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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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
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COOPERATIVE BANKSHARES, INC.
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(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, Wilmington, 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.
3,035,684 shares at July 24, 1998
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TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition,
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations, for the
three and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows, for the
six months ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-15
Part II Other Information 16
Signatures 17
Exhibit 11 - Statement Regarding Computation of
Earnings Per Share 18
Exhibit 27 - Financial Data Schedule 19-20
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PART 1-FINANCIAL INFORMATION-ITEM 1-FINANCIAL STATEMENTS
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (including interest-bearing
deposits:
June 1998-$9,506,709; December 1997-$12,311,582) $ 11,709,353 $ 17,207,777
Securities:
Available for sale 21,016,572 21,004,067
Held to maturity (market value: June 1998-$20,558,444;
December 1997-$20,348,130) 21,039,105 21,043,946
Mortgage-backed and related securities available for sale 11,754,838 12,856,337
Other investments 2,828,000 2,688,200
Loans receivable, net 303,977,678 286,691,769
Foreclosed real estate owned -- 251,141
Accrued interest receivable 2,401,634 2,172,335
Premises and equipment, net 6,013,669 4,872,202
Prepaid expenses and other assets 313,423 333,316
------------ ------------
Total assets $381,054,272 $369,121,090
============ ============
LIABILITIES
Deposits $298,695,936 $288,690,634
Borrowed funds 50,111,296 50,141,002
ESOP note payable -- 84,824
Escrow deposits 885,061 427,983
Accrued interest payable on deposits 112,373 126,155
Deferred income taxes, net 844,606 1,051,800
Accrued expenses and other liabilities 129,165 305,123
------------ ------------
Total liabilities 350,778,437 340,827,521
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STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, 3,000,000 shares
authorized, none issued and outstanding -- -
Common stock, $1.00 par value, 7,000,000 shares authorized,
3,027,440 and 2,984,396 shares issued and outstanding 3,027,440 2,984,396
Additional paid-in capital 6,541,310 6,022,454
Unearned ESOP shares -- (84,824)
Accumulated other comprehensive income 44,899 (6,663)
Retained earnings 20,662,186 19,378,206
------------ ------------
Total stockholders' equity 30,275,835 28,293,569
------------ ------------
Total liabilities and stockholders' equity $381,054,272 $369,121,090
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3 <PAGE>
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COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable $ 6,088,450 $ 5,483,242 $ 11,869,080 $ 10,677,345
Mortgage-backed and related
securities 187,791 508,792 391,712 1,006,781
Securities 831,940 482,553 1,726,030 985,311
----------- ----------- ----------- -----------
Total interest income 7,108,181 6,474,587 13,986,822 12,669,437
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 3,485,744 3,247,958 6,871,617 6,366,829
Borrowed funds 809,477 650,357 1,610,185 1,220,698
----------- ----------- ----------- -----------
Total interest expense 4,295,221 3,898,315 8,481,802 7,587,527
----------- ----------- ----------- -----------
NET INTEREST INCOME 2,812,960 2,576,272 5,505,020 5,081,910
Provision for loan losses 60,000 30,000 190,000 60,000
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 2,752,960 2,546,272 5,315,020 5,021,910
----------- ----------- ----------- -----------
NONINTEREST INCOME
Net gains on sale of loans
and mortgage-backed and
related securities 1,790 12,115 261,964 12,115
Real estate owned income
(expenses), net (2,808) 1,880 (79,186) 1,280
Loan fees 77,255 67,454 156,746 133,223
Deposit and related fees 103,948 66,150 185,914 134,669
Other income (expense), net (1,004) (7,794) (400) (8,299)
----------- ----------- ----------- -----------
Total noninterest income 179,181 139,805 525,038 272,988
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES
Compensation and fringe
benefits 1,078,430 988,306 2,130,293 1,977,598
Occupancy and equipment 369,699 383,476 731,955 721,071
Federal insurance premiums 44,416 65,484 89,388 130,727
Advertising 94,840 90,097 186,688 158,085
Other 280,973 266,075 679,271 489,188
----------- ----------- ----------- -----------
Total other operating expenses 1,868,358 1,793,438 3,817,595 3,476,669
----------- ----------- ----------- -----------
Income before income taxes 1,063,783 892,639 2,022,463 1,818,229
Income tax expense 394,983 349,460 738,482 691,630
----------- ----------- ----------- -----------
NET INCOME $ 668,800 $ 543,179 $ 1,283,981 $ 1,126,599
----------- ----------- ----------- -----------
EARNINGS PER:
Common share $ 0.22 $ 0.18 $ 0.43 $ 0.38
Common share -
assuming dilution $ 0.21 $ 0.17 $ 0.40 $ 0.36
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4<PAGE>
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COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,283,981 $ 1,126,599
Adjustments to reconcile net income to net
cash provided by operating activities:
Net accretion, amortization, and depreciation 298,723 284,374
Net gain on sale of loans and mortgage-backed and
related securities (261,964) --
Provision (benefit) for deferred income taxes (240,700) (112,200)
Release of ESOP shares 120,642 --
Loss (gain) on sale of premises and equipment 1,587 (302)
Loss (gain) on sales of foreclosed real estate 2,498 (2,311)
Valuation losses on foreclosed real estate 62,300 --
Provision for loan losses 190,000 60,000
Changes in assets and liabilities:
Accrued interest receivable (229,299) (145,798)
Prepaid expenses and other assets 12,055 869,446
Accrued interest payable on deposits (13,782) (173,533)
Accrued expenses and other liabilities 41,153 (20,978)
------------ ------------
Net cash provided by operating activities 1,267,194 1,885,297
------------ ------------
INVESTING ACTIVITIES:
Purchases of securities available for sale (10,000,000) --
Proceeds from maturity of securities available
for sale 10,000,000 --
Proceeds from principal repayments of mortgage-
backed and related securities available for sale 1,133,410 499,025
Proceeds from sales of loans 13,941,895 4,070,113
Loan originations, net of principal repayments (31,216,165) (22,851,077)
Proceeds from disposals of foreclosed real estate 292,147 107,968
Purchases of premises and equipment (1,389,718) (230,793)
Proceeds from sale of premises and equipment 710 9,139
Net purchases of other investments (208,556) (253,200)
------------ ------------
Net cash used in investing activities (17,446,277) (18,648,825)
------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits 10,005,302 4,866,311
Proceeds from FHLB advances -- 5,000,000
Principal payments on FHLB advances (1,128) (2,150)
Proceeds from issuance of common stock 219,407 --
Net change in escrow deposits 457,078 290,114
------------ ------------
Net cash provided by financing activities 10,680,659 10,154,275
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (5,498,424) (6,609,253)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 17,207,777 11,507,283
------------ ------------
END OF PERIOD $ 11,709,353 $ 4,898,030
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5<PAGE>
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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,
1997. The results of operations for the six month period ended
June 30, 1998 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: On August 25, 1997 the Company declared
a 100% stock split effected in the form of a stock dividend.
This split increased the number of common shares outstanding to
2,983,396. All prior period share and per share data have been
adjusted for the split. The Company adopted SFAS No. 128
"Earnings Per Share" on December 31, 1997. As required, all
prior period earnings per share have been restated to conform
with the provisions of the statement. Earnings per share are
calculated by dividing net income by both the weighted average
number of common shares outstanding and the 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 the proceeds from the assumed exercise of the common stock
options plus any tax benefits received as a result of the
assumed exercise.
4. Comprehensive Income: Comprehensive income includes net
income and all other changes to the Company's equity, with the
exception of transactions with shareholders ("other
comprehensive income"). The Company's only components of other
comprehensive income relate to unrealized gains and losses on
available for sale securities.
The Company's total comprehensive income for the six-month
periods ended June 30, 1998 and 1997 was $1,335,543 and
$1,215,109, respectively. Information concerning the Company's
other comprehensive income for the six-month periods ended June
30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Unrealized gains/(losses) on available
for sale securities $ 85,068 $152,327
Income tax (expense)/benefit relating to
unrealized gains on available for sale
securities (33,506) (63,817)
-------- --------
Other comprehensive income $ 51,562 $ 88,510
======== ========
</TABLE>
5. Statement of Financial Accounting Standards No. 133: On
June 15, 1998 the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities(FAS
133). FAS 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999 (January 1, 2000 for
the Company). FAS 133 requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes
in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction.
Management of the Company anticipates that, due to its limited
use of derivative instruments, the adoption of FAS 133 will not
have a significant effect on the Company's results of operations
or its financial position.
6<PAGE>
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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 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 home loans, commercial loans, consumer 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, 1998, $260.5 million, or
85.1% of the Bank's loan portfolio consisted of loans secured by
one-to-four family residential properties. Also at that date,
approximately 90.1% 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. As of June 30, 1998, adjustable rate
loans totaled 67.3%, and fixed rate loans totaled 32.7% 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
7<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 exceeds the
amount of interest rate sensitive liabilities. Gap is considered
negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. At June
30, 1998, Cooperative had a one-year negative gap position of
17.7%. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest
income. During a period of falling interest rates, a negative
gap would tend to result in an increase in net interest income
while a positive gap would tend to adversely affect net interest
income. It is 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, 1998, the estimated market value of liquid
assets (cash, cash equivalents, and marketable securities) was
approximately $67.9 million, which represents 19.4% of deposits
and borrowed funds as compared to $74.1 million or 21.9% of
deposits and borrowed funds at December 31, 1997. The decrease
in liquid assets during the six months ended June 30, 1998, 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 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, 2002.
8<PAGE>
<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, 1998, outstanding
off-balance sheet commitments to extend credit totaled $14.8
million, and the undisbursed portion of construction loans was
$16.7 million. Management considers current liquidity levels
adequate to meet the Company's cash flow requirements.
CAPITAL
Stockholders' equity at June 30, 1998, was $30.3 million,
up 7.1% from $28.3 million at December 31, 1997. 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, 1998, the Bank's ratio of
Tier I capital was 7.9%. 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 I capital plus the
balance of allowance for loan losses. At June 30, 1998, 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.
OTHER INFORMATION
The Year 2000 Issue is the result of computer programs
being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that
have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar
normal business activities.
Based on a recent assessment, the Company has developed a
plan to address the year 2000 issue. The Company presently
believes that the majority of the existing software in use is in
compliance with the year 2000 issue and plans are in progress to
bring the remaining software in compliance at what we believe
will be a minimal cost to the Company. Although the precise
cost to bring the Company's software in compliance cannot be
determined at this time, it is not expected to be material.
However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems,
would not have material adverse effect on the Company.
<PAGE>
FINANCIAL CONDITION AT JUNE 30, 1998 COMPARED TO DECEMBER 31,
1997
The Company's total assets increased 3.2% to $381.1 million
at June 30, 1998, as compared to $369.1 million at December 31,
1997. Two major changes in the assets were a decrease of $5.5
million (32%) in cash and a $17.3 million (6%) increase in loans
receivable. Retail deposits and available liquid assets funded
the increase in loans during the current period. Due to a high
loan demand, the Bank sold $14
9<PAGE>
<PAGE>
million in fixed rate loans during the period ended June 30,
1998 and used the funds to reinvest in new loans. Although 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, it is becoming more active in the
origination of small loans secured by commercial properties. At
June 30, 1998, approximately 9.9% of the Company's loan
portfolio were loans other than residential properties. In
addition to the above, premises and equipment increased 23.4%.
The increase is due to two major projects. The Bank is
upgrading the teller work stations and data communications at a
cost of $1.5 million of which $884 thousand has been disbursed
with an estimated completion date during the third quarter of
1998. The Bank is also in the process of constructing a
replacement office in Elizabethtown, North Carolina, to be
completed during the third quarter of 1998, at a cost of $900
thousand with current disbursements of $558 thousand.
With a $10 million (3.5%) increase in retail deposits the
Bank had adequate funds to meet its loan demand without
additional borrowings from the Federal Home Loan Bank ("FHLB").
Borrowed funds, collateralized through an agreement with the
FHLB for advances, are secured by the Bank's investment in FHLB
stock and qualifying first mortgage loans. At June 30, 1998,
$10.0 million in borrowed funds mature in 1 year and the
remaining amount of funds mature in 2 to 5 years.
The Company's non-performing assets (loans 90 days or more
delinquent and foreclosed real estate) were $317 thousand, or
0.08% of assets, at June 30, 1998, compared to $761 thousand, or
0.21% of assets, at December 31, 1997. The Company assumes an
aggressive position in collecting delinquent loans to minimize
balances of non-performing assets 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 $1.5 million at June 30, 1998 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, 1998, increased 23% to $668,800 and 14% to $1.3 million
respectively, as compared to the same periods last year.
Contributing factors for the increase in net income was an 8%
increase in interest-earning assets and an increase in the net
interest margin to 3.02% for the six month period ended June 30,
1998, as compared to 3.01% for the same period last year. Also,
noninterest income increased 92% for the six month period ended
June 30, 1998, as compared to the same period last year due to
the sale of fixed rate long term loans at a gain of $262
thousand.
<PAGE>
INTEREST INCOME
For the three month period ended June 30, 1998, interest
income increased 9.8% 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
10<PAGE>
<PAGE>
average interest-earning assets increased to 7.71% as compared
to 7.59% for the same period a year ago, and the average balance
increased by 8%.
Interest income increased 10.4% for the six month period
ended June 30, 1998, 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 7.68% as compared
to 7.52% for the same period a year ago, and the average balance
increased by 8%.
INTEREST EXPENSE
For the three month period ended June 30, 1998, interest
expense increased 10.2% as compared to the same period a year
ago. The 6.4% increase in the average balance of
interest-bearing liabilities and their subsequent increase in
cost of funds principally contributed to the increase in
interest expense during this period. The cost of
interest-bearing liabilities increased 18 basis points to 5.07%
as compared to 4.89% for the same period last year.
Interest expense increased 11.8% for the six month period
ended June 30, 1998, as compared to the same period a year ago.
The 7.5% increase in the average balance of interest-bearing
liabilities and their subsequent increase in cost of funds
principally contributed to the increase in interest expense.
The cost of interest-bearing liabilities increased 20 basis
points to 5.02% as compared to 4.82% for the same period last
year.
NET INTEREST INCOME
Net interest income for the three and six month periods
ended June 30, 1998, as compared to the same period a year ago,
increased 8.3% and 9.2% respectively. During these same periods
ended June 30, 1998, the yield on average interest-earning
assets increased 12 basis points and 16 basis points
respectively. For the same periods, the cost of average
interest-bearing liabilities increased 18 basis points and 20
basis points respectively. The 8% increase in the average
balance of interest-earning assets was the major factor for the
increase in net interest income.
11<PAGE>
<PAGE>
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the
Company's average balance sheet and reflects the annualized
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, 1998 June 30, 1997
-------------------------- -------------------------
(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 $ 60,602 $ 832 5.49% $ 33,428 $ 483 5.78%
Mortgage-backed and related
securities 12,106 188 6.21% 29,017 509 7.02%
Loan portfolio 295,833 6,088 8.23% 278,872 5,483 7.86%
Total interest-earning -------- ------ -------- ------
assets 368,541 $7,108 7.71% 341,317 $6,475 7.59%
------ ------
Non-interest earning assets 12,300 10,190
-------- --------
Total assets $380,841 $351,507
======== ========
Interest-bearing liabilities:
Deposits 288,981 3,486 4.83% 278,419 3,248 4.67%
Borrowed funds 50,137 809 6.45% 40,228 650 6.46%
Total interest-bearing -------- ------ -------- ------
liabilities 339,118 $4,295 5.07% 318,647 3,898 4.89%
------ ------
Non-interest bearing
liabilities 11,836 6,320
-------- --------
Total liabilities 350,954 324,967
Stockholders' equity 29,887 26,540
Total liabilities and -------- --------
stockholders' equity $380,841 $351,507
======== ========
Net interest income $2,813 $2,577
====== ======
Interest rate spread 2.64% 2.70%
==== ====
Net yield on interest-
earning assets 3.05% 3.02%
==== ====
Percentage of average
interest-earning assets to
average interest-bearing
liabilities 108.7% 107.1%
===== =====
</TABLE>
12<PAGE>
<PAGE>
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the
Company's average balance sheet and reflects the annualized
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, 1998 June 30, 1997
-------------------------- --------------------------
(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 $ 61,862 $ 1,726 5.58% $ 34,280 $ 985 5.75%
Mortgage-backed and related
securities 12,400 392 6.32% 29,150 1,007 6.91%
Loan portfolio 289,932 11,869 8.19% 273,619 10,677 7.80%
Total interest-earning -------- ------- -------- -------
assets 364,194 $13,987 7.68% 337,049 $12,669 7.52%
------- -------
Non-interest earning assets 12,884 10,157
-------- --------
Total assets $377,078 $347,206
======== ========
Interest-bearing liabilities:
Deposits 288,037 6,872 4.77% 276,634 6,367 4.60%
Borrowed funds 50,139 1,610 6.42% 38,092 1,221 6.41%
Total interest-bearing -------- ------- -------- -------
liabilities 338,176 $ 8,482 5.02% 314,726 7,588 4.82%
------- -------
Non-interest bearing
liabilities 9,484 6,199
-------- --------
Total liabilities 347,660 320,925
Stockholders' equity 29,418 26,281
Total liabilities and -------- --------
stockholders' equity $377,078 $347,206
======== ========
Net interest income $ 5,505 $ 5,081
======= =======
Interest rate spread 2.66% 2.70%
==== ====
Net yield on interest-
earning assets 3.02% 3.01%
==== ====
Percentage of average
interest-earning assets to
average interest-bearing
liabilities 107.7% 107.1%
===== =====
</TABLE>
13<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); and (ii) changes in rates (change in rate multiplied by
old volume). The change attributable to changes in rate-volume
have been allocated to the other categories based on absolute
values.
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, 1997 vs. June 30, 1998
Increase (Decrease)
Due to
-------------------------------
(DOLLARS IN THOUSANDS) Volume Rate Total
-------------------------------
<S> <C> <C> <C>
Interest income:
Securities and other
interest-earning assets $ 771 $ (30) $ 741
Mortgage-backed and related
securities (536) (79) (615)
Loan portfolio 654 538 1,192
------ ------ ------
Total interest-earning assets 889 429 1,318
------ ------ ------
Interest expense:
Deposits 267 238 505
Borrowed funds 387 2 389
------ ------ ------
Total interest-bearing
liabilities 654 240 894
------ ------ ------
Net interest income $ 235 $ 189 $ 424
====== ====== ======
</TABLE>
14<PAGE>
<PAGE>
RESERVE FOR LOAN LOSSES
During the six month period ended June 30, 1998 the Bank
had charge-offs against the allowance for loan losses of
$16,856. The Bank added $190,000 to the allowance for loan
losses for the current six-month period increasing the balance
to $1,046,946. Management considers this level to be
appropriate based on lending volume, the current level of
delinquencies and other non-performing 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 six month period ended June 30, 1998, the Bank
sold $14 million in fixed rate mortgage loans at a gain of
$262,000 as compared to the sale of $4.1 million at a gain of
$12,000 for the same period a year ago. The proceeds from the
sales were used to fund new loans. The balance in real estate
owned expense represents operating expense and further reduction
of the carrying amount of foreclosed real estate owned. During
the six month period ended June 30, 1998, the Bank aggressively
pursued disposal of the foreclosed real estate owned thereby
incurring various charges in the sales of these properties.
Loan fees for the six month period ended June 30, 1998 as
compared to last year increased 17.7% due to an increase in the
volume of loans serviced. For the same period, fee income from
deposit operations increased 38.1% due to an increase in
checking accounts.
NONINTEREST EXPENSES
For the six month period ended June 30, 1998, noninterest
expense increased 9.8% as compared to the same period last year.
Compensation and related cost increased 7.7% due to normal
increases in salaries and benefits. Occupancy and equipment
expense increased 1.5%. This increase can be attributed to
additional maintenance necessary to keep the buildings in good
repair. The decrease of 31.6% in Federal insurance premium can
be attributed to a reduction in the premium. Advertising
increased 18.1% due to a more aggressive advertising campaign.
During the current six month period the Bank started a new
courier system to deliver the Bank's daily work to a central
location. This accounted for a 14.3% increase in other
operating expense as compared to the same period a year ago.
The remaining increase was in postage, due to mail volume, and
normal increases in other operating expenses.
INCOME TAXES
The effective tax rates for the six month periods ended
June 30, 1998 and 1997 approximate the statutory rate after
giving effect to nontaxable interest, other permanent tax
differences, and adjustments to certain deferred tax
liabilities.
15<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, 1998.
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, 1998.
16<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 10, 1998 /s/ Frederick Willetts, III
-------------------------------------
President and Chief Executive Officer
Dated: August 10, 1998 /s/ Edward E. Maready
-------------------------------------
Treasurer and Chief Financial Officer
17
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
1998 1997 1998 1997
---------- --------- ---------- ----------
<S> <C> <C>
Basic income per common share:
Net Income $ 668,800 $ 543,179 $1,283,981 $1,126,599
Weighted average common shares
outstanding 3,011,416 2,974,622 2,997,717 2,970,675
Basic income per common share $ 0.22 $ 0.18 $ 0.43 $ 0.38
Dilutive income per common share:
Net income $ 688,800 $ 543,179 $1,283,981 $1,126,599
Weighted average common shares
outstanding 3,011,416 2,974,622 2,997,717 2,970,675
Dilutive effect of stock options 195,285 179,780 203,421 178,744
---------- ---------- ---------- ----------
Total shares 3,206,701 3,154,402 3,201,138 3,149,419
Dilutive income per common share $ 0.21 $ 0.17 $ 0.40 $ 0.36
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,202,645
<INT-BEARING-DEPOSITS> 9,506,708
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,771,410
<INVESTMENTS-CARRYING> 21,039,105
<INVESTMENTS-MARKET> 20,558,444
<LOANS> 305,024,624
<ALLOWANCE> 1,046,946
<TOTAL-ASSETS> 381,054,272
<DEPOSITS> 298,695,936
<SHORT-TERM> 50,111,296
<LIABILITIES-OTHER> 1,971,205
<LONG-TERM> 0
<COMMON> 3,027,440
0
0
<OTHER-SE> 27,248,395
<TOTAL-LIABILITIES-AND-EQUITY> 381,054,272
<INTEREST-LOAN> 11,869,080
<INTEREST-INVEST> 2,117,742
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 13,986,822
<INTEREST-DEPOSIT> 6,871,617
<INTEREST-EXPENSE> 8,481,802
<INTEREST-INCOME-NET> 5,505,020
<LOAN-LOSSES> 190,000
<SECURITIES-GAINS> 261,964
<EXPENSE-OTHER> 3,817,595
<INCOME-PRETAX> 2,022,463
<INCOME-PRE-EXTRAORDINARY> 2,022,463
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,283,981
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 3.02
<LOANS-NON> 0
<LOANS-PAST> 317,035
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 873,802
<CHARGE-OFFS> 16,856
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,046,946
<ALLOWANCE-DOMESTIC> 1,046,946
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
