UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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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 March 31, 1996
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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
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Commission File Number: 0-24626
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COOPERATIVE BANKSHARES, INC.
- - ------------------------------------------------------
(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
- - -------------------------------------------------------------- ----------------
(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 April 30, 1996
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COOPERATIVE BANKSHARES, INC.
TABLE OF CONTENTS
Page
Part I Financial Information
Item 1 Financial Statements
Consolidated Statements of Financial Condition,
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Income for the three
months ended March 31, 1996 and 1995 4
Consolidated Statements of Stockholders' Equity
for the periods ended March 31, 1996,
December 31, 1995, and December 31, 1994 5
Consolidated Statements of Cash Flows, for the
three months ended March 31, 1996 and 1995 6-7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
Part II Other Information 17
Statement Regarding Computation of Earnings Per Share 18
Signatures 19
PART 1-FINANCIAL INFORMATION - ITEM 1-FINANCIAL STATEMENTS
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS MARCH 31, 1996 December 31, 1995
-------------- -----------------
Cash and cash equivalents (including interest-bearing deposits:
March 1996 - $9,209,676; December 1995 - $8,202,722) $ 11,441,303 $ 11,889,473
Securities:
Available for sale - -
Held to maturity (market value March 1996 - $19,463,350;
December 1995 - $19,885,820) 21,060,889 21,063,310
Mortgage-backed and related securities:
Available for sale 30,342,837 30,907,341
Held to maturity - -
Other investments 2,490,401 2,587,101
Loans receivable, net 237,029,811 234,008,085
Real estate owned:
Foreclosed 319,736 329,338
Other 206,885 206,885
Accrued interest receivable 1,815,136 1,742,589
Premises and equipment, net 4,927,061 5,025,587
Goodwill 3,529,172 3,602,189
Prepaid expenses and other assets 639,563 481,362
-------------- -----------------
TOTAL $313,802,794 $311,843,260
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $270,940,131 $270,070,661
Borrowed funds 10,088,539 10,089,017
Escrow deposits 638,186 352,668
Accrued interest payable on deposits 1,292,842 862,377
Deferred income taxes, net 806,700 857,500
Accrued expenses and other liabilities 735,662 528,147
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Total liabilities 284,502,060 282,760,370
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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, 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 (339,950) (297,938)
Retained earnings 22,145,875 21,886,019
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Total stockholders' equity 29,300,734 29,082,890
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TOTAL $313,802,794 $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 MARCH 31,
1996 1995
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INTEREST INCOME:
Loans receivable $4,501,592 $4,351,297
Mortgage-backed and related securities 527,478 556,362
Securities 443,835 684,244
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Total interest income 5,472,905 5,591,903
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INTEREST EXPENSE:
Deposits 3,202,708 2,863,371
Borrowed funds 163,379 447,640
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Total interest expense 3,366,087 3,311,011
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NET INTEREST INCOME 2,106,818 2,280,892
Provision for loan losses 10,000 --
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Net interest income after provision for loan losses 2,096,818 2,280,892
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NONINTEREST INCOME:
Gain on sale of loans and mortgage-backed
and related securities -- 23,144
Loss on real estate owned (24,532) (8,576)
Other income, net 141,693 118,133
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Total noninterest income 117,161 132,701
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OTHER OPERATING EXPENSES:
Compensation and fringe benefits 930,129 904,057
Occupancy and equipment 295,417 287,314
Federal insurance premiums 175,265 152,786
Advertising 63,556 87,362
Amortization of goodwill 73,017 73,017
Other 247,492 275,180
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Total other operating expenses 1,784,876 1,779,716
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INCOME BEFORE INCOME TAXES 429,103 633,877
Income tax expense 169,247 242,200
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NET INCOME $ 259,856 $ 391,677
========== ==========
EARNINGS PER SHARE:
Net income $0.16 $0.25
========== ==========
Weighted average common shares and common
equivalent shares outstanding 1,589,148 1,578,175
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
4
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIODS ENDED MARCH 31, 1996, DECEMBER 31, 1995 AND DECEMBER 31, 1994
NET UNREALIZED
GAIN (LOSS) ON
ADDITIONAL SECURITIES
COMMON PAID-IN AVAILABLE RETAINED STOCKHOLDERS'
STOCK CAPITAL FOR SALE EARNINGS EQUITY
-----------------------------------------------------------------------------
BALANCE, MARCH 31, 1994 $1,491,698 $6,003,111 $ 278,571 $18,374,785 $26,148,165
Change in unrealized gain (loss) on securities
available for sale, net of income -- -- (1,712,261) -- (1,712,261)
taxes of $1,117,923
Net income for nine months -- -- -- 2,486,853 2,486,853
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 1,491,698 6,003,111 (1,433,690) 20,861,638 26,922,757
Change in unrealized gain (loss) on securities
available for sale, net of income
taxes of $741,546 -- -- 1,135,752 -- 1,135,752
Net income for year -- -- -- 1,024,381 1,024,381
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 1,491,698 6,003,111 (297,938) 21,886,019 29,082,890
Change in unrealized gain (loss) on securities
available for sale, net of income
taxes of $16,196 -- -- (42,012) -- (42,012)
Net income for three months -- -- -- 259,856 259,856
-----------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 $1,491,698 $6,003,111 $ (339,950) $22,145,875 $29,300,734
=============================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
5
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
1996 1995
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OPERATING ACTIVITIES:
Net income $ 259,856 $ 391,677
Adjustments to reconcile net income to net cash provided
by operating activities:
Net accretion, amortization, and depreciation 201,144 178,545
Gain on sale of loans and mortgage-backed and
related securities -- (23,144)
Provision for deferred income taxes (32,000) (31,800)
Loss on sales of foreclosed real estate 6,149 99
Changes in assets and liabilities:
Accrued interest receivable (72,546) 130,416
Prepaid expenses and other assets (158,721) (89,757)
Escrow deposits 285,518 310,617
Accrued interest payable on deposits 430,465 208,999
Accrued expenses and other liabilities 207,515 350,488
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Net cash provided by operating activities 1,127,379 1,426,140
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INVESTING ACTIVITIES:
Proceeds from principal repayments of mortgage-backed
and related securities available for sale 481,969 70,300
Proceeds from principal repayments of mortgage-backed
and related securities -- 143,428
Proceeds from sales of loans -- 3,734,907
Loan originations, net of principal repayments (3,174,163) (6,679,850)
Change in foreclosed real estate 166,617 (55,613)
Purchases of premises and equipment (15,664) (15,926)
Purchases of other investments -- (38,600)
Proceeds from sales of other investments 96,700
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Net cash provided by (used in) investing activities (2,444,541) (2,841,354)
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FINANCING ACTIVITIES:
Net increase (decrease) in deposits 869,469 6,910,731
Net decrease in borrowings (478) (4,000,000)
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Net cash provided by (used in) financing activities 868,992 2,910,731
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INCREASE IN CASH AND CASH EQUIVALENTS (448,170) 1,495,517
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD) 11,889,473 2,933,255
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD) $11,441,303 $ 4,428,772
=========== ===========
(Continued)
6
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest on deposits and borrowed funds $2,935,622 $3,102,012
Income taxes -- $ 200,000
Net change in market value - securities available for sale $ 42,012 $ 602,297
Transfer from loans to foreclosed real estate $ 239,729 $ 59,494
Loans to facilitate the sale of foreclosed real estate -- $ 13,950
The accompanying notes are an integral part of the consolidated financial
statements.
7
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 three month period ended March 31, 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.
8
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 three months ended March 31, 1996, the
Company originated $13.0 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
March 31, 1996, Cooperative had a one-year negative gap position of 15.1%.
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
9
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 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 March 31, 1996, the estimated market value of liquid assets (cash, cash
equivalents, and marketable securities) was approximately $63.7 million, which
represents 22.7% 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 three months ended March 31, 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 March 31, 1996, the Company's investment in CMOs totaled $15 million,
or 28.9% 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 was adjusted to 3.485% based on
an indexing formula. Subsequent interest rates will also be based on an
indexing formula and will adjust on
10
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.
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 March 31, 1996, outstanding off-balance sheet commitments to
extend credit totaled $9.3 million, and the undisbursed portion of construction
loans was $8.1 million. Management considers current liquidity levels adequate
to meet the Company's cash flow requirements.
CAPITAL
Stockholders' equity at March 31, 1996, was $29.3 million, up 0.7% from
$29.1 million at December 31, 1995. The total at March 31, 1996, and December
31, 1995, includes $340 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 March 31, 1996, the
Bank's ratio of Tier I capital was 8.4%.
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 March 31, 1996, the Bank had a ratio of qualifying
total capital to risk-weighted assets of 16.8%.
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 March 31, 1996, the Bank's capital ratio, as calculated
pursuant to North Carolina statutory requirements, was 8.6%.
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
In September 1995, Congress began consideration of a recapitalization plan
for the SAIF, the insurance fund covering deposits of savings institutions. The
purpose of this plan is to eliminate the significant disparity between deposit
insurance rates paid by savings associations and most commercial banks. This
disparity has adversely affected the Bank's competitive position vis-a-vis its
commercial banking competitors. In April 1996, there was an attempt to attach
legislation that would have provided for a special one-time assessment to
recapitalize the SAIF and would have spread the interest payments on obligations
issued by the Financing Corporation ("FICO") on all FDIC-insured institutions.
Such attempt was unsuccessful. The Company cannot
11
predict whether this proposed legislation will be enacted in the future or, if
enacted, what its final form will be. The following summarizes the major
provisions of the legislation as most recently considered by congress. As part
of the continuing resolution, congress proposed to authorize the FDIC to assess
a one-time fee on institutions, like the Bank, with deposits insured by the SAIF
in order to increase the SAIF's reserves to the 1.25% of insured deposits
required by the Federal Deposit Insurance Act ("FDIA"). The amount of such
assessment would be determined by the FDIC based on the amount of reserves in
the SAIF, the amount of insured deposits and such other factors as the FDIC
deemed appropriate. The amount of such assessment for an individual institution
would have been based on its SAIF-assessable deposits as of March 31, 1995 and
was expected to range between 0.85% and 0.90% of such deposits. The special
assessment would have been due on such date as the FDIC prescribed within 60
days of enactment of the legislation. The proposed legislation provided for the
merger of the SAIF and the Bank Insurance Fund ("BIF") into a single Deposit
Insurance Fund effective January 1, 1998 if no insured depository institution
was a savings association on that date. Based on its deposits as of March 31,
1995, the Bank would have been required to pay a special assessment of
approximately $2.3 million on a pre-tax basis if it is assessed at the rate of
0.85% of SAIF-assessable deposits.
On March 7, 1996, the Bank entered into a memorandum of understanding (the
"MOU") with the FDIC and the North Carolina Savings Institutions Division, the
Bank's primary regulators, whereby the Bank agreed that it will proceed in good
faith to comply with the requirements of the MOU and address certain conditions
identified by the regulators in their most recent joint examination of the Bank,
completed in November 1995. These conditions relate primarily to the Bank's
interest rate risk exposure, securities investment strategies, earnings (i.e.,
net interest margin), the monitoring and reporting of certain lending
activities, and senior management's responsibilities and compensation. The MOU
requires, among other things, that the Bank develop strategies to address
weaknesses in these areas. The Board of Directors and management of the Bank are
in the process of formulating such strategies, and believe that such strategies
are consistent with their efforts to improve the Company's financial condition
and results of operations.
The Company continually evaluates the realizability of its unamortized
goodwill, amounting to $3.5 million at March 31, 1996, which is related to the
1983 purchase of a savings and loan. During 1995 this evaluation process
indicated that the related branches had begun to experience decreasing
profitability. Management will continue to monitor the profitability of these
branches in light of changing economic conditions and trends and the Company's
long-term strategy for this market area. At such time that permanent impairment
of goodwill is indicated, an impairment loss will be recognized as a charge to
non-interest expense.
In October 1995, the Company opened a new branch office in the Ogden area
of Wilmington, North Carolina. The capital investment in the new branch
increased the Company's nonearning assets by $840 thousand or 6.9% resulting in
a slight decrease in interest income. Due to the start-up cost of a new branch
office, other operating expense is expected increase slightly in 1996. The new
branch could have a negative effect on net income for a short period of time.
FINANCIAL CONDITION AT MARCH 31, 1996 COMPARED TO DECEMBER 31, 1995
FINANCIAL CONDITION
The Company's total assets increased 0.6% to $313.8 million at March 31,
1996, as compared to $311.8 million at December 31, 1995. The major change in
the assets was a $3.0 million (1.3%) increase in loans receivable. The increase
in loans during the current period was funded by retail deposits and current
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 March
31, 1996, over 94% of the Company's loan portfolio consisted of loans secured by
one- to four-family residential properties.
12
The $869 thousand increase in retail deposits during the three month period
ended March 31, 1996, 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 March 31, 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 $705 thousand, or 0.22% of assets, at March 31,
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 December 31, 1995, as compared to March 31, 1996.
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 $673 thousand at March 31, 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.
INTEREST INCOME
Interest income decreased 2.1% for the three month period ended March 31,
1996, as compared to the three month period ended March 31, 1995. The decrease
in income can be principally attributed to a reduction in the balance of average
interest earning assets of 5.0% 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 $18.7 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 7.08% for the three month period ended March 31,
1995, to 7.30% for the three month period ended March 31, 1996.
INTEREST EXPENSE
Interest expense for the three month period ended March 31, 1996, increased
1.7% to $3.4 million as compared to $3.3 million for the same period last year.
With a higher interest rate environment, rate sensitive interest-bearing
liabilities repricing upward caused the cost of average interest-bearing
liabilities to increase to 4.83% for the three month period ended March 31,
1996, as compared to 4.45% for the same period last year.
Although there was a small reduction in the average balance of interest-
bearing liabilities for the three month period ended March 31, 1996, this had
only a small impact on reducing interest expense. Management believes that the
rates on the Company's deposits have also increased due to the disparity in
deposit insurance premiums paid by savings associations such as the Bank and its
commercial banking competitors (see "Other Information -- Deposit Insurance
Premium Assessment").
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 quarter ended
March 31, 1996 March 31, 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 $ 32,744 $ 444 5.42% $ 39,853 $ 684 6.87%
Mortgage-backed and related securities 31,188 527 6.76% 33,025 557 6.75%
Loan portfolio 236,128 4,502 7.63% 243,097 4,351 7.16%
-------- ------ -------- ------
Total interest-earning assets 300,060 5,473 7.30% 315,975 5,592 7.08%
------ ------
Non-interest earning assets 13,145 11,942
-------- --------
Total assets $313,205 $327,917
======== ========
Interest-bearing liabilities:
Deposits $268,638 $3,203 4.77% $267,930 $2,863 4.27%
Borrowed funds 10,089 163 6.46% 29,408 448 6.09%
-------- ------ -------- ------
Total interest-bearing liabilities 278,727 3,366 4.83% 297,338 3,311 4.45%
------ ------
Non-interest bearing liabilities 5,280 3,412
-------- --------
Total liabilities 284,007 300,750
Stockholders' equity 29,198 27,167
-------- --------
Total liabilities and stockholders'
equity $313,205 $327,917
======== ========
Net interest income $2,107 $2,281
====== ======
Interest rate spread 2.47% 2.63%
==== ====
Net yield on interest-earning assets 2.81% 2.89%
==== ====
Percentage of average interest-earning
assets to average interest-bearing
liabilities 107.7% 106.3%
===== =====
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).
March 31, 1995 vs. March 31, 1996
Increase (Decrease)
Due to
-------------------------------------
(DOLLARS IN THOUSANDS)
Volume Rate Rate/Volume Total
-------- ---- ----------- -----
Interest income:
Securities and other
interest-earning assets (122) (144) 26 (240)
Mortgage-backed and related securities (31) 1 (0) (30)
Loan portfolio (125) 284 (8) 151
----- ---- -- ----
Total interest-earning assets (278) 141 18 (119)
----- ---- -- ----
Interest expense:
Deposits 8 332 0 340
Borrowed funds (294) 27 (18) (285)
---- --- ---- ----
Total interest-bearing liabilities (286) 359 (18) 55
---- --- --- ----
Net interest income 8 (218) 36 (174)
---- ---- --- ----
NET INTEREST INCOME
Net interest income for the three month period ended March 31, 1996, as
compared to the same period a year ago, decreased 7.6%. A one-year negative gap
position in which interest-bearing liabilities repriced faster than interest-
earning assets caused the interest rate spread to narrow. During the three month
period ended March 31, 1996, the yield on average interest-earning assets
increased 22 basis points, while the cost of average interest-bearing
liabilities increased 38 basis points, causing net interest income to decrease.
The percentage of average interest-earning assets to average interest-bearing
liabilities increased to 107.7% as of March 31, 1996, as compared to 106.3% as
of March 31, 1995. This increase had a minimal effect on the decrease in net
interest income. For the three month period ended March 31, 1996, the Company's
average interest rate spread was 2.47% as compared to 2.63% for the same period
last year. As stated above, the reduction in average interest earning assets
and a higher interest rate environment influencing the repricing rates paid on
maturing deposits and borrowed funds were the major factor for the decrease in
net interest income for the three month period ended March 31, 1996. Due to
lagging index rates on Cooperative's loans and securities, the average yield on
interest-earning assets did not increase correspondingly.
PROVISION FOR LOAN LOSSES
During the three month period ended March 31, 1996, the Bank had a charge
to the provision for loan losses of $74 thousand consisting of $10 thousand for
consumer loans and $64 thousand for loans on single family residential property.
The Bank added $10 thousand to the provision for loan losses for the three month
period March 31, 1996, bringing the balance back up to $673 thousand.
Management considers this level to be appropriate based on lending volume, the
current level of delinquencies and other nonperforming assets, overall
15
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.
NONINTEREST INCOME
The change in the components of noninterest income for the three month
period ended March 31, 1996, as compared to the same period last year, was the
result of several factors. During the three month period ended March 31, 1995,
the Company sold $3.7 million in fixed rate mortgage loans at a gain of $23
thousand. There were no sales made during the three month period ended March
31, 1996. The balance in loss on real estate owned for both periods ended March
31, 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 three month period ended March
31, 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 and annuity sales.
OTHER OPERATING EXPENSES
Compensation and related cost increased 2.9% due to additional new
employees and normal cost of living increases for existing employees. The new
employees were retained in connection with opening a new branch office in
October 1995. Occupancy and equipment expense increased 2.8% during the three
month period ended March 31, 1996, as compared to the same period a year ago.
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 27.3% for the
period ended March 31, 1996 as compared to the same period last year. The
higher advertising cost for the three month period ended March 31, 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 down 10.1% for the three month period ended March 31, 1996, as compared to
the same period last year. This was primarily due to a reduction in the
purchase of paper, printing and dues.
INCOME TAXES
The effective tax rates for the three month periods ended March 31, 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
Not applicable
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 March 31,
1996.
17
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: May 10, 1996 /s/ Frederick Willetts, III
----------------- --------------------------------
President and Chief Executive
Officer
Dated: May 10, 1996 /s/ Edward E. Maready
----------------- --------------------------------
Treasurer and Chief Financial
Officer