<PAGE>
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 June 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
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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
- ------------------------------------------------ ----------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
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. 1,491,698 shares at July 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,
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the three
and six months ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows, for the
six months ended June 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
<PAGE>
PART 1-FINANCIAL INFORMATION - ITEM 1-FINANCIAL STATEMENTS
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
ASSETS June 30, 1996 December 31, 1995
------------------ -------------------
<S> <C> <C>
Cash and cash equivalents (including
interest-bearing deposits:
June 1996 - $5,773,280; December 1995 -
$8,202,722) $ 7,940,657 $ 11,889,473
Securities:
Available for sale 1,990,000 0
Held to maturity (market value June
1996 - $19,072,188; December 1995 -
$19,885,820) 21,058,469 21,063,310
Mortgage-backed and related securities:
Available for sale 29,610,099 30,907,341
Held to maturity 0 0
Other investments 2,490,401 2,587,101
Loans receivable, net 242,594,817 234,008,085
Real estate owned:
Foreclosed 46,896 329,338
Other 196,885 206,885
Accrued interest receivable 1,852,348 1,742,589
Premises and equipment, net 4,825,816 5,025,587
Goodwill 3,456,155 3,602,189
Prepaid expenses and other assets 591,538 481,362
----------------- ------------------
TOTAL $316,654,081 $311,843,260
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $273,775,267 $270,070,661
Borrowed funds 10,147,318 10,089,017
Escrow deposits 754,507 352,668
Accrued interest payable on deposits 1,017,573 862,377
Deferred income taxes, net 713,100 857,500
Accrued expenses and other liabilities 752,663 528,147
----------------- ------------------
Total liabilities 287,160,428 282,760,370
================= ==================
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 (445,138) (297,938)
Retained earnings 22,443,982 21,886,019
------------------ ------------------
Total stockholders' equity 29,493,653 29,082,890
------------------ ------------------
TOTAL $316,654,081 $311,843,260
================== ==================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- --------------------------
June 30, June 30,
------------------------- --------------------------
1996 1995 1996 1995
------------------------- --------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $4,623,435 $4,404,094 $ 9,125,026 $ 8,755,390
Mortgage-backed and related securities 514,332 556,785 1,041,811 1,113,147
Securities 427,108 552,724 870,943 1,236,968
------------------------- --------------------------
Total interest income 5,564,875 5,513,603 11,037,780 11,105,505
------------------------- --------------------------
INTEREST EXPENSE:
Deposits 3,141,645 3,199,855 6,344,353 6,063,226
Borrowed funds 163,482 280,125 326,861 727,765
------------------------- --------------------------
Total interest expense 3,305,127 3,479,980 6,671,214 6,790,991
------------------------- --------------------------
NET INTEREST INCOME 2,259,748 2,033,623 4,366,566 4,314,514
Provision for loan losses 30,000 0 40,000 0
------------------------- --------------------------
Net interest income after provision for loan losses 2,229,748 2,033,623 4,326,566 4,314,514
------------------------- --------------------------
NONINTEREST INCOME:
Gain on sale of securities 0 22,629 0 22,629
Gain on sale of loans and mortgage-backed
and related securities 0 146,980 0 170,123
Loss on real estate owned (9,430) (85,142) (33,962) (93,718)
Other income, net 122,945 134,658 264,639 252,793
------------------------- --------------------------
Total noninterest income 113,515 219,125 230,677 351,827
------------------------- --------------------------
OTHER OPERATING EXPENSES:
Compensation and fringe benefits 919,210 934,876 1,849,339 1,838,933
Occupancy and equipment 305,851 273,689 601,268 561,004
Federal insurance premiums 174,436 152,786 349,701 305,573
Advertising 74,046 97,819 137,602 185,181
Amortization of goodwill 73,017 73,017 146,035 146,035
Other 290,597 241,138 538,089 516,315
------------------------- --------------------------
Total other operating expenses 1,837,157 1,773,325 3,622,034 3,553,041
------------------------- --------------------------
INCOME BEFORE INCOME TAXES 506,106 479,423 935,209 1,113,300
Income tax expense 207,999 205,200 377,246 447,400
------------------------- --------------------------
NET INCOME $ 298,107 $ 274,223 $ 557,963 $ 665,900
------------------------- --------------------------
EARNINGS PER SHARE:
Net income $0.19 $0.17 $0.35 $0.42
------------------------- --------------------------
Weighted average common shares and common
equivalent shares outstanding 1,587,582 1,580,740 1,588,319 1,579,458
------------------------- --------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
----------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 557,963 $ 665,900
Adjustments to reconcile net income to net
cash provided by operating activities:
Net accretion, amortization, and
depreciation 414,384 371,419
Net gain on sale of securities 0 (22,629)
Net gain on sale of loans and
mortgage-backed and related securities 0 (170,123)
Provision (benefit) for deferred income
taxes (48,900) (96,100)
Loss (gain) on sales of foreclosed real
estate 13,344 (510)
Valuation losses on foreclosed real estate 76,565 77,336
Provision for loan losses 40,000 0
Changes in assets and liabilities:
Accrued interest receivable (109,759) 250,516
Prepaid expenses and other assets (103,157) (74,531)
Escrow deposits 401,839 474,706
Accrued interest payable on deposits 155,196 356,164
Accrued expenses and other liabilities 224,515 262,736
-------------- --------------
Net cash provided by operating activities 1,621,990 2,094,884
-------------- --------------
INVESTING ACTIVITIES:
Proceeds from principal repayments of
mortgage-backed
and related securities available for sale 1,015,963 138,654
Purchase of securities available for sale (1,996,563)
Proceeds from sale of securities 0 14,698,750
Proceeds from principal repayments of
mortgage-backed
and related securities held to maturity 0 456,806
Proceeds from sales of loans 0 17,617,569
Loan originations, net of principal
repayments (8,852,777) (11,115,266)
Proceeds from disposals of foreclosed real
estate 432,261 83,243
Purchases of premises and equipment (29,297) (132,808)
Purchases of other investments 0 (38,600)
Proceeds from sales of other investments 96,700 0
-------------- --------------
Net cash provided by (used in) investing
activities (9,333,713) 21,708,348
-------------- --------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 3,704,606 7,201,767
Net increase (decrease) in borrowings 58,301 (19,940,615)
-------------- --------------
Net cash provided by (used in) financing
activities 3,762,907 (12,738,848)
-------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS (3,948,816) 11,064,384
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 11,889,473 2,933,255
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,940,657 $ 13,997,639
============== ==============
(Continued)
</TABLE>
5
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COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES:
<S> <C> <C>
Net change in market value - securities available
for sale $147,200 $1,170,026
Transfer from loans to foreclosed real estate $239,729 $252,495
Loans to facilitate the sale of foreclosed real estate $0 $13,950
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
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 six month period ended June 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.
7
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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 six months ended June 30, 1996, the
Company originated $28.2 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
June 30, 1996, Cooperative had a one-year negative gap position of 9%. 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
8
<PAGE>
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 June 30, 1996, the estimated market value of liquid assets (cash, cash
equivalents, and marketable securities) was approximately $61.1 million, which
represents 22.5% 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 six months ended June 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 June 30, 1996, the Company's investment in CMOs totaled $15 million,
or 28.2% 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 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
<PAGE>
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 June 30, 1996, outstanding off-balance sheet commitments to
extend credit totaled $11.4 million, and the undisbursed portion of construction
loans was $8.3 million. Management considers current liquidity levels adequate
to meet the Company's cash flow requirements.
Capital
Stockholders' equity at June 30, 1996, was $29.5 million, up 1.4% from
$29.1 million at December 31, 1995. The total at June 30, 1996, and December
31, 1995, includes $445 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 June 30, 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 June 30, 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 June 30, 1996, the Bank's capital ratio, as calculated
pursuant to North Carolina statutory requirements, was 8.7%.
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 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
10
<PAGE>
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
have formulated 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 June 30, 1996, which is related to the
1983 purchase of a savings and loan. This evaluation process indicated that the
related branches are experiencing decreased 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. Due to the start-up
cost of a new branch office, other operating expense has increased slightly in
1996. The new branch could have a negative effect on net income for a short
period of time.
FINANCIAL CONDITION AT JUNE 30, 1996 COMPARED TO DECEMBER 31, 1995
Financial Condition
The Company's total assets increased 1.6% to $316.7 million at
June 30, 1996, as compared to $311.8 million at December 31, 1995. The two major
changes in the assets were the purchase of $2.0 million in available for sale
securities and $8.6 million (3.7%) increase in loans receivable. The security
was a Federal Home Loan Bank bond with a maturity date of October 29, 1998. The
security purchase and the increase in loans during the current period were
funded by retail deposits 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 June 30, 1996, over 94% of the Company's loan
portfolio consisted of loans secured by one- to four-family residential
properties.
Of the $3.7 million increase in retail deposits during the three month
period ended June 30, 1996, $2.3 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 June 30, 1996, in the amount of $10.0 million, mature in May
1997 with the remaining amount maturing in later years.
11
<PAGE>
The Company's nonperforming assets (loans 90 days or more delinquent and
foreclosed real estate) were $718 thousand, or 0.23% of assets, at
June 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 December 31, 1995, as
compared to June 30, 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 $703 thousand at June 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.
Interest Income
Interest income decreased 0.6% for the six month period ended
June 30, 1996, as compared to the six month period ended June 30, 1995. The
decrease in income can be principally attributed to a reduction in the balance
of average interest earning assets of 3.6% 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 7.11% for the six month period
ended June 30, 1995, to 7.33% for the six month period ended June 30, 1996.
For the three month period ended June 30, 1996, interest income increased
0.9% as compared to the same period in 1995. Although there was a reduction of
2.1% in the balance of average interest-earning assets for the three month
period ended June 30, 1996, the increase in yield on average interest-earning
assets to 7.37% as compared to 7.15% for the same period a year ago had a
positive impact on interest income.
Interest Expense
With a higher interest rate environment, rate sensitive interest-bearing
liabilities repricing upward caused the cost of average interest-bearing
liabilities to increase to 4.78% for the six month period ended June 30, 1996,
as compared to 4.63% for the same period last year. The increase in cost was
offset by a 4.8% reduction in the average balance of interest-bearing
liabilities resulting in a decrease in interest expense of 1.8% for the six
month period ended June 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 June 30, 1996, as compared to the same
period in 1995, the repayment of short term borrowed funds was the main factor
in reducing average interest-bearing liabilities by 3.2%. Along with the
reduction in the balance, the cost of interest bearing liabilities decreased to
4.73% as compared to 4.82% for the same period last year. The combined
reduction in balance and cost of interest-bearing liabilities reduced interest
expense by 5.02%.
12
<PAGE>
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.
<TABLE>
<CAPTION>
For the quarter ended
June 30, 1996 June 30, 1995
---------------------------------------------------------------------
(Dollars in thousands) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities and other
interest-earning assets $ 31,123 $ 427 5.49% $ 33,428 $ 553 6.62%
Mortgage-backed and related securities 30,685 514 6.70% 32,751 557 6.80%
Loan portfolio 240,224 4,624 7.70% 242,286 4,404 7.27%
--------- --------- --------- --------
Total interest-earning assets 302,032 $ 5,565 7.37% 308,465 $5,514 7.15%
--------- --------
Non-interest earning assets 12,710 12,091
--------- ---------
Total assets $314,742 $320,556
========= =========
Interest-bearing liabilities:
Deposits 269,177 3,142 4.67% 270,939 3,200 4.72%
Borrowed funds 10,095 163 6.46% 17,603 280 6.36%
--------- --------- --------- --------
Total interest-bearing liabilities 279,272 $ 3,305 4.73% 288,542 $3,480 4.82%
--------- --------
Non-interest bearing liabilities 5,948 3,947
--------- ---------
Total liabilities 285,220 292,489
Stockholders' equity 29,522 28,067
--------- ---------
Total liabilities and stockholders' equity $314,742 $320,556
========= =========
Net interest income $2,260 $2,034
========= ========
Interest rate spread 2.64% 2.33%
========= =========
Net yield on interest-earning assets 2.99% 2.64%
========= =========
Percentage of average interest-earning
assets to average interest-bearing
liabilities 108.1% 106.9%
========= =========
</TABLE>
13
<PAGE>
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.
<TABLE>
<CAPTION>
For the six months ended
June 30, 1996 June 30, 1995
---------------------------------------------------------------------
(Dollars in thousands) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities and other
interest-earning assets $ 31,934 $ 871 5.46% $ 36,640 $ 1,237 6.75%
Mortgage-backed and related securities 30,936 1,042 6.74% 32,888 1,113 6.77%
Loan portfolio 238,176 9,125 7.66% 242,692 8,756 7.22%
--------- --------- --------- --------
Total interest-earning assets 301,046 $11,038 7.33% 312,220 $11,106 7.11%
--------- --------
Non-interest earning assets 12,927 12,017
--------- ---------
Total assets $313,973 $324,237
========= =========
Interest-bearing liabilities:
Deposits 268,907 6,344 4.72% 269,434 6,063 4.50%
Borrowed funds 10,092 327 6.48% 23,506 728 6.19%
--------- --------- --------- --------
Total interest-bearing liabilities 278,999 $ 6,671 4.78% 292,940 $6,791 4.63%
--------- --------
Non-interest bearing liabilities 5,614 3,680
--------- ---------
Total liabilities 284,613 296,620
Stockholders' equity 29,360 28,617
--------- ---------
Total liabilities and stockholders' equity $313,973 $325,237
========= =========
Net interest income $4,367 $4,315
========= ========
Interest rate spread 2.55% 2.48%
========= =========
Net yield on interest-earning assets 2.90% 2.76%
========= =========
Percentage of average interest-earning
assets to average interest-bearing
liabilities 107.9% 106.6%
========= =========
</TABLE>
14
<PAGE>
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).
<TABLE>
<CAPTION>
For the six months ended
June 30, 1995 vs. June 30, 1996
Increase (Decrease)
Due to
-------------------------------------------------
(Dollars in thousands)
Volume Rate Rate/Volume Total
--------- ---------- -----------------------
<S> <C> <C> <C> <C>
Interest income:
Securities and other
interest-earning assets (159) (238) 31 (366)
Mortgage-backed and related securities (66) (5) 0 (71)
Loan portfolio (163) 542 (10) 369
-------- --------- ---------- --------
Total interest-earning assets (388) 299 21 (68)
-------- --------- ---------- --------
Interest expense:
Deposits (12) 294 (1) 281
Borrowed funds (415) 33 (19) (401)
-------- --------- ---------- --------
Total interest-bearing liabilities (427) 327 (20) (120)
-------- --------- ---------- --------
Net interest income 39 (28) 41 52
======== ========= ========== ========
</TABLE>
Net Interest Income
Net interest income for the six and three month periods ended
June 30, 1996, as compared to the same period a year ago, increased 1.2% and
11.1% 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 9% at June 30, 1996, as compared to 19%
for the same period last year. During the six and three month periods ended
June 30, 1996, the yield on average interest-earning assets increased 14 basis
points and 35 basis points respectively. The percentage of average interest-
earning assets to average interest-bearing liabilities increased to 108.1% for
the quarter ended June 30, 1996, as compared to 106.9% for the same quarter in
1995.
Provision for Loan Losses
During the six month period ended June 30, 1996, the Bank 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 Bank added $40 thousand to the provision for loan losses for the six month
period June 30, 1996, bringing the balance back up to $703 thousand. Management
considers this level to be appropriate based on lending volume, the current
level of delinquencies and other nonperforming assets, overall
15
<PAGE>
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
During the six month period ended June 30, 1995, the Company sold $14.7
million in securities and $17.6 million in fixed rate mortgage loans at a gain
of $23 thousand and $170 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. There were no
sales made during the six month period ended June 30, 1996. The balance in loss
on real estate owned for both periods ended June 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 six month period ended June 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 and
annuity sales.
Other Operating Expenses
For the six month period ended June 30, 1996, compensation and related cost
increased slightly 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 7.1% during the six month period ended June 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 25.7% for the period ended June 30, 1996,
as compared to the same period last year. The higher advertising cost for the
six month period ended June 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 4.2% for the six month
period ended June 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 six month periods ended June 30, 1996 and
1995 approximate the statutory rate after giving effect to nontaxable interest,
amortization of goodwill and other permanent tax differences.
16
<PAGE>
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
(a) Annual Meeting of Stockholders, April 26, 1996
Election of Directors
<TABLE>
<CAPTION>
Votes For Votes Against Votes Withheld Abstentions
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles H. Boney 1,252,582 5,644 0 233,472
Paul G. Burton 1,252,582 5,644 0 233,472
H. Thompson King, III 1,252,582 5,644 0 233,472
</TABLE>
No other matters submitted to a vote of Security Holders.
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
June 30, 1996.
17
<PAGE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
----------------------- -----------------------
NET INCOME $298,107 $274,223 $557,963 $665,900
======================= =======================
<S> <C> <C> <C> <C>
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 95,884 89,042 96,621 87,760
----------------------- -----------------------
TOTAL 1,587,582 1,580,740 1,588,319 1,579,458
======================= =======================
PER SHARE AMOUNT $0.19 $0.17 $0.35 $0.42
======================= =======================
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%. 95,884 89,042 96,621 87,760
----------------------- -----------------------
TOTAL 1,587,582 1,580,740 1,588,319 1,579,458
======================= =======================
PER SHARE AMOUNT $0.19 $0.17 $0.35 $0.42
======================= =======================
</TABLE>
18
<PAGE>
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: August 9, 1996
----------------- /s/ Frederick Willetts, III
----------------------------------
President and Chief Executive
Officer
Dated: August 9, 1996 /s/ Edward E. Maready
----------------- ----------------------------------
Treasurer and Chief Financial
Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 2,167,377
<INT-BEARING-DEPOSITS> 5,773,280
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,600,099
<INVESTMENTS-CARRYING> 21,058,469
<INVESTMENTS-MARKET> 19,072,188
<LOANS> 243,297,817
<ALLOWANCE> 703,000
<TOTAL-ASSETS> 316,654,081
<DEPOSITS> 273,775,267
<SHORT-TERM> 10,147,318
<LIABILITIES-OTHER> 3,237,843
<LONG-TERM> 0
0
0
<COMMON> 1,491,698
<OTHER-SE> 28,001,955
<TOTAL-LIABILITIES-AND-EQUITY> 316,654,081
<INTEREST-LOAN> 4,623,435
<INTEREST-INVEST> 941,440
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,564,875
<INTEREST-DEPOSIT> 3,141,645
<INTEREST-EXPENSE> 3,305,127
<INTEREST-INCOME-NET> 2,259,748
<LOAN-LOSSES> 30,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,837,157
<INCOME-PRETAX> 506,106
<INCOME-PRE-EXTRAORDINARY> 506,106
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 298,107
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
<YIELD-ACTUAL> 2.99
<LOANS-NON> 192,000
<LOANS-PAST> 479,187
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 673,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 703,000
<ALLOWANCE-DOMESTIC> 703,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
