<PAGE>
<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 September 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.
2,983,396 shares at October 31, 1997
- ------------------------------------<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition,
Sepember 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations for the
three and nine months ended September 30, 1997
and 1996 4
Consolidated Statements of Cash Flows, for
the nine months ended September 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.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30, December 31
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents (including interest-bearing
deposits:
September 1997-$1,340,777; December 1996-$9,084,216) $ 6,006,794 $ 11,507,283
Securities:
Available for sale 5,993,752 5,946,250
Held to maturity (market value September 1997-$20,131,254;
December 1996 - $19,705,700) 21,046,366 21,053,628
Mortgage-backed and related securities available for sale 28,307,746 28,824,918
Other investments 2,688,200 2,435,000
Loans receivable, net 287,800,092 263,312,730
Foreclosed real estate owned 342,183 42,146
Accrued interest receivable 2,138,750 1,917,447
Premises and equipment, net 4,775,661 4,786,292
Prepaid expenses and other assets 435,175 1,474,164
------------ ------------
Total assets $359,534,719 $341,299,858
============ ============
LIABILITIES
Deposits $289,080,716 $278,138,909
Borrowed funds 40,142,115 35,145,362
ESOP note payable 84,824 289,160
Escrow deposits 1,016,673 620,808
Accrued interest payable on deposits 142,959 351,295
Deferred income taxes, net 1,104,058 1,075,883
Accrued expenses and other liabilities 311,298 208,891
------------ ------------
Total liabilities 331,882,643 315,830,308
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value, 3,000,000 shares
authorized, none issued and outstanding - -
Common stock, $1.00 par value, 7,000,000 shares authorized,
2,983,396 and 1,491,698 shares issued and outstanding,
respectively 2,983,396 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 (57,999) (372,265)
Retained earnings 18,796,728 18,636,166
------------ ------------
Total stockholders' equity 27,652,076 25,469,550
------------ ------------
Total liabilities and stockholders' equity $359,534,719 $341,299,858
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3 <PAGE>
<PAGE>
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1997 1996 1997 1996
------ --------- -------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $5,668,139 $4,796,711 $16,345,483 $13,921,737
Mortgage-backed and related
securities 489,269 507,065 1,496,051 1,548,876
Securities 469,405 452,303 1,454,717 1,323,246
---------- ---------- ----------- -----------
Total interest income 6,626,813 5,756,079 19,296,251 16,793,859
---------- ---------- ----------- -----------
INTEREST EXPENSE
Deposits 3,373,143 3,156,209 9,739,972 9,500,562
Borrowed funds 661,122 251,500 1,881,821 578,361
---------- ---------- ----------- -----------
Total interest expense 4,034,265 3,407,709 11,621,793 10,078,923
---------- ---------- ----------- -----------
NET INTEREST INCOME 2,592,548 2,348,370 7,674,458 6,714,936
Provision for loan losses 30,000 79,689 90,000 119,689
---------- ---------- ----------- -----------
Net interest income after
provision for loan losses 2,562,548 2,268,681 7,584,458 6,595,247
---------- ---------- ----------- -----------
Noninterest Income
Net gain on sale of other
investments 0 45,941 0 45,941
Net gain on sale of loans and
mortgage-backed and related
securities 0 0 12,115 0
Net real estate owned income
(expenses) (13,339) (4,261) (12,059) (38,223)
Other income, net 160,131 148,934 419,725 413,573
---------- ---------- ----------- -----------
Total noninterest income 146,792 190,614 419,781 421,291
---------- ---------- ----------- -----------
Noninterest Expenses
Compensation and fringe benefits 1,009,624 892,605 2,987,222 2,741,945
Occupancy and equipment 354,514 313,518 1,075,585 914,786
Federal insurance premiums 43,759 175,556 174,486 525,257
Federal insurance special assessment 0 1,782,810 0 1,782,810
Advertising 129,595 83,846 287,680 221,448
Amortization of goodwill 0 73,018 0 219,052
Charge-off impaired goodwill 0 3,359,791 0 3,359,791
Other operating expense 301,428 225,712 790,616 763,801
---------- ---------- ----------- -----------
Total noninterest expenses 1,838,920 6,906,856 5,315,589 10,528,890
---------- ---------- ----------- -----------
Income (loss) before income taxes 870,420 (4,447,561) 2,688,650 (3,512,352)
Income tax expense (benefit) 344,758 (110,500) 1,036,388 266,746
---------- ---------- ----------- -----------
Net Income (loss) $ 525,662 ($4,337,061) $ 1,652,262 ($3,779,098)
========== ========== =========== ===========
Earnings (loss) per:
Common share ($1.45) ($1.27)
Common and common share equivalent $ 0.16 $ 0.52
Common share - assuming full dilution $ 0.16 $ 0.52
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4<PAGE>
<PAGE>
<PAGE>
COOPERATIVE BANKSHARES, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1997 1996
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $1,652,262 ($3,779,098)
Adjustments to reconcile net income to net
cash provided by operating activities:
Goodwill impairment - 3,359,791
Net accretion, amortization, and depreciation 407,889 609,617
Gain on sale of other investments - (45,941)
Gain on sale of loans and mortgage-backed and
related securities (12,115) -
Provision (benefit) for deferred income taxes (197,642) 168,400
Loss on sale of property, plant and equipment 574 -
Loss on sales of foreclosed real estate 929 12,831
Valuation losses on foreclosed real estate 10,653 12,800
Provision for loan losses 90,000 119,689
Changes in assets and liabilities:
Accrued interest receivable (221,303) (201,725)
Prepaid expenses and other assets 1,023,382 (1,028,890)
Escrow deposits 395,865 743,649
Accrued interest payable on deposits (208,336) (311,351)
Accrued expenses and other liabilities 102,407 1,931,323
------------ ------------
Net cash provided by operating activities 3,044,565 1,591,095
------------ ------------
INVESTING ACTIVITIES:
Proceeds from principal repayments of mortgage-backed
and related securities available for sale 959,523 1,481,764
Purchases of securities (2,000,000) (3,994,062)
Proceeds from sale of securities 2,000,000 -
Loan originations, net of principal repayments (29,202,019) (19,521,943)
Proceeds from sale of foreclosed real estate 290,232 437,524
Proceeds from sales of loans 4,070,113 -
Purchases of property, plant and equipment (357,402) (117,918)
Proceeds from sale of property, plant and equipment 9,139 -
Purchases of other investments (253,200) -
Proceeds from sales of other investments - 404,526
------------ ------------
Net cash provided by (used in) investing
activities (24,483,614) (21,310,109)
------------ ------------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 10,941,807 6,729,273
Net increase (decrease) in borrowings 4,996,753 10,057,398
------------ ------------
Net cash provided by (used in) financing
activities 15,938,560 16,786,671
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,500,489) (2,932,343)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,507,283 11,889,473
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,006,794 $ 8,957,130
============ ============
SUPPLEMENTAL DISCLOSURES:
Transfer from loans to foreclosed real estate $ 843,477 $ 239,729
Loans to facilitate the sale of foreclosed real
estate $ 230,850 $ 0
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
5<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 nine month
period ended September 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.
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 entity'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.
6<PAGE>
<PAGE>
5. Earnings Per Share: On August 25, 1997, the Board of
Directors declared a two for one (2 for 1) stock split in the
form of a 100% stock dividend on the bank's outstanding common
stock. The stock split was payable on September 22, 1997, to
stockholders of record as of September 8, 1997. As a result of
this dividend, the number of outstanding common stock shares
increased to 2,983,396 shares. Earnings per share are
calculated by dividing net income by the weighted average number
of common and dilutive common equivalent shares outstanding
after giving retroactive effect for any stock dividends and
splits. Common equivalent shares consist of stock options
issued and outstanding. In determining the number of equivalent
shares outstanding, the treasury stock method was applied. This
method assumes that the number of shares issuable upon exercise
of the stock options is reduced by the number of common shares
assumed purchased at market prices with the proceeds from the
assumed exercise of the common stock options.
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 September 30, 1997, the following computation would have
been presented on the consolidated statements of income:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------------
1997 1996 1997 1996
------------------ ----------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Basic income per common share:
Net Income (loss) $ 525,662 ($4,337,061) $1,652,262 ($3,779,098)
Weighted average common shares
outstanding 2,974,622 2,983,396 2,971,991 2,983,396
Basic income per common share
(loss) $ 0.18 ($1.45) $0.56 ($1.27)
Dilutive income per common share:
Net Income (loss) $ 525,662 ($4,337,061) $1,652,262 ($3,779,098)
Weighted average common shares
outstanding 2,974,622 2,983,396 2,971,991 2,983,396
Dilutive effect of stock options 219,726 207,855
---------- ---------- ---------- ----------
Total shares 3,194,348 2,983,396 3,179,846 2,983,396
Dilutive income per common share
(loss) $ 0.16 ($1.45) $ 0.52 ($1.27)
</TABLE>
7
<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 September 30, 1997, $267.1
million, or 92.1%, of the Bank's loan portfolio consisted of
loans secured by one- to four family residential properties.
Also at that date, approximately 95.2% 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 $1,000,000. The
Bank's primary emphasis is to originate adjustable rate loans
with the fixed rate loan as an option. Adjustable rate loans at
September 30, 1997, were 67.1%, and fixed rate loans were 32.9%
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.
8
<PAGE>
<PAGE>
To the extent that interest income and interest expense do not
respond equally to changes in interest rates, or that all rates
do not change uniformly, earnings will be affected. Interest
rate sensitivity, at a point in time, can be analyzed using a
static gap analysis that measures the match in balances subject
to repricing between interest-earning assets and interest-
bearing liabilities. Gap is considered positive when the amount
of interest rate sensitive assets exceed the amount of interest
rate sensitive liabilities. Gap is considered negative when the
amount of interest rate sensitive liabilities exceed the amount
of interest rate sensitive assets. At September 30, 1997,
Cooperative had a one-year negative gap position of 7.5%.
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 September 30, 1997, the estimated market value of liquid
assets (cash, cash equivalents, and marketable securities) was
approximately $63.1 million, which represents 19.2% 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 nine months ended September 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 September 30, 1997, the Company's investment in
CMOs totaled $15 million, or 27.1% of the securities portfolio.
Of the $15
9<PAGE>
<PAGE>
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 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 September 30, 1997, outstanding
off-balance sheet commitments to extend credit totaled $15.1
million, and the undisbursed portion of construction loans was
$13.3 million. Management considers current liquidity levels
adequate to meet the Company's cash flow requirements.
CAPITAL
Stockholders' equity at September 30, 1997, was $27.7
million, up 8.6% from $25.5 million at December 31, 1996. The
total at September 30, 1997, and December 31, 1996, includes $58
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 September 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
September 30, 1997, the Bank had a ratio of qualifying total
capital to risk-weighted assets of 14.6%.
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.
10<PAGE>
<PAGE>
FINANCIAL CONDITION AT SEPTEMBER 30, 1997 COMPARED TO DECEMBER
31, 1996
The Company's total assets increased 5.3% to $359.5 million
at September 30, 1997, as compared to $341.3 million at December
31, 1996. The major change in the assets was a $24.5 million
(9.3%) 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
September 30, 1997, over 92% of the Company's loan portfolio
consisted of loans secured by one- to four-family residential
properties.
The $10.9 million (3.9%) 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 September 30, 1997, have remaining
maturities from 11 months to 5 years.
The Company's non-performing assets (loans 90 days or more
delinquent and foreclosed real estate) were $769 thousand, or
0.21% of assets, at September 30, 1997, compared to $1.5
million, or 0.44% of assets, at 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 $841 thousand at September 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 (LOSS)
Net income for the three and nine month periods ended
September 30, 1997, was $525.7 thousand and $1.7 million
respectively, as compared to a loss for the same periods last
year. Several factors contributed to the increase in net
income. Interest earning assets grew 11.7% and the net interest
margin increased to 3.01% for the nine month period ended
September 30, 1997, as compared to 2.94% 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>
The net loss of $4.3 million and $3.8 million for the three
and nine month periods ended September 30, 1996, respectively,
was the direct result of one-time special charges. The effect
of the SAIF assessment was to reduce the Company's net income
for the quarter ended September 30, 1996, by $1.8 million. In
addition to the SAIF assessment, the Company recognized a
charge-off of impaired goodwill of $3.4 million to non-interest
expense during the quarter ended September 30, 1996. Excluding
the one-time special assessment for deposit insurance of $1.8
million and a charge-off of goodwill of $3.4 million, net income
for the three and nine month periods ended September 30, 1996,
would have been $407 thousand and $965 thousand respectively.
INTEREST INCOME
Interest income increased 14.9% for the nine month period
ended September 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
7.57% as compared to 7.36% for the same period a year ago, and
the average balance increased by 11.7%.
For the three month period ended September 30, 1997,
interest income increased 15.1% 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
7.66% as compared to 7.41% for the same period a year ago, and
the average balance increased by 11.3%.
INTEREST EXPENSE
Interest expense increased 15.3% for the nine month period
ended September 30, 1997, as compared to the same period a year
ago. The 12.5% increase in average interest-bearing liabilities
was the major factor in causing interest expense to increase.
In addition, the 225% increase in borrowed funds, used to fund
the major part of the 11.7% increase in interest bearing assets,
carries a higher cost than retail deposits. This higher cost of
borrowed funds at 6.47% as compared to 4.66% cost of retail
deposits, adversely affects the overall cost of interest-bearing
liabilities. The cost of interest-bearing liabilities increased
12 basis points to 4.89% as compared to 4.77% for the same
period last year.
For the three month period ended September 30, 1997,
interest expense increased 18.4% as compared to the same period
a year ago. The 12% increase in average interest-bearing
liabilities was the major factor in causing interest expense to
increase. In addition, the 157% increase in borrowed funds,
used to fund the major part of the 11.3% increase in interest
bearing assets carries a higher cost than retail deposits. This
higher cost of borrowed funds at 6.57% as compared to 4.79% cost
of retail deposits adversely affects the overall cost of
interest-bearing liabilities. The cost of interest-bearing
liabilities increased 27 basis points to 5.01% as compared to
4.74% for the same period last year.
NET INTEREST INCOME
Net interest income for the nine and three month periods
ended September 30, 1997, as compared to the same period a year
ago, increased 12.3% and 10.4% respectively. During the nine
and three month periods ended September 30, 1997, the yield on
average interest-earning assets increased 21 basis points and 25
basis points respectively. For the same periods, the cost of
average interest-bearing liabilities increased 12 basis points
and 27 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
September 30, 1997 September 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 $ 32,550 $ 469 5.76% $ 31,968 $ 452 5.66%
Mortgage-backed and related
securities 28,698 489 6.82% 30,097 507 6.74%
Loan portfolio 284,716 5,668 7.96% 248,767 4,797 7.71%
Total interest-earning -------- ------ -------- ------
assets 345,964 $6,626 7.66% 310,832 $5,756 7.41%
------ ------
Non-interest earning assets 10,792 12,675
-------- --------
Total assets $356,756 $323,507
======== ========
Interest-bearing liabilities:
Deposits 281,928 3,373 4.79% 272,040 3,156 4.64%
Borrowed funds 40,227 661 6.57% 15,631 252 6.45%
Total interest-bearing -------- ------ -------- ------
liabilities 322,155 $4,034 5.01% 287,671 3,408 4.74%
------ ------
Non-interest bearing
liabilities 7,328 6,102
-------- --------
Total liabilities 329,483 293,773
Stockholders' equity 27,273 29,734
Total liabilities and -------- --------
stockholders' equity $356,756 $323,507
======== ========
Net interest income $2,592 $2,348
====== ======
Interest rate spread 2.65% 2.67%
==== ====
Net yield on interest-
earning assets 3.00% 3.02%
==== ====
Percentage of average interest-
earning assets to average
interest-bearing
liabilities 107.4% 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 nine month ended
September 30, 1997 September 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 $ 33,704 $ 1,455 5.76% $ 31,945 $ 1,323 5.52%
Mortgage-backed and related
securities 29,000 1,496 6.88% 30,657 1,549 6.74%
Loan portfolio 277,318 16,345 7.86% 241,706 13,922 7.68%
Total interest-earning -------- ------- -------- -------
assets 340,022 $19,296 7.57% 304,308 $16,794 7.36%
------- -------
Non-interest earning assets 10,368 12,843
-------- --------
Total assets $350,390 $317,151
======== ========
Interest-bearing liabilities:
Deposits 278,399 9,740 4.66% 269,951 9,501 4.69%
Borrowed funds 38,804 1,882 6.47% 11,938 578 6.46%
Total interest-bearing -------- ------- -------- -------
liabilities 317,203 $11,622 4.89% 281,889 $10,079 4.77%
------- -------
Non-interest bearing
liabilities 6,575 5,777
-------- --------
Total liabilities 323,778 287,666
Stockholders' equity 26,612 29,485
Total liabilities and -------- --------
stockholders' equity $350,390 $317,151
======== ========
Net interest income $ 7,674 $ 6,715
======= =======
Interest rate spread 2.68% 2.59%
==== ====
Net yield on interest-
earning assets 3.01% 2.94%
==== ====
Percentage of average interest-
earning assets to average
interest-bearing
liabilities 107.2% 108.0%
===== =====
</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 nine months ended
September 30, 1996 vs. September 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 $ 73 $ 56 $ 3 $ 132
Mortgage-backed and related
securities (84) 33 (2) (53)
Loan portfolio 2,051 324 48 2,423
------ ----- ----- ------
Total interest-earning
assets 2,040 413 49 2,502
------ ----- ----- ------
Interest expense:
Deposits 297 (56) (2) 239
Borrowed funds 1,301 1 2 1,304
------ ----- ----- ------
Total interest-bearing
liabilities 1,598 (55) 0 1,543
------ ----- ----- ------
Net interest income $ 442 $ 468 $ 49 $ 959
====== ===== ===== ======
</TABLE>
15<PAGE>
<PAGE>
RESERVE FOR LOAN LOSSES
During the nine month period ended September 30, 1997, the
Bank had a charge to the allowance for loan losses of $56
thousand. The Bank added $90 thousand to the provision for loan
losses for the nine month period September 30, 1997, bringing
the balance to $841 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 nine month period ended September 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 September 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 nine month
period ended September 30, 1997, as compared to last year
decreased due to a decrease in servicing fees on sold loans.
Fee income from deposit operations increased for the nine month
period ended September 30, 1997, due to a more aggressive
position in offering checking accounts.
NONINTEREST EXPENSES
With the exception of the one time FDIC assessment of $1.8
million and the goodwill charges of $3.6 million, for the nine
month period ended September 30, 1996, noninterest expense
decreased 1.3% for the nine month period ended September 30,
1997, as compared to the same period last year. The changes in
noninterest expense are listed as follows. Compensation and
related cost increased 8.9%. This 8.9% can be broken down as
follows: 7.9% for new employees and normal cost of living
increases for existing employees, and 1.0% for a payment to a
retiring member of the Company's Board Of Directors. Occupancy
and equipment expense increased 17.6%. This increase can be
attributed to additional maintenance necessary to keep the
Bank's buildings and equipment in good repair. The 66.8%
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 29.9% 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. An increase in
professional services (consultant fees, attorney fees and
accounting fees) was the major component that increased other
operating expense by 3.5%.
INCOME TAXES
The effective tax rates for the nine month periods ended
September 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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11. Computation of Earnings Per Share
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
ended September 30, 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: October 10, 1997 /s/ Frederick Willetts, III
-------------------------------------
President and Chief Executive Officer
Dated: October 10, 1997 /s/ Edward E. Maready
-------------------------------------
Treasurer and Chief Financial Officer
18
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------- ---------------------
1997 1996 1997 1996
------------------ ---------------------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 525,662 (4,337,061) 1,652,262 (3,779,098)
========== ========== ========= ==========
PRIMARY
Average shares outstanding 2,974,622 2,983,396 2,971,991 2,983,396
---------- ---------- --------- ----------
Net effect of dilutive stock
options -- based on the
treasury stock method using
average market price 219,726 207,855
---------- ---------- ---------- ----------
TOTAL 3,194,348 2,983,396 3,179,846 2,983,396
========== ========== ========== ==========
PER SHARE AMOUNT $0.16 ($1.45) $0.52 ($1.27)
========== ========== ========== ==========
FULLY DILUTED
Average shares outstanding 2,974,622 2,983,396 2,971,991 2,983,396
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%. 233,564 213,898
---------- ---------- ---------- ---------
TOTAL 3,208,186 2,983,396 3,185,889 2,983,396
========== ========== ========== =========
PER SHARE AMOUNT $0.16 ($1.45) $0.52 ($1.27)
========== ========== ========== =========
</TABLE>
Earnings per share are computed based on the weighted-average
number of common and dilutive common equivalent shares (stock
options) outstanding, after giving retroactive effect for any
stock dividends and splits.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,666,017
<INT-BEARING-DEPOSITS> 1,340,777
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,301,498
<INVESTMENTS-CARRYING> 21,046,366
<INVESTMENTS-MARKET> 20,131,254
<LOANS> 288,641,340
<ALLOWANCE> 841,248
<TOTAL-ASSETS> 359,534,719
<DEPOSITS> 289,080,716
<SHORT-TERM> 40,142,115
<LIABILITIES-OTHER> 2,659,812
<LONG-TERM> 0
<COMMON> 2,983,396
0
0
<OTHER-SE> 24,668,680
<TOTAL-LIABILITIES-AND-EQUITY> 359,534,719
<INTEREST-LOAN> 16,345,483
<INTEREST-INVEST> 2,950,768
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 19,296,251
<INTEREST-DEPOSIT> 9,739,972
<INTEREST-EXPENSE> 11,621,793
<INTEREST-INCOME-NET> 7,674,458
<LOAN-LOSSES> 90,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,315,589
<INCOME-PRETAX> 2,688,650
<INCOME-PRE-EXTRAORDINARY> 2,688,650
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,652,262
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
<YIELD-ACTUAL> 3.00
<LOANS-NON> 0
<LOANS-PAST> 426,550
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 807,539
<CHARGE-OFFS> 56,291
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 841,248
<ALLOWANCE-DOMESTIC> 841,248
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
