<PAGE>
<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
(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, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______
Commission File Number: No. 0-24626
COOPERATIVE BANKSHARES, INC.
______________________________________________________
(Exact name of registrant as specified in its charter)
North Carolina 56-1886527
- ----------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
of incorporation or organization Identification No.)
201 Market Street, Wilmingon, North Carolina 28401
- -------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(910) 343-0181
--------------
- -----------------------------------------------------------------
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, 1997
- ----------------------------------<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition,
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations for the
three and six months ended June 30, 1997
and 1996 4
Consolidated Statements of Cash Flows, for
the six months ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-16
Part II Other Information 17
Signatures 18
<PAGE>
PART 1-FINANCIAL INFORMATION-ITEM 1-FINANCIAL STATEMENTS
COOPERATIVE BANKSHARES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30 December 31
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents (including interest-
bearing deposits:
June 1997 - $1,454,996; December 1996 - $9,084,216) $ 4,898,030 $ 11,507,283
Securities:
Available for sale 5,931,876 5,946,250
Held to maturity (market value June 1997 -
$19,688,448; December 1996 - $19,705,700) 21,048,787 21,053,628
Mortgage-backed and related securities available
for sale 28,463,402 28,824,918
Other investments 2,688,200 2,435,000
Loans receivable, net 281,253,883 263,312,730
Foreclosed real estate owned 727,966 42,146
Accrued interest receivable 2,063,245 1,917,447
Premises and equipment, net 4,769,217 4,786,292
Prepaid expenses and other assets 593,405 1,474,164
------------ ------------
Total assets $352,438,011 $341,299,858
============ ============
LIABILITIES
Deposits $283,005,220 $278,138,909
Borrowed funds 40,143,212 35,145,362
ESOP note payable 84,824 289,160
Escrow deposits 910,922 620,808
Accrued interest payable on deposits 177,762 351,295
Deferred income taxes, net 1,027,500 1,075,883
Accrued expenses and other liabilities 187,913 208,891
------------ ------------
Total liabilities 325,537,353 315,830,308
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 issued and outstanding 1,491,698 1,491,698
Additional paid-in capital 6,014,775 6,003,111
Unearned ESOP shares (84,824) (289,160)
Net unrealized gain (loss) on securities
available for sale (283,755) (372,265)
------------ ------------
Retained earnings 19,762,764 18,636,166
------------ ------------
Total stockholders' equity 26,900,658 25,469,550
------------ ------------
Total liabilities and stockholders' equity $352,438,011 $341,299,858
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3<PAGE>
<PAGE>
COOPERATIVE BANKSHARES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months Six months
ended June 30, ended June 30,
---------------------- ----------------------
1997 1996 1997 1996
------ --------- -------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $5,483,242 $4,623,435 $10,677,345 $9,125,026
Mortgage-backed and related
securities 508,792 514,332 1,006,781 1,041,811
Securities 482,553 427,108 985,311 870,943
---------- ---------- ----------- ----------
Total interest income 6,474,587 5,564,875 12,669,437 11,037,780
---------- ---------- ----------- ----------
INTEREST EXPENSE
Deposits 3,247,958 3,141,645 6,366,829 6,344,353
Borrowed funds 650,357 163,482 1,220,698 326,861
---------- ---------- ----------- ----------
Total interest expense 3,898,315 3,305,127 7,587,527 6,671,214
---------- ---------- ----------- ----------
NET INTEREST INCOME 2,576,272 2,259,748 5,081,910 4,366,566
Provision for loan losses 30,000 30,000 60,000 40,000
---------- ---------- ----------- ----------
Net interest income after
provision for loan losses 2,546,272 2,229,748 5,021,910 4,326,566
---------- ---------- ----------- ----------
NONINTEREST INCOME
Net gain on sale of loans and mortgage-
backed and related securities 12,115 0 12,115 0
Net real estate owned income (expenses) 1,880 (9,430) 1,280 (33,962)
Other income, net 125,810 122,945 259,593 264,639
---------- ---------- ----------- ----------
Total noninterest income 139,805 113,515 272,988 230,677
NONINTEREST EXPENSES
Compensation and fringe benefits 988,306 919,210 1,977,598 1,849,339
Occupancy and equipment 383,476 305,851 721,071 601,268
Federal insurance premiums 65,484 174,436 130,727 349,701
Advertising 90,097 74,046 158,085 137,602
Amortization of goodwill 0 73,017 0 146,035
Other operating expense 266,075 290,597 489,188 538,089
---------- ---------- ----------- ----------
Total noninterest expenses 1,793,438 1,837,157 3,476,669 3,622,034
---------- ---------- ----------- ----------
Income before income taxes 892,639 506,106 1,818,229 935,209
Income tax expense 349,460 207,999 691,630 377,246
---------- ---------- ----------- ----------
NET INCOME $ 543,179 $ 298,107 $ 1,126,599 $ 557,963
---------- ---------- ----------- ----------
EARNINGS PER:
Common and common share equivalent $ 0.34 $ 0.19 $0.71 $0.35
Common share - assuming full dilution $ 0.34 $ 0.19 $0.71 $0.35
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3<PAGE>
<PAGE>
COOPERATIVE BANKSHARES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1997 1996
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,126,599 $ 557,963
Adjustments to reconcile net income to net cash
provided by operating activities:
Net accretion, amortization, and depreciation 284,374 414,384
Provision for deferred income taxes (112,200) (48,900)
Gain on sale of property, plant and equipment (302) -
Loss on sales of foreclosed real estate (2,311) 13,344
Valuation losses on foreclosed real estate - 76,565
Provision for loan losses 60,000 40,000
Changes in assets and liabilities:
Accrued interest receivable (145,798) (109,759)
Prepaid expenses and other assets 869,446 (103,157)
Escrow deposits 290,114 401,839
Accrued interest payable on deposits (173,533) 155,196
Accrued expenses and other liabilities (20,978) 224,515
------------ -----------
Net cash provided by operating activities 2,175,411 1,621,990
------------ -----------
INVESTING ACTIVITIES:
Proceeds from principal repayments of mortgage-
backed and related securities available for sale 499,025 1,015,963
Purchases of securities - (1,996,563)
Loan originations, net of principal repayments (22,851,077) (8,852,777)
Change in foreclosed real estate 107,968 432,261
Proceeds from sales of loans 4,070,113 -
Purchases of property, plant and equipment (230,793) (29,297)
Proceeds from sale of property, plant and equipment 9,139 -
Purchases of other investments (253,200) 58,301
Proceeds from sales of other investments - 96,700
------------ -----------
Net cash provided by (used in) investing
activities (18,648,825) (9,275,412)
------------ -----------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 4,866,311 3,704,606
Net increase (decrease) in borrowings 4,997,850 58,301
------------ -----------
Net cash provided by (used in) financing
activities 9,864,161 3,762,907
------------ -----------
INCREASE IN CASH AND CASH EQUIVALENTS (6,609,253) (3,890,515)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,507,283 11,889,473
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,898,030 $ 7,998,958
============ ===========
SUPPLEMENTAL DISCLOSURES:
Transfer from loans to foreclosed real estate $ 843,477 $ 239,729
Loans to facilitate the sale of foreclosed real
estate $0 $0
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
5
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<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, 1996.
The results of operations for the three and six month period
ended June 30, 1997 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. SFAS 130: In June 1997, SFAS 130, "Reporting Comprehensive
Income" was issued and is effective for fiscal years beginning
after December 15, 1997. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-
purpose financial statements. SFAS 130 requires the disclosure
of an amount that represents total comprehensive income and the
components of comprehensive income in a financial statement. The
adoption of SFAS 130 is not expected to have a material impact on
the financial statements of the Company.
4. SFAS 131: In June 1997, SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information" was issued and is
effective for financial statements for periods beginning after
December 15, 1997. SFAS 131 establishes standards for
determining an entry's operating segments and the type and level
of financial information to be disclosed in both annual and
interim financial statements. It also establishes standards for
related disclosures about products and services, geographic
areas, and major customers. The adoption of SFAS 131 in not
expected to have a material impact on the financial statements of
the Company.
6<PAGE>
5. 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.
The Company will adopt Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings Per Share" on December 31,
1997. SFAS No. 128 requires the Company to change its method for
computing, presenting and disclosing earnings per share
information. Upon adoption, all prior period data presented will
be restated to conform to the provisions of SFAS No. 128.
If the Company had adopted SFAS No. 128 for the period ended
June 30, 1997, the following computation would have been
presented on the consolidated statements of income:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
1997 1996 1997 1996
------------------ ----------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Basic income per common share:
Net Income $ 543,179 $ 298,107 $ 1,126,599 $ 557,963
Weighted average common shares
outstanding 1,487,311 1,491,698 1,485,338 1,491,698
Basic income per common share $ 0.37 $ 0.20 $0.76 $0.37
Dilutive income per common share:
Net Income $ 543,179 $ 298,107 $ 1,126,599 $ 557,963
Weighted average common shares
outstanding 1,487,311 1,491,698 1,485,338 1,491,698
Dilutive effect of stock options 101,573 95,884 100,942 96,621
---------- ---------- ----------- ----------
Total shares 1,588,884 1,587,582 1,586,280 1,588,319
Dilutive income per common share $ 0.34 $ 0.19 $ 0.71 $ 0.35
</TABLE>
7
<PAGE>
<PAGE>
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 chartered under the laws of the state of
North Carolina to engage in general banking business. The Bank
offers a wide range of retail banking services including deposit
services, banking cards and alternative investment products.
These funds are used for the extension of credit through mortgage
loans, savings account loans and other installment credit such as
home equity, auto and boat loans and check reserve.
The Company conducts its operations through its main office
in Wilmington, North Carolina and 16 offices throughout eastern
North Carolina. The Company considers its primary market for
savings and lending activities to be the communities of eastern
North Carolina extending from the Virginia to the South Carolina
borders.
The following management's discussion and analysis is
presented to assist in understanding the Company's financial
condition and results of operations. This discussion should be
read in conjunction with the consolidated financial statements
and accompanying notes presented in this report.
MANAGEMENT STRATEGY
It is the mission of the Company to provide the maximum in
safety and security for our depositors, an equitable rate of
return for our stockholders, excellent service for our customers,
and to do so while operating in a fiscally sound and conservative
manner, with fair pricing of our products and services, good
working conditions, outstanding training and opportunities for
our staff, along with a high level of corporate citizenship.
Cooperative Bank's lending activities are concentrated on
the origination of conventional mortgage loans for the purpose of
constructing, financing or refinancing one- to four-family
residential properties. As of June 30, 1997, $261.9 million, or
92.4%, of the Bank's loan portfolio consisted of loans secured by
one- to four family residential properties. Also at that date,
approximately 95.3% of the Bank's total loan portfolio consisted
of loans secured by residential real estate. To a lesser extent,
the Bank originates multi-family, nonresidential real estate
loans, home equity line of credit loans, secured and unsecured
consumer and business loans. While continuing to place primary
emphasis on residential mortgage loans, the Bank is taking a more
aggressive position in pursuing business lending, and
nonresidential real estate lending involving loans secured by
small commercial properties with balances generally ranging from
$100,000 to $500,000. The Bank's primary emphasis is to
originate adjustable rate loans with the fixed rate loan as an
option. Adjustable rate loans at June 30, 1997, were 68.4%, and
fixed rate loans were 31.6% of the Bank's total loan portfolio.
INTEREST RATE SENSITIVITY ANALYSIS
Interest rate sensitivity refers to the change in interest
spread resulting from changes in interest rates. To the extent
that interest income and interest expense do not respond equally
to changes in interest rates, or
8
<PAGE>
<PAGE>
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, 1997,
Cooperative had a one-year negative gap position of 3.1%.
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 increase in net interest income while a
positive gap would tend to adversely affect net interest income.
It is important to note that certain shortcomings are inherent in
static gap analysis. Although certain assets and liabilities may
have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. For
example, 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. The one-year or less
interest-bearing liabilities also include checking, savings, and
money market deposit accounts. Experience has shown that the
Company sees relatively modest repricing of these transaction
accounts. Management takes this into consideration in
determining acceptable levels of interest rate risk.
LIQUIDITY
The Company's goal is to maintain adequate liquidity to meet
potential funding needs of loan and deposit customers, pay
operating expenses, and meet regulatory liquidity requirements.
Maturing securities, principal repayments of loans and
securities, deposits, income from operations and borrowings are
the main sources of liquidity. Scheduled loan repayments are a
relatively predictable source of funds, unlike deposits and loan
prepayments that are significantly influenced by general interest
rates, economic conditions and competition.
At June 30, 1997, the estimated market value of liquid
assets (cash, cash equivalents, and marketable securities) was
approximately $61.7 million, which represents 19.1% of deposits
and borrowed funds as compared to $68.4 million or 21.8% of
deposits and borrowed funds at December 31, 1996. The decrease
in liquid assets during the six months ended June 30, 1997, was
primarily due to the funding of new mortgage loans.
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, 1997, the Company's investment in CMOs
totaled $15 million, or 26.9% of the securities portfolio. Of
the $15 million, a $10 million CMO is 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
9
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<PAGE>
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 annually on February 4 and
August 4. The indexing formula states that the interest rate per
annum will be equal to a rate determined by the 10-Year CMT less
the 6 month LIBOR plus a margin of 2.9% for August 4, 1995,
increasing 30 basis points annually to 5.0% for August 4, 2005.
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, 1997, outstanding off-
balance sheet commitments to extend credit totaled $10.8 million,
and the undisbursed portion of construction loans was $12.7
million. Management considers current liquidity levels adequate
to meet the Company's cash flow requirements.
CAPITAL
Stockholders' equity at June 30, 1997, was $26.9 million, up
5.5% from $25.5 million at December 31, 1996. The total at June
30, 1997, and December 31, 1996, includes $284 thousand and $372
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, 1997,
the Bank's ratio of Tier I capital was 7.7%. 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, 1997, the Bank had a ratio of qualifying total capital to
risk-weighted assets of 14.5%.
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.
10
<PAGE>
<PAGE>
FINANCIAL CONDITION AT JUNE 30, 1997 COMPARED TO DECEMBER 31,
1996
The Company's total assets increased 3.3% to $352.4 million
at June 30, 1997, as compared to $341.3 million at December 31,
1996. The major change in the assets was a $17.9 million (6.8%)
increase in loans receivable. 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 June 30, 1997, over92% of the
Company's loan portfolio consisted of loans secured by
one- to four-family residential properties.
The $4.8 million (1.7%) increase in retail deposits with an
addition of $5 million in borrowed funds from the Federal Home
Loan Bank ("FHLB") was used in part to fund the increase in loans
receivable. Borrowed funds, collateralized through an agreement
with the FHLB for advances, are secured by the Company's
investment in FHLB stock and qualifying first mortgage loans.
Borrowed funds at June 30, 1997, have remaining maturities from
1 to 5 years.
The Company's non-performing assets (loans 90 days or more
delinquent and foreclosed real estate) were $1.6 million, or
0.46% of assets, at June 30, 1997, compared to $1.5 million, or
0.44% of assets, at December 31, 1996. An increase in delinquent
single family loans caused non-performing assets to be higher for
the period ended June 30, 1997, as compared to December 31, 1996.
The Company takes an aggressive position in collecting delinquent
loans to keep non-performing 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 $815 thousand at June 30, 1997,
is adequate to cover potential losses.
COMPARISON OF OPERATION RESULTS
OVERVIEW
The net income of the Company depends primarily upon net
interest income. Net interest income is the difference between
the interest earned on 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
Net income for the three and six month periods ended June
30, 1997, increased 82% to $543.2 thousand and 102% to $1.1
million respectively, as compared to the same periods last year.
Several factors contributed to the increase in net income.
Interest earning assets grew 12% and the net interest margin
increased to 3.01% for the six month period ended June 30, 1997,
as compared to 2.90% for the same period last year. In addition
to the above, noninterest expense decreased due to a reduction in
the Federal insurance premium and the elimination of goodwill
amortization. The impaired goodwill was charged-off during
September 1996 eliminating a $73 thousand quarterly charge to
income. Charges in September 1996, by the Federal Deposit
Insurance Corporation Fund ("FDIC"), to capitalize the Savings
Association Assurance Fund ("SAIF"), resulted in an approximate
decrease of 62% in the quarterly Federal insurance premium.
11
<PAGE>
<PAGE>
Interest Income
Interest income increased 14.8% for the six month period
ended June 30, 1997, as compared to the same period a year ago.
The increase in interest income can be principally attributed to
an increase in yield and the average balance of interest-earning
assets as compared to the same period last year. The yield on
average interest-earning assets increased to 7.52% as compared to
7.33% for the same period a year ago, and the average balance
increased by 12%.
For the three month period ended June 30, 1997, interest
income increased 16.3% as compared to the same period a year ago.
The increase in interest income can be principally attributed to
an increase in yield and the average balance of interest-earning
assets as compared to the same period last year. The yield on
average interest-earning assets increased to 7.59% as compared to
7.37% for the same period a year ago, and the average balance
increased by 13%.
INTEREST EXPENSE
Interest expense increased 13.7% for the six month period
ended June 30, 1997, as compared to the same period a year ago.
The 12.8% increase in average interest-bearing liabilities was
the major factor in causing interest expense to increase. In
addition, the 277% increase in borrowed funds, used to fund the
major part of the 12% increase in interest bearing assets carries
a higher cost than retail deposits. This higher cost of borrowed
funds at 6.41% as compared to 4.60% cost of retail deposits
adversely affects the overall cost of interest-bearing
liabilities. The cost of interest-bearing liabilities decreased
4 basis points to 4.82% as compared to 4.78% for the same period
last year.
For the three month period ended June 30, 1997, interest
expense increased 17.9% as compared to the same period a year
ago. The 14.1% increase in average interest-bearing liabilities
was the major factor in causing interest expense to increase. In
addition, the 298% increase in borrowed funds, used to fund the
major part of the 13% increase in interest bearing assets carries
a higher cost than retail deposits. This higher cost of borrowed
funds at 6.46% as compared to 4.67% cost of retail deposits
adversely affects the overall cost of interest-bearing
liabilities. The cost of interest-bearing liabilities decreased
16 basis points to 4.89% as compared to 4.73% for the same period
last year.
NET INTEREST INCOME
Net interest income for the six and three month periods
ended June 30, 1997, as compared to the same period a year ago,
increased 16.4% and 14% 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 3% at June 30,
1997, as compared to 9% for the same period last year. During
the six and three month periods ended June 30, 1997, the yield on
average interest-earning assets increased 19 basis points and 22
basis points respectively. For the same periods, the cost of
average interest-bearing liabilities decreased 4 basis points and
16 basis points respectively.
12
<PAGE>
<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, 1997 June 30, 1996
-------------------------- -------------------------
(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 $ 33,428 $ 483 5.78% $ 31,123 $ 427 5.49%
Mortgage-backed and related
securities 29,017 509 7.02% 30,685 514 6.70%
Loan portfolio 278,872 5,483 7.86% 240,224 4,624 7.70%
Total interest-earning -------- ------ -------- ------
assets 341,317 $6,475 7.59% 302,032 $5,565 7.37%
------ ------
Non-interest earning assets 10,190 12,710
-------- --------
Total assets $351,507 $314,742
======== ========
Interest-bearing liabilities:
Deposits 278,419 3,248 4.67% 269,177 3,142 4.67%
Borrowed funds 40,228 650 6.46% 10,095 163 6.46%
Total interest-bearing -------- ------ -------- ------
liabilities 318,647 $3,898 4.89% 279,272 3,305 4.73%
------ ------
Non-interest bearing
liabilities 6,320 5,948
-------- --------
Total liabilities 324,967 285,220
Stockholders' equity 26,540 29,522
Total liabilities and -------- --------
stockholders' equity $351,507 $314,742
======== ========
Net interest income $2,577 $2,260
====== ======
Interest rate spread 2.70% 2.64%
==== ====
Net yield on interest-
earning assets 3.02% 2.99%
==== ====
Percentage of average interest-
earning assets to average
interest-bearing
liabilities 107.1% 108.1%
===== =====
</TABLE>
13
<PAGE>
<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 month ended
June 30, 1997 June 30, 1996
-------------------------- -------------------------
(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 $ 34,280 $ 985 5.75% $ 31,934 $ 871 5.46%
Mortgage-backed and related
securities 29,150 1,007 6.91% 30,936 1,042 6.74%
Loan portfolio 273,619 10,677 7.80% 238,176 9,125 7.66%
Total interest-earning -------- ------- -------- -------
assets 337,049 $12,669 7.52% 301,046 $11,038 7.33%
------ ------
Non-interest earning assets 10,157 12,927
-------- --------
Total assets $347,206 $313,973
======== ========
Interest-bearing liabilities:
Deposits 276,634 6,367 4.60% 268,907 6,344 4.72%
Borrowed funds 38,092 1,221 6.41% 10,092 327 6.48%
Total interest-bearing -------- ------ -------- ------
liabilities 314,726 $7,588 4.82% 278,999 6,671 4.78%
------ ------
Non-interest bearing
liabilities 6,199 5,614
-------- --------
Total liabilities 320,925 284,613
Stockholders' equity 26,281 29,360
Total liabilities and -------- --------
stockholders' equity $347,206 $313,973
======== ========
Net interest income $5,081 $4,367
====== ======
Interest rate spread 2.70% 2.55%
==== ====
Net yield on interest-
earning assets 3.01% 2.90%
==== ====
Percentage of average interest-
earning assets to average
interest-bearing
liabilities 107.1% 107.9%
===== =====
</TABLE>
14
<PAGE>
<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, 1997 vs. June 30, 1997
Increase (Decrease)
Due to
--------------------------------------
(Dollars in thousand) Volume Rate Rate/Volume Total
--------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Securities and other
interest-earning assets $ 64 $ 47 $ 3 $ 114
Mortgage-backed and related
securities (60) 27 (2) (35)
Loan portfolio 1,358 169 25 1,552
------ ----- ----- ------
Total interest-earning assets 1,362 243 26 1,631
------ ----- ----- ------
Interest expense:
Deposits 182 (155) (4) 23
Borrowed funds 907 (4) (10) 893
------ ----- ----- ------
Total interest-bearing
liabilities 1,089 (159) (14) 916
------ ----- ----- ------
Net interest income $ 273 $ 402 $ 40 $ 715
====== ===== ===== ======
</TABLE>
15<PAGE>
<PAGE>
Reserve for Loan Losses
At June 30, 1997, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS 114
totaled $320 thousand with a valuation allowance of $8 thousand.
The Bank uses several factors in determining if a loan is
impaired. The internal asset classification procedures include a
review of significant loans and lending relationships and
includes the accumulation of related data. This data includes
loan payment status, borrowers' financial data and borrowers'
operating factors such as cash flows and operating income or
loss.
During the six month period ended June 30, 1997, the Bank
had a charge to the allowance for loan losses of $52 thousand
for loans on single family residential property. The Bank added
$60 thousand to the provision for loan losses for the six month
period June 30, 1996, bringing the balance to $815 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.
NONINTEREST INCOME
During the three month period ended June 30, 1997, the Bank
sold $4.1 million in fixed rate mortgage loans at a gain of $12
thousand. The proceeds from the sale were used to fund new
loans. The balance in real estate owned expense for both
periods ended June 30, 1997 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 other income includes service fees on loans and fee income
from the deposit operations. Loan fees for the six month period
ended June 30, 1997, as compared to last year decreased due to a
decrease in servicing fees on sold loans. Scheduled payments and
prepayments decreased sold loans. Fee income from deposit
operations increased for the three month period ended June 30,
1997, due to a more aggressive position in offering checking
accounts.
NONINTEREST EXPENSES
For the six month period ended June 30, 1997, noninterest
expense decreased by 4% as compared to the same period last year.
The changes in noninterest expense are listed as follows.
Compensation and related cost increased 6.9%. This 6.9% can be
broken down as follows: 4.9% for new employees and normal cost
of living increases for existing employees, and 2.0% for a
payment to a retiring Bank Board Of Director member. Occupancy
and equipment expense increased 19.9%. This increase can be
attributed to additional maintenance necessary to keep the
buildings in good repair. The decrease in Federal insurance
premium can be attributed to the enacted legislation in September
1996 that resulted in a reduction in the premium. Advertising
increased 14.9% due to a more aggressive advertising campaign.
The impaired goodwill was charged-off during September 1996
eliminating a $73 thousand quarterly charge to noninterest
expense. A reduction in professional services (consultant fees,
attorney fees and accounting fees) was the major component that
reduced other operating expense by 9.1%.
INCOME TAXES
The effective tax rates for the six month periods ended June
30, 1997 and 1996 approximate the statutory rate after giving
effect to nontaxable interest, amortization of goodwill, other
permanent tax differences, and adjustments to certain deferred
tax liabilities.
16<PAGE>
<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
The information required by this item was disclosed in Item
4 of the Form 10-Q for the quarter ended March 31, 1997.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11. Computation of Earnings Per Share
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
ended June 30, 1997.
17
<PAGE>
<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 11, 1997 /s/ Frederick Willetts, III
-------------------------------------
President and Chief Executive Officer
Dated: August 11, 1997 /s/ Edward E. Maready
-------------------------------------
Treasurer and Chief Financial Officer
18
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------- ----------------
1997 1996 1997 1996
------------------ ----------------
<S> <C> <C> <C> <C>
NET INCOME $ 583,421 $ 298,107 $1,126,599 $ 557,963
========== ========== ========== ==========
PRIMARY
Average shares outstanding 1,487,311 1,491,698 1,485,338 1,491,698
Net effect of dilutive stock
options -- based on the
treasury stock method using
average market price 101,573 95,884 100,942 96,621
---------- ---------- ---------- ----------
TOTAL 1,588,884 1,587,582 1,586,280 1,588,319
========== ========== ========== ==========
PER SHARE AMOUNT $0.34 $0.19 $0.71 $0.35
========== ========== ========== ==========
FULLY DILUTED
Average shares outstanding 1,487,311 1,491,698 1,485,338 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%. 102,948 95,884 102,948 96,621
---------- ---------- ---------- ----------
TOTAL 1,590,259 1,587,582 1,588,286 1,588,319
========== ========== ========== ==========
PER SHARE AMOUNT $0.34 $0.19 $0.71 $0.35
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,543,034
<INT-BEARING-DEPOSITS> 1,454,996
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,395,278
<INVESTMENTS-CARRYING> 21,048,787
<INVESTMENTS-MARKET> 19,688,448
<LOANS> 282,069,422
<ALLOWANCE> 815,539
<TOTAL-ASSETS> 352,438,011
<DEPOSITS> 283,005,220
<SHORT-TERM> 40,143,212
<LIABILITIES-OTHER> 2,388,921
<LONG-TERM> 0
<COMMON> 1,491,698
0
0
<OTHER-SE> 25,408,960
<TOTAL-LIABILITIES-AND-EQUITY> 352,438,011
<INTEREST-LOAN> 10,677,345
<INTEREST-INVEST> 1,992,092
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12,669,437
<INTEREST-DEPOSIT> 6,366,829
<INTEREST-EXPENSE> 7,587,527
<INTEREST-INCOME-NET> 5,081,910
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,476,669
<INCOME-PRETAX> 1,818,229
<INCOME-PRE-EXTRAORDINARY> 1,818,229
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,126,599
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.71
<YIELD-ACTUAL> 3.01
<LOANS-NON> 319,909
<LOANS-PAST> 579,178
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 837,539
<CHARGE-OFFS> 52,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 815,539
<ALLOWANCE-DOMESTIC> 815,539
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
