UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______
Commission File Number: No. 0-24626
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COOPERATIVE BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1886527
- ------------------------------- -------------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
201 Market Street, Wilmington, North Carolina 28401
- --------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(910)343-0181
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- ---------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 of 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of
shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
2,761,168 shares at October 22, 1999.
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TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition,
September 30, 1999 and December 31, 1998 2
Consolidated Statements of Operations, for the
three and nine months ended September 30, 1999
and 1998 3
Consolidated Statements of Cash Flows, for the
nine months ended September 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-14
Part II Other Information 15
Signatures 16
Exhibit 11 - Statement Regarding Computation of
Earnings Per Share 17
Exhibit 27 - Financial Data Schedule 18-19
PART 1 - FINANCIAL INFORMATION - ITEM 1 - FINANCIAL STATEMENTS
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
SEPTEMBER 30, December 31,
1999 1998
------------ ------------
ASSETS:
Cash and cash equivalents (including interest-bearing
deposits: $ 7,244,100 $ 8,856,389
September 1999 - $2,489,132; December 1998 -
$7,904,166)
Securities:
Available for sale 20,800,632 21,163,133
Held to maturity (estimated market value:
September 1999 - $17,249,064; December 1998 -
$12,779,690) 18,027,002 13,034,264
Mortgage-backed and related securities available for sale 8,387,470 10,550,692
Other investments 3,005,400 2,828,000
Loans receivable, net 321,726,843 321,324,146
Other real estate owned 208,604 2,439,158
Accrued interest receivable 2,581,348 2,286,657
Premises and equipment, net 6,289,551 6,372,456
Prepaid expenses and other assets 1,214,966 918,311
------------ ------------
Total assets $389,485,916 $389,773,206
============ ============
LIABILITIES:
Deposits $308,076,936 $301,656,204
Borrowed funds 50,106,555 55,109,439
Escrow deposits 864,614 337,474
Accrued interest payable on deposits 108,392 79,263
Deferred income taxes, net 253,298 738,623
Accrued expenses and other liabilities 461,077 239,053
------------ ------------
Total liabilities 359,870,872 358,160,056
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STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value, 3,000,000 shares authorized,
none issued and outstanding - -
Common stock, $1 par value, 7,000,000 shares authorized,
2,761,168 and 3,046,284 shares issued and outstanding 2,761,168 3,046,284
Additional paid-in capital 3,296,815 6,649,374
Accumulated other comprehensive income (200,052) 154,051
Retained earnings 23,757,113 21,763,441
------------ ------------
Total stockholders' equity 29,615,044 31,613,150
------------ ------------
Total liabilities and stockholders' equity $389,485,916 $389,773,206
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
2
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------- -------- -------- --------
INTEREST INCOME:
Loans receivable $6,266,788 $6,297,876 $18,798,154 $18,166,956
Mortgage-backed and related securities 144,134 172,485 452,218 564,197
Securities 642,027 733,454 1,846,265 2,459,484
---------- ---------- ----------- -----------
Total interest income 7,052,949 7,203,815 21,096,637 21,190,637
---------- ---------- ----------- -----------
INTEREST EXPENSE:
Deposits 3,203,684 3,535,488 9,627,737 10,407,105
Borrowed funds 841,231 861,741 2,532,432 2,471,926
---------- ---------- ----------- -----------
Total interest expense 4,044,915 4,397,229 12,160,169 12,879,031
---------- ---------- ----------- -----------
NET INTEREST INCOME 3,008,034 2,806,586 8,936,468 8,311,606
Provision for loan losses 45,000 65,000 165,000 255,000
---------- ---------- ----------- -----------
Net interest income after provision for
loan losses 2,963,034 2,741,586 8,771,468 8,056,606
---------- ---------- ----------- -----------
NONINTEREST INCOME:
Net Gains on sale of loans 4,514 6,214 149,432 268,178
Net Gains on sale of investments 0 0 937 0
Service charges on deposit accounts 178,245 146,423 493,853 403,641
Loan fees and service charges 82,565 74,052 238,900 230,964
Investment fees 31,427 19,252 61,328 68,975
Other service charges and fees 11,214 4,476 31,518 17,845
Real estate owned income (expenses), net 17,798 0 (24,679) (79,186)
Other income (expenses), net (6,984) (3,981) (6,423) (4,381)
---------- ---------- ----------- -----------
Total noninterest income 318,779 246,436 944,866 906,036
---------- ---------- ----------- -----------
NONINTEREST EXPENSE:
Compensation and fringe benefits 1,201,262 1,125,271 3,470,068 3,278,494
Occupancy and equipment 498,441 489,033 1,420,986 1,283,581
FDIC premium 42,807 45,189 132,021 134,577
Advertising 123,006 98,605 347,545 285,293
Other expense 352,799 410,051 1,209,089 1,138,361
---------- ---------- ----------- -----------
Total noninterest expenses 2,218,315 2,168,149 6,579,709 6,120,306
---------- ---------- ----------- -----------
Income before income taxes 1,063,498 819,873 3,136,625 2,842,336
Income tax expense 384,173 306,377 1,142,953 1,044,859
---------- ---------- ----------- -----------
NET INCOME $ 679,325 $ 513,496 $ 1,993,672 $ 1,797,477
========== ========== =========== ===========
NET INCOME PER SHARE:
Basic $ 0.25 $ 0.17 $ 0.70 $ 0.60
========== ========== =========== ===========
Diluted $ 0.23 $ 0.16 $ 0.66 $ 0.56
========== ========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
3
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
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OPERATING ACTIVITIES:
Net income $ 1,993,672 $ 1,797,477
Adjustments to reconcile net income to net cash
provided by operating activities:
Net accretion, amortization, and depreciation 572,394 507,721
Net gain on sale of loans and securities (150,369) (268,178)
Benefit for deferred income taxes (258,931) (316,900)
Release of ESOP shares - 125,380
Loss on sale of premises and equipment 7,784 8,183
Loss on sales of foreclosed real estate 16,974 2,498
Valuation losses on foreclosed real estate 10,000 62,300
Provision for loan losses 165,000 255,000
Changes in assets and liabilities:
Accrued interest receivable (294,691) (493,869)
Prepaid expenses and other assets (304,233) (53,514)
Accrued interest payable on deposits 29,129 (12,690)
Accrued expenses and other liabilities 222,024 235,485
------------ ------------
Net cash provided by operating activities 2,008,753 1,848,893
------------ ------------
INVESTING ACTIVITIES:
Purchase of securities available for sale (1,999,375) (10,000,000)
Purchase of securities held to maturity (5,000,000) -
Proceeds from maturity of securities available
for sale - 10,000,000
Proceeds from sale of securities available for sale 2,000,937 -
Proceeds from principal repayments of mortgage-backed
and related securities available for sale 1,888,222 1,866,026
Proceeds from sales of loans 29,895,606 13,977,489
Loan originations, net of principal repayments (28,279,233) (39,078,706)
Proceeds from disposals of foreclosed real estate 193,452 292,147
Purchases of premises and equipment (451,064) (1,902,805)
Proceeds from sale of premises and equipment 500 1,360
Net purchases of other investments (177,400) (208,556)
------------ ------------
Net cash provided by (used in) investing
activities (1,928,355) (25,053,045)
------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits 6,420,732 12,347,690
Proceeds from FHLB advances 22,000,000 5,000,000
Principal payments on FHLB advances (27,002,884) (30,628)
Proceeds from issuance of common stock 100,371 268,898
Repurchase of common stock (3,738,046) -
Net change in escrow deposits 527,140 403,371
------------ ------------
Net cash provided by (used in)
financing activities (1,692,687) 17,989,331
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,612,289) (5,214,821)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 8,856,389 17,207,777
------------ ------------
END OF PERIOD $ 7,244,100 $ 11,992,956
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies: The significant accounting policies
-------------------
followed by Cooperative Bankshares, Inc. (the "Company") for
interim financial reporting are consistent with the accounting
policies followed for annual financial reporting. These
unaudited consolidated financial statements have been prepared
in accordance with Rule 10-01 of Regulation S-X, and, in
management's opinion, all adjustments of a normal recurring
nature necessary for a fair presentation have been included.
The accompanying financial statements do not purport to contain
all the necessary financial disclosures that might otherwise be
necessary in the circumstances and should be read in conjunction
with the consolidated financial statements and notes thereto in
the Company's annual report for the year ended December 31,
1998. The results of operations for the nine-month period ended
September 30, 1999 are not necessarily indicative of the results
to be expected for the full year.
2. Basis of Presentation: The accompanying unaudited
---------------------
consolidated financial statements include the accounts of
Cooperative Bankshares, Inc., Cooperative Bank For Savings,
Inc., SSB and its wholly owned subsidiary, CS&L Services, Inc.
All significant intercompany items have been eliminated.
3. Earnings Per Share: Earnings per share are calculated by
------------------
dividing net income by both the weighted average number of
common shares outstanding and the dilutive common equivalent
shares outstanding. Common equivalent shares consist of stock
options issued and outstanding. In determining the number of
equivalent shares outstanding, the treasury stock method was
applied. This method assumes that the number of shares issuable
upon exercise of the stock options is reduced by the number of
common shares assumed purchased at market prices with the
proceeds from the assumed exercise of the common stock options
plus any tax benefits received as a result of the assumed
exercise.
4. Comprehensive Income: Comprehensive income includes net
--------------------
income and all other changes to the Company's equity, with the
exception of transactions with shareholders ("other
comprehensive income"). The Company's only components of other
comprehensive income relate to unrealized gains and losses on
available for sale securities.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------- -------- -------- --------
Unrealized gains/(losses) on available for
sale securities $(160,826) $ 384,898 $ (569,870) $ 463,715
Income tax (expense)/benefit relating to
unrealized gains on available for sale
securities 62,722 (150,110) 222,249 (180,991)
--------- --------- ---------- ----------
Other comprehensive income (loss) (98,104) 234,788 (347,621) 282,724
Net Income 679,325 513,496 1,993,672 1,797,477
--------- -------- ---------- ----------
Total comprehensive income $ 581,221 $ 748,284 $1,646,051 $2,080,201
========= ========= ========== ==========
5. Statement of Financial Accounting Standards No. 137: In June
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1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 137, Accounting
for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133 as an amendment of
FASB Statement No. 133. SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, was issued in June 1998. It
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. SFAS No. 133,
as issued, is effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999 with earlier applications
encouraged. SFAS No. 137 amended SFAS No. 133 by delaying the
effective date to all fiscal quarters of all fiscal years
beginning after June 15, 2000. The FASB continues to encourage
early application of SFAS No. 133.
SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction.
Management of the Company anticipates that, due to the fact that
it does not use derivative instruments, the adoption of SFAS No.
133 will not have a material effect on the Company's results of
operations or its financial position.
5
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 of Cooperative Bank For Savings, Inc., SSB,
("Cooperative Bank" or the "Bank") a North Carolina chartered
stock 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 the consolidated financial statements and
related data, relates primarily to Cooperative Bank.
Cooperative Bank is chartered under the laws of the state
of North Carolina to engage in general banking business. The
Bank offers a wide range of retail banking services including
deposit services, banking cards and alternative investment
products. Funds generated are used for the extension of credit
through home loans, commercial loans, consumer loans and other
installment credit such as home equity, auto and boat loans and
check reserve.
The Company conducts its operations through its main
office in Wilmington, North Carolina and 16 offices throughout
eastern North Carolina. The Company considers its primary
market for savings and lending activities to be the communities
of eastern North Carolina extending from the Virginia to the
South Carolina borders.
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.
MANAGEMENT STRATEGY
It is the mission of the Company to provide the maximum in
safety and security for our depositors, an equitable rate of
return for our stockholders, 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.
Cooperative Bank's lending activities are concentrated on
the origination of conventional mortgage loans for the purpose
of constructing, financing or refinancing residential
properties. As of September 30, 1999, $276.8 million, or
approximately 86%, of the Bank's loan portfolio consisted of
loans secured by residential properties. To a lesser extent,
the Bank originates nonresidential real estate loans, home
equity line of credit loans, secured and unsecured consumer and
business loans. While continuing to place primary emphasis on
residential mortgage loans, the Bank is taking a more aggressive
position in pursuing business lending, and nonresidential real
estate lending involving loans secured by small commercial
properties with balances generally ranging from $100,000 to
$2,000,000. The Bank's primary emphasis is to originate
adjustable rate loans with the fixed rate loan as an option. As
of September 30, 1999, adjustable rate loans totaled
approximately 62%, and fixed rate loans totaled approximately
38%, of the Bank's loan portfolio.
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 the amount of
interest rate sensitive assets exceed the amount of interest
rate sensitive liabilities.
6
Gap is considered negative when the amount of interest rate
sensitive liabilities exceed the amount of interest rate
sensitive assets. At September 30, 1999, Cooperative had a
one-year negative gap position of 11.6%. 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, a large 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 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.
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 September 30, 1999, the estimated market value of
liquid assets (cash, cash equivalents, and marketable
securities) was approximately $56.7 million, which represents
15.8% of deposits and borrowed funds as compared to $56.2
million or 15.7% of deposits and borrowed funds at December 31,
1998. The increase in liquid assets was primarily due to the
increase in securities.
The Company's security portfolio consists of U.S.
Government agency, mortgage-backed and other permissible
securities. The mortgage-backed securities are guaranteed by
the following agencies: Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA"), and
the Government National Mortgage Association ("GNMA").
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.
The Company's investment in U. S. Government agency bonds
includes $5 million in Federal Home Loan Banks' Dual Indexed
Consolidated Bonds maturing August 4, 2003. These bonds had an
8% interest rate from August 4, 1993, through August 3, 1995, at
which time the rate was adjusted to 3.485% based on an indexing
formula. Subsequent interest rates will also be based on an
indexing formula and will adjust annually on February 4 and
August 4. The indexing formula states that the interest rate
per annum will be equal to a rate determined by the 10-Year CMT
less the 6 month LIBOR plus a margin of 2.9% for August 4, 1995,
increasing 30 basis points annually to 5.0% for August 4, 2002.
The rate at September 30, 1999 on this bond was 4.08%.
The mortgage-backed and related securities owned by the
Company are subject to repayment by the mortgagors of the
underlying collateral at any time. A rising or declining
interest rate environment may affect these repayments. 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 make investments. At September 30, 1999, outstanding
off-balance sheet commitments to extend credit totaled $17.8
million, and the undisbursed portion of construction loans was
$19.5 million. Management considers current liquidity levels
adequate to meet the Company's cash flow requirements.
7
CAPITAL
On September 17, 1998, the Company's Board of Directors
approved a Stock Repurchase Program. The Stock Repurchase
Program authorized the Company to repurchase up to 150,000
shares, or approximately 5% of the currently outstanding shares
of common stock. The initial repurchase program was completed
in February 1999. On March 25, 1999, the Company's Board of
Directors announced a second Stock Repurchase Program. This
Stock Repurchase Program authorized the Company to repurchase an
additional 152,000 shares, or approximately 5% of the currently
outstanding shares of common stock. The second repurchase
program was completed in May 1999. As of September 30, 1999,
the Company had repurchased 302,000 shares at an average cost of
$12.38 per share.
Stockholders' equity at September 30, 1999, was $29.6
million, down 6.3% due to the stock repurchase plan, from $31.6
million at December 31, 1998. The total at September 30, 1999
and December 31, 1998, includes unrealized losses of $200
thousand and unrealized gains of $154 thousand, respectively,
net of tax, on securities available for sale marked to estimated
fair market value under Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities.
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 September 30,
1999, the Bank's ratio of Tier I capital was 7.65%. The FDIC's
risk-based capital rules require banks supervised by the FDIC to
maintain risk-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
September 30, 1999, the Bank had a ratio of qualifying total
capital to risk-weighted assets of 13.17%.
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.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 Issue is the result of computer programs
being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that
have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar
normal business activities.
Based on a recent assessment, the Company has developed a
plan to address the year 2000 issue. With respect to the
Company's teller/platform system, the Company has installed a
new system that is Year 2000 compliant and fully tested.
Installation has been completed and the new system is currently
in use. Since the installation of the new system was a
scheduled upgrade of hardware and software and not a result of
the Year 2000 issue, the costs of such system, approximately
$1.0 million, have been capitalized. All other costs associated
with the Year 2000 compliance are considered immaterial and have
been expensed. After extensive testing the Company presently
believes that the remaining hardware and software is in
compliance. The Company has developed a contingency plan to
deal with any possible risk that such changes to its hardware
and software are not fully successful as well as the risk to the
Company from the failure of third parties with which the Company
does business to make all necessary corrections.
8
Computer problems experienced by its borrowers could have
an adverse effect on its business operations and their ability
to repay their loans when due. The Company has evaluated its
major borrowers and does not anticipate that any problems will
be material to its operations.
On September 23, 1999, Cooperative Bank's Board of
Directors approved a definitive agreement to sell its $8 million
deposit branch in Robersonville, North Carolina to Southern Bank
and Trust Company of Mount Olive, North Carolina. Due to the
deteriorating economic conditions in Robersonville, the Bank's
management decided it was no longer feasible to continue in this
market area along with the two other banks. Southern Bank is
within a city block of the Robersonville branch and the
customers of Cooperative can expect the same level of personal
service from Southern Bank that they are accustomed to
receiving.
During September 1999, Hurricane Floyd struck eastern North
Carolina - changing lives and landscape for many years to come.
None of our offices sustained significant damage and, at this
point, it appears that losses on loans will be minimal.
Management considers the Bank's Reserve for Loan Losses of $1.3
million to be adequate to handle the potential losses without a
material effect on the Company's results of operations or its
financial position.
FINANCIAL CONDITION AT SEPTEMBER 30, 1999 COMPARED TO DECEMBER
31, 1998
The Company's total assets decreased .07% to $389.5
million at September 30, 1999, as compared to $389.8 million at
December 31, 1998. The major changes in assets are as follows:
a decrease of $1.6 million (18.2%) in cash, a $5 million (38%)
increase in securities classified as held to maturity, and a
decrease in foreclosed real estate to $209 thousand from $2.4
million at December 31, 1998. Due to a high loan demand, the
Bank sold $29.9 million in fixed rate loans during the nine
month period ended September 30, 1999 and used the proceeds to
repay borrowed funds, invest in securities, and reinvest in new
loans. Although the Company concentrates its lending activities
on the origination of conventional mortgage loans for the
purpose of the construction, financing or refinancing of
residential properties, it is becoming more active in the
origination of small loans secured by commercial properties. At
September 30, 1999, approximately 14% of the Company's loan
portfolio were loans other than residential properties.
Funds from the $29.9 million loan sale were used in part
for the repayment of $5 million (9.8%) in borrowed funds from
the Federal Home Loan Bank ("FHLB). Borrowed funds,
collateralized through an agreement with the FHLB for advances,
are secured by the Bank's investment in FHLB stock and
qualifying first mortgage loans. At September 30, 1999, $10.0
million in borrowed funds mature in 1 year and the remaining
amount of funds mature in 2 to 5 years.
The Company's non-performing assets (loans 90 days or more
delinquent and foreclosed real estate) were $1.6 million, or
0.42% of assets, at September 30, 1999, compared to $4.2
million, or 1.08% of assets, at December 31, 1998. The Company
assumes an aggressive position in collecting delinquent loans to
minimize balances of non-performing assets and continues to
evaluate the loan and real estate portfolios to provide loss
reserves as considered necessary. While there can be no
guarantee, in the opinion of management, the allowance for loan
losses of $1.3 million at September 30, 1999 is adequate to
cover potential losses inherent in the loan portfolio.
COMPARISON OF OPERATION RESULTS
OVERVIEW
The net income of the Company depends primarily upon net
interest income. Net interest income is the difference between
the interest earned on the loan and investment portfolios and
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.
9
NET INCOME
Net income for the three-month period ended September 30,
1999, increased 32% to $679,325 as compared to $513,496 for the
same period last year. For the nine-month periods ended
September 30, 1999, net income increased 11% to $1,993,672 as
compared $1,797,477 for the same periods a year ago.
Contributing factors for the increase in net income was a 1.2%
increase in interest-earning assets and an increase in the net
interest margin to 3.21% for the nine-month period ended
September 30, 1999, as compared to 3.02% for the same period
last year.
INTEREST INCOME
Interest income decreased 2.1% for the three-month period
ended September 30, 1999, as compared to the same period a year
ago. The decrease can be attributed to a decrease in average
yield as compared to the same period a year ago. The yield on
average interest-earning assets decreased to 7.57% as compared
to 7.74% for the same period a year ago.
For the nine-month period ended September 30, 1999,
interest income was essentially unchanged as compared to the
same period a year ago. The average balance of interest-earning
assets increased 1.2% while average yield decreased 13 basis
points as compared to the same period a year ago. The yield on
average interest-earning assets decreased to 7.57% as compared
to 7.70% for the same period a year ago. The increase in the
average balance of interest-earning assets had a positive effect
on interest income while the decrease in the yield on
interest-earning assets had a negative effect on interest
income.
INTEREST EXPENSE
Interest expense decreased 8% for the three-month period
ended September 30, 1999, as compared to the same period a year
ago. Although there was a small increase in average
interest-bearing liabilities, the decrease in cost was the major
factor causing interest expense to decrease. The cost of
interest-bearing liabilities decreased 42 basis points to 4.67%
as compared to 5.09% for the same period last year.
For the nine-month period ended September 30, 1999,
interest expense decreased 5.6%, as compared to the same period
a year ago. Although there was a 1.4% increase in average
interest-bearing liabilities, the decrease in cost was the major
factor in causing interest expense to decrease. The cost of
interest-bearing liabilities decreased 35 basis points to 4.69%
as compared to 5.04% for the same period last year.
NET INTEREST INCOME
Net interest income for the three and nine month periods
ended September 30, 1999, as compared to the same period a year
ago, increased 7.2% and 7.5%, respectively. During these same
periods ended September 30, 1999, the yield on average
interest-earning assets decreased 17 basis points and 13 basis
points, respectively. For the same periods, the cost of average
interest-bearing liabilities decreased 42 basis points and 35
basis points, respectively. The decrease in the cost of average
interest-bearing liabilities was the major factor for the
increase in net interest income.
10
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the
Company's average balance sheet and reflects the annualized
average yield on assets and average cost of liabilities for the
periods indicated. Such annualized yields and costs are derived
by dividing income or expense by the average balances of asset
or liabilities, respectively, for the periods presented.
For the quarter ended
September 30, 1999 September 30, 1998
-----------------------------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------ ------- -------- ------
Interest-earning assets:
Securities and other
interest-earning assets $ 45,905 $ 642 5.59% $ 51,999 $ 733 5.64%
Mortgage-backed and related
securities 9,093 144 6.33% 11,365 172 6.05%
Loan portfolio 317,482 6,267 7.90% 308,904 6,298 8.16%
Total interest-earning -------- ------ -------- ------
assets 372,480 $7,053 7.57% 372,268 $7,203 7.74%
------ ------
Non-interest earning assets 14,237 12,333
-------- --------
Total assets $386,717 $384,601
======== ========
Interest-bearing liabilities:
Deposits 293,313 3,204 4.37% 292,567 3,535 4.83%
Borrowed funds 53,063 841 6.34% 53,054 862 6.50%
Total interest-bearing -------- ------ -------- ------
liabilities 346,376 $4,045 4.67% 345,621 $4,397 5.09%
------ ------
Non-interest bearing
liabilities 10,643 8,127
-------- --------
Total liabilities 357,019 353,748
Stockholders' equity 29,698 30,853
Total liabilities and -------- --------
stockholders' equity $386,717 $384,601
======== ========
Net interest income $3,008 $2,806
====== ======
Interest rate spread 2.90% 2.65%
==== ====
Net yield on interest-
earning assets 3.23% 3.02%
Percentage of average
interest-earning assets to
average interest-bearing
liabilities 107.5% 107.7%
===== =====
11
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the
Company's average balance sheet and reflects the annualized
average yield on assets and average cost of liabilities for the
periods indicated. Such annualized yields and costs are derived
by dividing income or expense by the average balances of asset
or liabilities, respectively, for the periods presented.
For the nine months ended
September 30, 1999 September 30, 1998
-----------------------------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------ ------- -------- ------
Interest-earning assets:
Securities and other
interest-earning assets $ 44,351 $ 1,846 5.55% $ 58,574 $ 2,459 5.60%
Mortgage-backed and related
securities 9,608 452 6.27% 12,055 564 6.24%
Loan portfolio 317,447 18,798 7.90% 296,256 18,167 8.18%
Total interest-earning -------- ------- -------- -------
assets 371,406 $21,096 7.57% 366,885 $21,190 7.70%
------- -------
Non-interest earning assets 14,558 12,700
-------- --------
Total assets $385,964 $379,585
======== ========
Interest-bearing liabilities:
Deposits 292,079 9,628 4.40% 289,547 10,407 4.79%
Borrowed funds 53,495 2,532 6.31% 51,110 2,472 6.45%
Total interest-bearing -------- ------- -------- -------
liabilities 345,574 $12,160 4.69% 340,657 $12,879 5.04%
------- -------
Non-interest bearing
liabilities 10,169 9,032
-------- --------
Total liabilities 355,743 349,689
Stockholders' equity 30,221 29,896
Total liabilities and -------- --------
stockholders' equity $385,964 $379,585
======== ========
Net interest income $8,936 $8,311
====== ======
Interest rate spread 2.88% 2.66%
==== ====
Net yield on interest-
earning assets 3.21% 3.02%
Percentage of average
interest-earning assets to
average interest-bearing
liabilities 107.5% 107.7%
===== =====
12
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 change attributable to
changes in rate-volume have been allocated to the other
categories based on absolute values.
For the nine months ended
September 30, 1998 vs. September 30, 1999
Increase (Decrease)
Due to
---------------------------------------
(DOLLARS IN THOUSANDS) Volume Rate Total
--------- --------- -----------
Interest income:
Securities and other
interest-earning assets $ (592) $ (21) $(613)
Mortgage-backed and related securities (115) 3 (112)
Loan portfolio 1,269 (639) 630
------ ----- -----
Total interest-earning assets 562 (657) (95)
------ ----- -----
Interest expense:
Deposits 90 (869) (779)
Borrowed funds 114 (54) 60
------ ----- -----
Total interest-bearing liabilities 204 (923) (719)
------ ----- -----
Net interest income $ 358 $ 266 $ 624
====== ===== =====
13
RESERVE FOR LOAN LOSSES
During the nine-month period ended September 30, 1999 the
Bank had net charge-offs against the allowance for loan losses
of $43,000. The Bank added $165,000 to the allowance for loan
losses for the current nine-month period bringing the balance up
to $1.3 million. Management considers this level to be
appropriate based on lending volume, the current level of
delinquencies and other non-performing assets, overall economic
conditions and other factors inherent in the loan portfolio.
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
NONINTEREST INCOME
Noninterest income was up by 29.4% for the three-month
period ended September 30, 1999, as compared to the same period
a year ago. During the three-month period ended September 30,
1999, the Bank sold $391 thousand in fixed rate mortgage loans
at a gain of $4,500 as compared to the sale of $29 thousand at a
gain of $6,200 for the same period a year ago. The sales
proceeds were used to fund new loans. For the three-month
period ended September 30, 1999, as compared to the same period
a year ago, service charges on deposit accounts increased 21.7%
and loan fees and service charges increased 11.5%. The increase
in service charges on deposit accounts was due to an increase in
transaction accounts and the increase in loan fees was due to an
increase in the volume of loans serviced. Foreclosed real
estate sold during the current three month period for a net gain
of $18,000 represents 7.2% of the increase in noninterest
income.
Noninterest income was up by 4.3% for the nine-month
period ended September 30, 1999, as compared to the same period
a year ago. The major change was the reduction in the net gain
on sale of loan. During the nine-month period ended September
30, 1999, the Bank sold $29.9 million in fixed rate mortgage
loans at a gain of $149,000 as compared to the sale of $14
million at a gain of $268,000 for the same period a year ago.
The sales proceeds were used to repay borrowed funds, invest in
securities, and fund new loans. For the nine-month period ended
September 30, 1999, as compared to the same period a year ago,
service charges on deposit accounts increased 22.3% and loan
fees and service charges increased 3.4%. The increase in
service charges on deposit accounts was due to an increase in
transaction accounts and the increase in loan fees was due to an
increase in the volume of loans serviced. The balance in real
estate owned expense represents operating expense and further
reduction of the carrying amount of foreclosed real estate
owned. Management continues to be committed to disposing of
these properties in a timely manner.
NONINTEREST EXPENSES
For the nine-month period ended September 30, 1999,
noninterest expense increased 7.5% as compared to the same
period last year. Compensation and related cost increased 5.8%
due to additional employees and normal increases in salaries and
benefits. Occupancy and equipment expense increased 10.7%. This
increase can be attributed to additional maintenance necessary
to keep the buildings in good repair, depreciation on the new
teller/platform system, and depreciation on the new
Elizabethtown office. The new teller/platform system and the
new Elizabethtown office were put in service during the third
quarter of 1998. Advertising increased 21.8% due to a more
aggressive advertising campaign. Other operating expense
increased 6.2%. This increase can be attributed to costs
associated with the processing of a larger volume of transaction
accounts and normal increases in other operating costs.
INCOME TAXES
The effective tax rates for the nine-month periods ended
September 30, 1999 and 1998 approximate the statutory rate after
giving effect to nontaxable interest, other permanent tax
differences, and adjustments to certain deferred tax
liabilities.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable
(b) Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11. Computation of Earnings Per Share
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the
quarter ended September 30, 1999.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
COOPERATIVE BANKSHARES, INC.
Dated: November 5, 1999 /s/ Frederick Willetts, III
---------------- ------------------------------------
Frederick Willetts, III
President and Chief Executive Officer
Dated: November 5, 1999 /s/ Edward E. Maready
---------------- -------------------------------------
Edward E. Maready
Treasurer and Chief Financial Officer
16