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, 1996
-------------------
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: 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
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
201 Market Street, Wilmington, North Carolina 28401
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(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. 1,491,698 shares at October 31, 1996
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COOPERATIVE BANKSHARES, INC.
TABLE OF CONTENTS
Page
Part I Financial Information
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition, September 30, 1996
and December 31, 1995 3
Consolidated Statements of Income for the three and nine months ended
September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows, for the nine months ended
September 30, 1996 and 1995 5-6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 8-16
Part II Other Information 17
Statement Regarding Computation of Earnings Per Share 18
Signatures 19
2
PART 1- FINANCIAL INFORMATION - ITEM 1-FINANCIAL STATEMENTS
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS September 30, 1996 December 31, 1995
----------------------- -------------------------
Cash and cash equivalents (including interest-bearing deposits:
September 1996 - $6,121,129; December 1995 - $8,202,722) $ 8,957,130 $ 11,889,473
Securities:
Available for sale 4,008,126 0
Held to maturity (market value September 1996 - $19,348,440;
December 1995 - $19,885,820) 21,056,048 21,063,310
Mortgage-backed and related securities:
Available for sale 29,161,133 30,907,341
Held to maturity 0 0
Other investments 2,435,401 2,587,101
Loans receivable, net 253,278,025 234,008,085
Real estate owned:
Foreclosed 42,147 329,338
Other 0 206,885
Accrued interest receivable 1,944,314 1,742,589
Premises and equipment, net 4,790,325 5,025,587
Goodwill 0 3,602,189
Prepaid expenses and other assets 1,525,630 481,362
----------------------- -------------------------
TOTAL $327,198,279 $311,843,260
======================= =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $276,799,934 $270,070,661
Borrowed funds 20,146,415 10,089,017
Escrow deposits 1,096,317 352,668
Accrued interest payable on deposits 551,026 862,377
Deferred income taxes, net 937,747 857,500
Accrued expenses and other liabilities 2,459,470 528,147
----------------------- -------------------------
Total liabilities 301,990,909 282,760,370
----------------------- -------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value, 3,000,000 shares
authorized, none issued and outstanding 0 0
Common stock, $1 par value, 7,000,000 shares
authorized, 1,491,698 shares issued and outstanding 1,491,698 1,491,698
Additional paid-in capital 6,003,111 6,003,111
Net unrealized loss on securities available for sale (394,360) (297,938)
Retained earnings 18,106,921 21,886,019
----------------------- -------------------------
Total stockholders' equity 25,207,370 29,082,890
----------------------- -------------------------
TOTAL $327,198,279 $311,843,260
======================= =========================
The accompanying notes are an integral part of the consolidated financial
statements.
3
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
-------------------------------- ----------------------------------
INTEREST INCOME:
Loans receivable $4,796,711 $4,253,081 $13,921,737 $13,008,471
Mortgage-backed and related securities 507,065 543,526 1,548,876 1,656,673
Securities 452,303 557,870 1,323,246 1,794,838
-------------------------------- ----------------------------------
Total interest income 5,756,079 5,354,477 16,793,859 16,459,982
-------------------------------- ----------------------------------
INTEREST EXPENSE:
Deposits 3,156,209 3,286,240 9,500,562 9,349,466
Borrowed funds 251,500 165,062 578,361 892,827
-------------------------------- ----------------------------------
Total interest expense 3,407,709 3,451,302 10,078,923 10,242,293
-------------------------------- ----------------------------------
NET INTEREST INCOME 2,348,370 1,903,175 6,714,936 6,217,689
Provision for loan losses 79,689 0 119,689 0
-------------------------------- ----------------------------------
Net interest income after provision for loan losses 2,268,681 1,903,175 6,595,247 6,217,689
-------------------------------- ----------------------------------
NONINTEREST INCOME:
Gain on sale of securities 0 0 0 22,629
Gain on sale of other investments 45,941 0 45,941 0
Gain on sale of loans and mortgage-backed
and related securities 0 34,374 0 204,497
Loss on real estate owned (4,261) (44,442) (38,223) (138,160)
Other income, net 148,934 142,677 413,573 395,470
-------------------------------- ----------------------------------
Total noninterest income 190,614 132,609 421,291 484,436
-------------------------------- ----------------------------------
OTHER OPERATING EXPENSES:
Compensation and fringe benefits 892,605 896,917 2,741,945 2,735,849
Occupancy and equipment 313,518 289,109 914,786 850,113
Federal insurance premiums 175,556 176,382 525,257 481,954
Federal insurance special assessment 1,782,810 0 1,782,810 0
Advertising 83,846 74,875 221,448 260,056
Amortization of goodwill 73,018 73,017 219,052 219,052
Charge-off impaired goodwill 3,359,791 0 3,359,791 0
Other 225,712 224,499 763,801 740,816
-------------------------------- ----------------------------------
Total other operating expenses 6,906,856 1,734,799 10,528,890 5,287,840
-------------------------------- ----------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (4,447,561) 300,985 (3,512,352) 1,414,285
Income tax expense (benefit) (110,500) 123,000 266,746 570,400
-------------------------------- ----------------------------------
NET INCOME (LOSS) ($4,337,061) $ 177,985 ($3,779,098) $ 843,885
================================ ==================================
EARNINGS PER SHARE:
Net income (loss) ($2.73) $0.11 ($2.38) $0.53
================================ ==================================
Weighted average common shares and common
equivalent shares outstanding 1,586,879 1,584,212 1,587,839 1,581,042
================================ ==================================
The accompanying notes are an integral part of the consolidated financial
statements.
4
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1996 1995
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OPERATING ACTIVITIES:
Net income (loss) ($3,779,098) $843,885
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Net accretion, amortization, and depreciation 3,969,408 573,770
Gain on sale of securities 0 (22,629)
Gain on sale of other investments (45,941) 0
Gain on sale of loans and mortgage-backed and
related securities 0 (204,497)
Provision (benefit) for deferred income taxes 168,400 (148,100)
Loss (gain) on sales of foreclosed real estate 12,831 38,873
Valuation losses on foreclosed real estate 12,800 77,335
Provision for loan losses 119,689 0
Changes in assets and liabilities:
Accrued interest receivable (201,725) 316,157
Prepaid expenses and other assets (1,028,890) (21,082)
Escrow deposits 743,649 533,690
Accrued interest payable on deposits (311,351) 552,553
Accrued expenses and other liabilities 1,931,323 215,151
-------------------- ---------------------
Net cash provided by operating activities 1,591,095 2,755,106
-------------------- ---------------------
INVESTING ACTIVITIES:
Proceeds from principal repayments of mortgage-backed
and related securities available for sale 1,481,764 209,797
Purchases of securities available for sale (3,994,062) 0
Proceeds from sale of securities 0 14,698,750
Proceeds from principal repayments of mortgage-backed
and related securities held to maturity 0 921,309
Proceeds from sales of loans 0 22,562,611
Loan originations, net of principal repayments (19,521,943) (13,502,551)
Change in foreclosed real estate 437,524 12,393
Purchases of premises and equipment (117,918) (372,034)
Purchases of other investments 0 (38,600)
Proceeds from sales of other investments 404,526 0
-------------------- ---------------------
Net cash provided by (used in) investing activities (21,310,109) 24,491,675
-------------------- ---------------------
FINANCING ACTIVITIES:
Net increase in deposits 6,729,273 4,647,171
Net increase (decrease) in borrowings 10,057,398 (19,910,915)
-------------------- ---------------------
Net cash provided by (used in) financing activities 16,786,671 (15,263,744)
-------------------- ---------------------
INCREASE IN CASH AND CASH EQUIVALENTS (2,932,343) 11,983,037
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,889,473 2,933,255
-------------------- ---------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $8,957,130 $14,916,292
==================== =====================
(Continued)
5
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
SUPPLEMENTAL DISCLOSURES:
Net change in market value - securities available for sale $96,422 $1,123,675
Transfer from loans to foreclosed real estate $239,729 $215,467
Loans to facilitate the sale of foreclosed real estate $0 $182,250
The accompanying notes are an integral part of the consolidated financial
statements.
6
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, 1995. The results of operations for the nine month period ended
September 30, 1996 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 the weighted average number of common and 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 a portion of the proceeds from
the assumed exercise of the common stock options.
4. Deposit Insurance: Pursuant to recently enacted legislation, the FDIC has
-----------------
levied an assessment on institutions with deposits insured by the Savings
Association Insurance Fund (the "SAIF") in order to recapitalize the SAIF. The
assessment, set by the FDIC at 0.657% of SAIF-insured deposits as of March 31,
1995, will be paid on November 27, 1996. The effect of this assessment was to
reduce the Company's net income for the quarter ended September 30, 1996 by $1.8
million. As a result of this legislation, the Company's deposit insurance
premiums will decline substantially commencing on January 1, 1997.
In addition to numerous regulatory relief provisions contained in the
recent legislation, the legislation provides for a merger of the SAIF and the
Bank Insurance Fund effective January 1, 1999 if there are no insured savings
associations remaining on that date, and directs the Secretary of Treasury to
make recommendations to the Congress by March 31, 1997 with respect to
establishment of a common charter for banks and thrift institutions.
5. Write-off of Goodwill: The Company continually evaluates the realizability of
---------------------
its unamortized goodwill relating to the 1983 purchase of a savings and loan.
During the three month period ended September 30, 1996, this evaluation process
indicated that the related branches are continuing to experience decreased
profitability that has permanently impaired the goodwill. It is Management's
opinion that the impairment of the goodwill can not be reversed based on the
Company's long-term strategy for this market area. Due to this permanent
impairment the Company recognized a charge-off of impaired goodwill of $3.4
million to non-interest expense during the quarter ended September 30, 1996.
7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Cooperative Bankshares, Inc. (the "Company") is a registered savings
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 financial
statements and related data, relates primarily to Cooperative Bank.
Cooperative Bank is primarily engaged in the business of attracting
deposits from the general public and using those funds to originate mortgage
loans for the purchase or construction of one- to four-family homes. To a lesser
extent, the Bank also originates multi-family residential mortgage loans,
nonresidential real estate loans, consumer loans, and home equity lines of
credit. Cooperative Bank is a community-oriented financial institution and, in
addition to loans, offers a wide variety of financial services to meet the needs
of the communities it serves. As a savings bank, Cooperative Bank's deposit
accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
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
The Company's management strategy is to maintain profitability and a
strong capital position while adhering to sound loan underwriting and investment
standards. The Company has historically focused on the origination of one- to
four-family mortgage loans. During the nine months ended September 30, 1996, the
Company originated $47.6 million in mortgage loans. The Company's primary focus
is to offer one-year adjustable-rate mortgages. As an alternative, fixed-rate
mortgages with varying terms are offered, with rate reduction incentives for 15
year fixed-rate mortgages. To a lesser extent, the Company offers secured and
unsecured consumer loans.
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. Gap is considered negative when the amount
of interest rate sensitive liabilities exceed the amount of interest rate
sensitive assets. At September 30, 1996, Cooperative had a one-year negative gap
position of 7%. 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
8
important to note that certain shortcomings are inherent in static gap analysis.
Although certain assets and liabilities may have similar maturities or period of
repricing, they may react in different degrees to changes in market interest
rates. For example, most 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.
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, 1996, the estimated market value of liquid assets
(cash, cash equivalents, and marketable securities) was approximately $63.9
million, which represents 21.5% of deposits and borrowed funds as compared to
$65.3 million or 23.3% of deposits and borrowed funds at December 31, 1995. The
decrease in liquid assets during the nine months ended September 30, 1996, was
primarily due to the funding of new mortgage loans.
Security Portfolio
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 mortgage-related securities includes
collateralized mortgage obligations ("CMO"). CMOs are securities derived by
reallocating the cash flows from mortgage-backed securities or pools of mortgage
loans in order to create multiple classes, or tranches, of securities with
coupon rates and average lives that differ from the underlying collateral as a
whole. At September 30, 1996, the Company's investment in CMOs totaled $15
million, or 27.4% of the securities portfolio. Of the $15 million, a $10 million
CMO is insured or guaranteed either directly or indirectly through
mortgage-backed securities underlying the obligations of FNMA. This FNMA CMO has
a 30 year term, floats at 155 basis points over the 30 day London Interbank
Offered Rate ("LIBOR") on a monthly basis and has a lifetime interest rate cap
of 8%. The remaining $5 million CMO securities were issued by Chase Mortgage
Finance Corporation and represent a beneficial interest in a pool of fixed-rate
one- to four-family mortgage loans. The Chase CMO has a 30 year term, floats at
180 basis points over the 30 day LIBOR on a monthly basis and has a lifetime
interest rate cap of 8%.
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 became adjustable based on an indexing
formula. Subsequent interest rates will also be based on an indexing formula and
will adjust 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, 2003.
9
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 make
investments. At September 30, 1996, outstanding off-balance sheet commitments to
extend credit totaled $12.1 million, and the undisbursed portion of construction
loans was $10.1 million. Management considers current liquidity levels adequate
to meet the Company's cash flow requirements.
Capital
Stockholders' equity at September 30, 1996, was $25.2 million, down
13.4% from $29.1 million at December 31, 1995. The total at September 30, 1996,
and December 31, 1995, includes $394 thousand and $298 thousand respectively,
net of tax, of unrealized losses 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 ("SFAS
----------------------------------------------------------------
115"). 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, 1996,
the Bank's ratio of Tier I capital was 7.81%.
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 1 capital plus the balance of
allowance for loan losses. At September 30, 1996, the Bank had a ratio of
qualifying total capital to risk-weighted assets of 15.3%.
For the capital regulations under North Carolina law, the Bank is
required to maintain total tangible capital (total capital less goodwill) of not
less than 5% of its tangible assets (total assets less goodwill). However, this
calculation does permit the allowance for loan losses to be added to capital for
the calculation. At September 30, 1996, the Bank's capital ratio, as calculated
pursuant to North Carolina statutory requirements, was 8.3%.
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.
Other Information
Pursuant to recently enacted legislation, the FDIC has levied an
assessment on institutions with deposits insured by the Savings Association
Insurance Fund (the "SAIF") in order to recapitalize the SAIF. The assessment,
set by the FDIC at 0.657% of SAIF-insured deposits as of March 31, 1995, will be
paid on November 27, 1996. The effect of this assessment was to reduce the
Company's net income for the quarter ended September 30, 1996 by $1.8 million.
As a result of this legislation, the Company's deposit insurance premiums will
decline substantially commencing on January 1, 1997.
In addition to numerous regulatory relief provisions contained in the
recent legislation, the legislation provides for a merger of the SAIF and the
Bank Insurance Fund effective January 1, 1999 if there are no insured savings
associations remaining on that date, and directs the Secretary of Treasury to
make recommendations to the Congress by March 31, 1997 with respect to
establishment of a common charter for banks and thrift institutions.
10
The Company continually evaluates the realizability of its unamortized
goodwill relating to the 1983 purchase of a savings and loan. During the three
month period ended September 30, 1996, this evaluation process indicated that
the related branches are continuing to experience decreased profitability that
has permanently impaired the goodwill. It is Management's opinion that the
impairment of the goodwill can not be reversed based on the Company's long-term
strategy for this market area. Due to this permanent impairment the Company
recognized a charge-off of impaired goodwill of $3.4 million to non-interest
expense during the quarter ended September 30, 1996.
FINANCIAL CONDITION AT SEPTEMBER 30, 1996 COMPARED TO DECEMBER 31, 1995
Financial Condition
The Company's total assets increased 4.9% to $327.2 million at
September 30, 1996, as compared to $311.8 million at December 31, 1995. The two
major changes in the assets were the purchase of $4.0 million in available for
sale securities and $19.3 million (8.2%) increase in loans receivable. The
securities were Federal Home Loan Bank bonds with three and five year maturity
dates. The security purchase and the increase in loans during the current period
were funded by retail deposits, borrowed funds, and liquid assets. The Company
concentrates its lending activities on the origination of conventional mortgage
loans for the purpose of the construction, financing or refinancing of one- to
four-family residential properties. At September 30, 1996, over 93% of the
Company's loan portfolio consisted of loans secured by one- to four-family
residential properties.
Of the $6.7 million increase in retail deposits during the nine month
period ended September 30, 1996, $2.1 was a deposit to a checking account from a
local municipality. The increase in retail deposits was used in part to fund the
increase in loans receivable. Borrowed funds, collateralized through an
agreement with the Federal Home Loan Bank ("FHLB") for advances, are secured by
the Company's investment in FHLB stock and qualifying first mortgage loans.
Borrowed funds at September 30, 1996, in the amount of $10.0 million, mature in
May 1997 with the remaining amount maturing in later years.
The Company's nonperforming assets (loans 90 days or more delinquent
and foreclosed real estate) were $1.4 million, or 0.43% of assets, at September
30, 1996, compared to $772 thousand, or 0.25% of assets, at December 31, 1995.
An increase in delinquent single family loans caused nonperforming assets to be
higher for the period ended September 30, 1996, as compared to December 31,
1995. The Company takes an aggressive position in collecting delinquent loans to
keep nonperforming assets down and continues to evaluate the loan and real
estate portfolios to provide loss reserves as considered necessary. In the
opinion of management, the allowance for loan losses of $783 thousand at
September 30, 1996, is adequate to cover potential losses.
Results of Operation
The net income of the Company depends primarily upon net interest
income. Net interest income is the difference between the interest earned on
loans and securities 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.
Net Income (Loss)
The net loss of $3.8 million and $4.3 million for the nine and three
month periods ended September 30, 1996, respectively, was the direct results of
one-time special charges. Pursuant to recently enacted legislation, the FDIC has
levied an assessment on institutions with deposits insured by the Savings
Association Insurance Fund (the "SAIF") in order to recapitalize the SAIF. The
effect of this assessment was to reduce the Company's net income for the quarter
ended September 30, 1996, by $1.8 million. As a result of this legislation, the
Company's deposit insurance premiums will decline substantially commencing on
January 1, 1997. In addition
11
to the SAIF assessment, the Company continually evaluates the realizability of
its unamortized goodwill relating to the 1983 purchase of a savings and loan.
During the three month period ended September 30, 1996, this evaluation process
indicated that the related branches are continuing to experience decreased
profitability that has permanently impaired the goodwill. Due to this permanent
impairment the Company recognized a charge-off of impaired goodwill of $3.4
million to non-interest expense during the quarter ended September 30, 1996.
Excluding the one-time special assessment for deposit insurance of $1.8 million
and a charge-off of goodwill of $3.4 million, net income for the nine and three
month periods ended September 30, 1996, would have been $965 thousand and $407
thousand respectively, compared to $570 and $178 thousand for the previous year.
Interest Income
Interest income increased 2% for the nine month period ended September
30, 1996, as compared to the nine month period ended September 30, 1995. The
increase in income can be principally attributed to an increase in yield on the
balance of average interest-earning assets as compared to the same period last
year. Earning assets consisting of long-term investment securities of $14.7
million and fixed rate loans of $22.6 million were sold during the period
between March 31, 1995, and January 1, 1996. The sales were made to generate
funds for the repayment of short-term borrowed funds, increase short-term
liquidity, and reduce the interest rate sensitive one-year negative gap. Because
the interest rates on the loans and securities sold were relatively high
(weighted average rate of 7.8%), the sales of these assets did adversely affect
the yield on the Company's interest-earning assets. The impact on interest
income due to the sale of interest-earning assets was minimized by an increase
in yield on average interest-earning assets from 7.11% for the nine month period
ended September 30, 1995, to 7.36% for the nine month period ended September 30,
1996.
For the three month period ended September 30, 1996, interest income
increased 7.5% as compared to the same period in 1995. The increase in income
can be attributed to two factors. The balance of average interest-earning assets
for the three month period ended September 30, 1996, increased 3% and the yield
on average interest-earning assets increased to 7.41% as compared to 7.10% for
the same period a year ago.
Interest Expense
With higher interest rates on borrowed funds and rate sensitive
interest-bearing deposits repricing upward the cost of average interest-bearing
liabilities increase to 4.77% for the nine month period ended September 30,
1996, as compared to 4.73% for the same period last year. The increase in cost
was offset by a 2.3% reduction in the average balance of interest-bearing
liabilities resulting in a decrease in interest expense of 1.6% for the nine
month period ended September 30, 1996, as compared to the same period last year.
The repayment of short term borrowed funds was the main factor in the reduction
of interest-bearing liabilities.
For the three month period ended September 30, 1996, as compared to the
same period in 1995, interest expense decreased 1.2%. With a change in the
interest rate environment, rate sensitive interest-bearing liabilities repricing
downward caused the cost of average interest-bearing liabilities to decrease to
4.74% for the three month period ended September 30, 1996, as compared to 4.93%
for the same period last year. The decrease in cost was offset by a 2.7%
increase in the average balance of interest-bearing liabilities.
12
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the Company's average
balance sheet and reflects the 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, 1996 September 30, 1995
----------------------------------------------------------------------------------
(Dollars in thousands) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------------- ----------- ----------- ------------- ------------ ------------
Interest-earning assets:
Securities and other
interest-earning assets $ 31,968 $ 452 5.66% $ 37,790 $ 558 5.91%
Mortgage-backed and related securities 30,097 507 6.74% 32,249 543 6.74%
Loan portfolio 248,767 4,797 7.71% 231,541 4,253 7.35%
-------------- ----------- ------------- ------------
Total interest-earning assets 310,832 $5,756 7.41% 301,580 $5,354 7.10%
----------- ------------
Non-interest earning assets 12,675 13,156
-------------- -------------
Total assets $323,507 $314,736
============== =============
Interest-bearing liabilities:
Deposits 272,040 3,156 4.64% 270,156 3,286 4.87%
Borrowed funds 15,631 252 6.45% 10,077 165 6.55%
-------------- ----------- ------------- ------------
Total interest-bearing liabilities 287,671 $3,408 4.74% 280,233 $3,451 4.93%
----------- ------------
Non-interest bearing liabilities 6,102 5,658
-------------- -------------
Total liabilities 293,773 285,891
Stockholders' equity 29,734 28,845
-------------- -------------
Total liabilities and stockholders' equity $323,507 $314,736
============== =============
Net interest income $2,348 $1,903
=========== ============
Interest rate spread 2.67% 2.17%
=========== ============
Net yield on interest-earning assets 3.02% 2.52%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 108.1% 107.6%
=========== ============
13
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the Company's average
balance sheet and reflects the 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 month ended
September 30, 1996 September 30, 1995
---------------------------------------------------------------------------------
(Dollars in thousands) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------------- ----------- ----------- ------------- ------------ -----------
Interest-earning assets:
Securities and other
interest-earning assets $ 31,945 $ 1,323 5.52% $ 37,023 $ 1,795 6.46%
Mortgage-backed and related securities 30,657 1,549 6.74% 32,675 1,657 6.76%
Loan portfolio 241,706 13,922 7.68% 238,975 13,008 7.26%
-------------- ----------- ------------- ------------
Total interest-earning assets 304,308 $16,794 7.36% 308,673 $16,460 7.11%
----------- ------------
Non-interest earning assets 12,843 12,397
-------------- -------------
Total assets $317,151 $321,070
============== =============
Interest-bearing liabilities:
Deposits 269,951 9,501 4.69% 269,433 9,349 4.63%
Borrowed funds 11,938 578 6.46% 19,030 893 6.26%
-------------- ----------- ------------- ------------
Total interest-bearing liabilities 281,889 $10,079 4.77% 288,463 $10,242 4.73%
----------- ------------
Non-interest bearing liabilities 5,777 4,581
-------------- -------------
Total liabilities 287,666 293,044
Stockholders' equity 29,485 28,026
-------------- -------------
Total liabilities and stockholders' equity $317,151 $321,070
============== =============
Net interest income $6,715 $6,218
=========== ============
Interest rate spread 2.59% 2.38%
=========== ===========
Net yield on interest-earning assets 2.94% 2.69%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 108.0% 107.0%
=========== ===========
14
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
asset and interest-bearing liabilities, information is provided on changes
attributable to (I) changes in volume (changes in volume multiplied by old
rate); (ii) changes in rates (change in rate multiplied by old volume); and
(iii) changes in rate-volume (changes in rate multiplied by changes in volume).
For the nine month ended
September 30, 1995 vs. September 30, 1996
Increase (Decrease)
Due to
------------------------------------------------------------
(Dollars in thousands)
Volume Rate Rate/Volume Total
-------------- -------------- -----------------------------
Interest income:
Securities and other
interest-earning assets (246) (262) 36 (472)
Mortgage-backed and related securities (102) (6) 0 (108)
Loan portfolio 148 757 9 914
-------------- -------------- -------------- --------------
Total interest-earning assets (200) 489 45 334
-------------- -------------- -------------- --------------
Interest expense:
Deposits 18 134 0 152
Borrowed funds (333) 28 (10) (315)
-------------- -------------- -------------- --------------
Total interest-bearing liabilities (315) 162 (10) (163)
-------------- -------------- -------------- --------------
Net interest income 115 327 55 497
-------------- -------------- -------------- --------------
Net Interest Income
Net interest income for the nine and three month periods ended
September 30, 1996, as compared to the same period a year ago, increased 8% and
23% respectively. A reduction in the Company's one-year negative gap position in
which interest-bearing liabilities reprice faster than interest-earning assets
had a positive effect on increasing the interest rate margin. The one-year
negative gap has been reduced to 7% at September 30, 1996, as compared to 18%
for the same period last year. During the nine and three month periods ended
September 30, 1996, the yield on average interest-earning assets increased 25
basis points and 31 basis points respectively. The percentage of average
interest-earning assets to average interest-bearing liabilities increased to
108.1% for the quarter ended September 30, 1996, as compared to 107.6% for the
same quarter in 1995.
Provision for Loan Losses
During the nine month period ended September 30, 1996, the Company had
a charge to the allowance for loan losses of $74 thousand consisting of $10
thousand for consumer loans and $64 thousand for loans on single family
residential property. The Company added $120 thousand to the provision for loan
losses for the nine month period September 30, 1996, bringing the balance up to
$783 thousand. Management considers this level to be appropriate based on
lending volume, the current level of delinquencies and other nonperforming
assets, 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.
15
Noninterest Income
During the nine month period ended September 30, 1995, the Company
sold $14.7 million in securities and $22.6 million in fixed rate mortgage loans
at a gain of $23 thousand and $204 thousand respectively. The proceeds from the
1995 sales were used to repay short-term borrowed funds, and improve the
Company's interest rate sensitivity position by reducing its one-year negative
gap. The gain on sale of other investments of $46 thousand for the quarter ended
September 30, 1996, was the cash liquidation of equity securities. The
corporation in which the Company had invested was purchased by a third party and
the stock was redeemed. The balance in loss on real estate owned for both
periods ended September 30, 1995 and 1996, 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. The net other income includes service fees on loans and fee
income from the deposit operations. The increase in these fees for the nine
month period ended September 30, 1996, as compared to the same period last year
was due to several factors. Service fees on sold loans increased due to an
increase in volume of loans serviced. Fee income from deposit operations
increased due to a more aggressive position in offering checking accounts.
Other Operating Expenses
The Company continually evaluates the realizability of its unamortized
goodwill relating to the 1983 purchase of a savings and loan. During the three
month period ended September 30, 1996, this evaluation process indicated that
the related branches are continuing to experience decreased profitability that
has permanently impaired the goodwill. It is Management's opinion that the
impairment of the goodwill can not be reversed based on the Company's long-term
strategy for this market area. Due to this permanent impairment the Company
recognized a charge-off of impaired goodwill of $3.4 million to non-interest
expense during the quarter ended September 30, 1996.
Pursuant to recently enacted legislation, the FDIC has levied an
assessment on institutions with deposits insured by the Savings Association
Insurance Fund (the "SAIF") in order to recapitalize the SAIF. The assessment,
set by the FDIC at 0.657% of SAIF-insured deposits as of March 31, 1995, will be
paid on November 27, 1996. The effect of this assessment was to reduce the
Company's net income for the quarter ended September 30, 1996 by $1.8 million.
As a result of this legislation, the Company's deposit insurance premiums will
decline substantially commencing on January 1, 1997.
For the nine month period ended September 30, 1996, compensation and
related cost increased slightly due to additional new employees and normal cost
of living increases for existing employees. Occupancy and equipment expense
increased 7.6% during the nine month period ended September 30, 1996, as
compared to the same period a year ago. The major part of this increase can be
attributed to depreciation and operating cost of the new branch office opened in
October 1995. The increase in Federal insurance premium can be attributed to
higher premiums. Advertising decreased 14.8% for the period ended September 30,
1996, as compared to the same period last year. The higher advertising cost for
the nine month period ended September 30, 1995, was due to promotional campaigns
for the introduction of new retail banking products and a more aggressive
advertising position. The other operating expense category was up 3.1% for the
nine month period ended September 30, 1996, as compared to the same period last
year. This was primarily due to normal increases in the purchase of paper,
printing and dues.
Income taxes
The effective tax rates for the nine month periods ended September 30,
1996 and 1995 approximate the statutory rate after giving effect to nontaxable
interest, amortization of goodwill and other permanent tax differences.
16
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
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September
30, 1996.
17
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
-------------------------------- ---------------------------------
================================ =================================
NET INCOME (LOSS) ($4,337,061) $177,985 ($3,779,098) $843,885
================================ =================================
PRIMARY
Average shares outstanding 1,491,698 1,491,698 1,491,698 1,491,698
Net effect of dilutive stock options -- based on the
treasury stock method using average market price 95,181 92,514 96,141 89,344
-------------------------------- ---------------------------------
TOTAL 1,586,879 1,580,740 1,587,839 1,581,042
================================ =================================
PER SHARE AMOUNT ($2.73) $0.11 ($2.38) $0.53
================================ =================================
FULLY DILUTED
Average shares outstanding 1,491,698 1,491,698 1,491,698 1,491,698
Net effect of dilutive stock options -- based on the
treasury stock method using the period-end market
price, if it is dilutive more than 3%. 95,181 92,514 96,141 89,344
-------------------------------- ---------------------------------
TOTAL 1,586,879 1,584,212 1,587,839 1,581,042
================================ =================================
PER SHARE AMOUNT ($2.73) $0.11 ($2.38) $0.53
================================ =================================
18
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 13, 1996 /s/ Frederick Willetts, III
----------------- President and Chief Executive Officer
-------------------------------------
Dated: November 13, 1996 /s/ Edward E. Maready
----------------- Treasurer and Chief Financial Officer
-------------------------------------
19