholders are cordially invited to attend.
ADDITIONAL INFORMATION OR COPIES
For additional information, please contact
Linda B. Garland or Todd Sammons at (910) 343-0181
www.coop-bank.com
ANNUAL DISCLOSURE STATEMENT
"This information has not been reviewed or confirmed
for accuracy or relevancy by Federal Deposit
Insurance Corporation (FDIC)."
CAPITAL STOCK
Cooperative Bankshares, Inc. stock is traded on the NASDAQ National Market under
the symbol "COOP". As of December 31, 2001, there were 2,835,447 shares
outstanding, which were held by 544 stockholders of record. The Company began
paying a quarterly cash dividend in April 2000. Stock performance for 2001 and
2000 is given in the following table.
QUARTERLY COMMON STOCK DATA
2001 2000
---------------------------------------------------------------------
QUARTERS ENDED HIGH LOW HIGH LOW
---------------------------------------------------------------------
December 12.400 9.500 12.000 9.000
September 13.500 9.500 10.250 8.250
June 12.500 10.800 11.625 8.000
March 15.750 9.750 12.125 8.875
---------------------------------------------------------------------
43
COOPERATIVE BANK FINANCIAL CENTERS
1. Main Office 5. Jacksonville 9. Beaufort 13. Kill Devil Hills
2. Hanover 6. Wallace 10. Jacksonville 14. Washington
3. Long Leaf 7. Elizabethtown 11. Washington 15. Ogden
4. Morehead City 8. Tabor City 12. Belhaven 18 Whiteville
Loan Origination Office
17 Corolla
[PICTURE OF MAP OF COUNTIES OF EASTERN NORTH CAROLINA WITH LOCATIONS OF
FINANCIAL CENTERS INDICATED]
44