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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997 Commission File
Number: 0-24626
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
For the Transition Period from __________ to __________
COOPERATIVE BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1886527
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Market Street, Wilmington, North Carolina 28401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(910) 343-0181
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 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. YES X NO .
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 10, 1998, the aggregate market value of the voting
stock held by non-affiliates of the registrant, based on the
closing sales price of the registrant's common stock as quoted on
the National Association of Securities Dealers, Inc. Automated
Quotation National Market was $50,869,376 (2,481,433 shares at
$20.50 per share). For purposes of this calculation, directors,
executive officers and beneficial owners of more than 5% of the
registrant's outstanding voting stock are treated as affiliates.
As of February 10, 1998 there were issued and outstanding
2,984,396 shares of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year
Ended December 31, 1997. (Parts I and II)
2. Portions of Proxy Statement for the 1998 Annual Meeting of
Stockholders. (Part III)
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PART I
ITEM 1. BUSINESS
- -----------------
GENERAL
THE COMPANY. 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 for Cooperative Bank for Savings,
Inc., SSB ("Cooperative Bank" or the "Bank"), a North Carolina
chartered 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. Cooperative Bank was organized as a North
Carolina-chartered building and loan association in 1898. The
Bank has been a member of the Federal Home Loan Bank System since
1933 and its deposits have been federally insured since 1940. In
August 1991, the Bank converted to a North Carolina-chartered
stock savings and loan association and on October 1, 1992, the
Bank converted from a North Carolina-chartered savings and
loan association to a North Carolina-chartered stock savings
bank. The Bank's deposit accounts are insured up to applicable
limits by the Federal Deposit Insurance Corporation ("FDIC"). At
December 31, 1997, Cooperative Bank had total assets of $369.1
million, deposits of $288.7 million and stockholders' equity of
$28.3 million.
The Bank is chartered under the laws of the state of North
Carolina to engage in general banking business. Cooperative Bank
offers a wide range of retail banking services including deposit
services, banking cards and alternative investments products.
These funds are used for the extension of credit through home
loans, commercial loans and other installment credit such as home
equity, auto and boat loans and check reserve.
Cooperative Bank conducts its operations through its main
office in Wilmington, North Carolina and 16 offices throughout
eastern North Carolina. The Bank's executive offices are located
at 201 Market Street, Wilmington, North Carolina 28401 and its
telephone number is (910) 343-0181. The Bank considers its
primary market for deposits and lending activities to be the
communities of eastern North Carolina, extending from the
Virginia to the South Carolina borders.
Since opening its first branch office in 1954, the Bank has
pursued a strategy of steady, moderate growth through the
promotion of banking services in eastern North Carolina. In
1983, the Bank acquired Seaboard Savings and Loan Association, a
state-chartered stock savings association with assets of
approximately $60 million and with four offices located in
northeastern North Carolina, and thereby extended its market area
to the northern border of North Carolina.
MARKET AREA
Cooperative Bank considers its primary market area to be the
communities of eastern North Carolina extending from the Virginia
to the South Carolina borders. The market is generally segmented
into the coastal communities and the inland areas. The economies
of the coastal communities (concentrated in Dare, Carteret,
Currituck, Onslow, Pender, New Hanover and Brunswick Counties)
are seasonal and largely dependent on the summer tourism
industry. The economy of Wilmington (the largest city in the
market area), a historic seaport with a population of
approximately 65,000, is also reliant upon summer tourism but is
diversified into the chemicals, shipping, aircraft engines,
nuclear fuels, and fiber optics industries. Wilmington also
serves as a regional retail center. The inland communities
served by the Bank (concentrated in Bladen, Brunswick, Columbus,
Duplin, Hyde, Martin, Beaufort and Pender Counties) are largely
service areas for the agricultural activities in eastern North
Carolina.
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LENDING ACTIVITIES
GENERAL. 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 December 31,
1997, $272.3 million, or 88.5%, of the Bank's loan portfolio
consisted of loans collateralized by one-to-four family
residential properties. At that date, approximately 91.6% of the
Bank's total loan portfolio consisted of loans collateralized by
residential real estate. To a lesser extent, the Bank originates
multi-family and nonresidential real estate loans, home equity
lines of credit loans and consumer loans. While continuing to
place primary emphasis on residential mortgage loans, the Bank
continues to be active in its nonresidential real estate lending,
involving loans secured by small commercial properties with
balances generally ranging from $100,000 to $1,000,000. See " --
Loans Secured by Nonresidential Real Estate." The Bank's primary
emphasis is to originate adjustable rate loans with the fixed
rate loan as an option. As of December 31, 1997, before the loan
loss reserve, adjustable rate loans totaled $208.3 million, or
67.7%, and fixed rate loans totaled $99.3 million, or 32.3%, of
the Bank's total net loan portfolio.
ANALYSIS OF LOAN PORTFOLIO. Set forth below is selected data
relating to the composition of the Bank's loan portfolio by type
of loan and type of collateral on the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------
1997 1996 1997
--------------- --------------- ----------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans secured by real estate:
1-4 family residential properties. . . . . $232,977 81.26% $226,765 86.12% $203,577 87.00%
Multi-family (5 or more) residential
properties. . . . . . . . . . . . . . . 4,835 1.69 4,959 1.88 5,185 2.21
Nonresidential property. . . . . . . . . . 4,891 1.71 5,205 1.98 7,145 3.05
1-4 family residential properties under
construction . . . . . . . . . . . . . . 24,908 8.69 23,152 8.79 17,684 7.56
Multi-family (5 or more) residential
property under construction. . . . . . . -- -- 267 .10 -- --
Nonresidential properties under
construction . . . . . . . . . . . . . . 469 .16 752 .29 698 .30
Installment loans secured by real estate:
1-4 family residential properties (1). . . 12,134 4.23 8,820 3.35% 5,368 2.29
Multi-family (5 or more) residential
properties . . . . . . . . . . . . . . . 1,442 .50 212 .08 -- --
Nonresidential property. . . . . . . . . . 4,526 1.58 475 .18 -- --
1-4 family residential properties under
construction . . . . . . . . . . . . . . 2,327 .81 -- -- -- --
Multi-family (5 or more) residential
property under construction. . . . . . . 2,996 1.05 2,400 .91 -- --
Nonresidential properties under
construction . . . . . . . . . . . . . . 7,868 2.74 -- -- -- --
Consumer loans, secured and unsecured. . . . 4,397 1.53 3,564 1.35 3,351 1.43
Business loans, secured and unsecured. . . . 2,586 .90 510 .19 -- --
Business and consumer loans, secured and
unsecured under construction . . . . . . . 1,213 .42 525 .20 -- --
-------- ------ -------- ------ -------- ------
Total loans . . . . . . . . . . . . . 307,569 107.27 277,606 105.42 243,008 103.84
-------- ------ -------- ------ -------- ------
Less:
Undisbursed portion of construction
loans. . . . . . . . . . . . . . . . . . 18,729 6.53 12,205 4.63 6,958 2.97
Discounts and other. . . . . . . . . . . . 1,274 .44 1,281 .49 1,305 .56
Loan loss reserve. . . . . . . . . . . . . 874 .30 807 .30 737 .31
-------- ------ -------- ------ -------- ------
Net loans. . . . . . . . . . . . . . . $286,692 100.00% $263,313 100.00% $234,008 100.00%
======== ====== ======== ====== ======== ======
<FN>
___________
(1) Includes residential 1-4 family home equity loans.
</FN>
</TABLE>
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RESIDENTIAL REAL ESTATE LOANS. The Bank's primary lending
activity consists of the origination of one-to four
family residential mortgage loans collateralized by property
located in its market area. While a majority of the Bank's
residential real estate loans are collateralized by
owner-occupied primary residences, the Bank's portfolio also
includes some second home and investor properties. The Bank
also originates residential lot loans collateralized by vacant
lots located in approved subdivisions.
The Bank's loan originations are generally for a term of 15
to 30 years, amortized on a monthly basis, with principal and
interest due each month. Residential real estate loans often
remain outstanding for significantly shorter periods than their
contractual terms. Borrowers may refinance or prepay loans at
their option.
The Bank has offered adjustable rate mortgage loans ("ARMs")
since 1979 and presently offers one year ARMs with rate
adjustments tied to prime or the weekly average yield on U.S.
Treasury Securities adjusted to a constant maturity of one year.
The Bank offers introductory interest rates on ARMs which are
not fully indexed. The interest rates on these loans generally
include a cap of 2% per adjustment and 6% over the life of the
loan. The Bank's underwriting policies require that the
borrower qualify for an ARM at the fully indexed rate. While
the proportion of fixed and adjustable rate loan originations in
the Bank's portfolio largely depends on the level of interest
rates, the Bank has strongly emphasized ARMs in recent years and
has been relatively successful in maintaining the level of one
year ARM originations even during periods of declining interest
rates. In addition to the one year ARM, the Bank offers 3/1
and 5/1 ARM products. These loans adjust annually after the end
of the first three or five year period. A non-conforming fixed
rate loan is offered at a rate that is 1/2% higher than the
conforming fixed rate loan. A "Low Doc" program is available
for the non-conforming loans.
Cooperative Bank also originates 15 to 30 year fixed rate
mortgage loans on one- to four-family units. The Bank generally
charges a higher interest rate on such loans if the property is
not owner-occupied. The majority of fixed rate loans are
underwritten according to Federal Home Loan Mortgage Corporation
("FHLMC") or Federal National Mortgage Association ("FNMA")
guidelines, so that the loans qualify for sale in the secondary
market. The Bank has sold fixed rate loans in the secondary
market from time to time when such sales were consistent with
the Bank's liquidity and asset/liability goals.
The Bank actively lends on the security of properties
located in the Outer Banks region of North Carolina. This
region's economic base is seasonal and driven by beach tourism,
and a large number of the loans made by the Bank in this area
are secured by vacation rental properties. These loans are
inherently more risky than loans secured by the borrower's
permanent residence, since the borrower is typically dependent
upon rental income to meet debt service requirements, and
repayment is therefore subject to a greater extent to adverse
economic, weather and other conditions affecting vacation
rentals. Management seeks to minimize these risks by employing
what it believes are conservative underwriting criteria.
The Bank's lending policies generally limit the maximum
loan-to-value ratio on conventional residential mortgage loans
to 95% of the lesser of the appraised value or purchase price,
with the condition that private mortgage insurance is required
on loans with loan-to-value ratios in excess of 80%.
Cooperative Bank also originates loans secured by
multi-family properties. At December 31, 1997, the Bank had
$9.3 million of such loans, representing 3.0% of its total loan
portfolio. These loans are primarily secured by apartment
buildings located in the Bank's market area.
CONSTRUCTION LOANS. The Bank originates loans to finance
the construction of one- to four and multi-family dwellings,
housing developments and condominiums. Construction loans
amounted to approximately $39.8 million, or 12.9%, of the Bank's
total loan portfolio at December 31, 1997. In recent years, the
Bank has emphasized the origination of construction loans in
response to the significant demand for such loans by borrowers
engaged in building and development activities in the growing
communities of its market area. Substantially all of the Bank's
construction loans are structured to be converted to permanent
loans at the end of the construction phase. At the time the
loan is
3<PAGE>
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converted to a permanent loan and assumed by the ultimate
purchaser, the Bank underwrites the creditworthiness of the
ultimate purchaser prior to approving the assumption, when the
original borrower is released from liability. Construction/
permanent loans have either fixed or adjustable rates and have
terms of up to 30 years. Occasionally, the Bank will make short
term construction loans which have fixed rates and terms of up
to 12 months. These loans are generally made in amounts up to
80% of appraised value. Loan proceeds generally are disbursed
in increments as construction progresses and as inspections
warrant.
Construction loans afford the Bank the opportunity to
increase the interest rate sensitivity of its loan portfolio.
The Bank's risk of loss on a construction loan is largely
dependent upon the accuracy of the initial estimate of the
property's value at completion of construction and the bid price
(including interest) of construction. If the estimate of
construction costs proves to be inaccurate, the Bank may be
required to advance funds beyond the amount originally
committed to permit completion of the project. If the estimate
of the value proves to be inaccurate, the Bank may be
confronted, at or prior to the maturity of the loan, with a
project whose value is insufficient to assure full repayment.
The Bank's underwriting criteria are designed to evaluate
and minimize the risks of each construction loan. Among other
things, the Bank considers the reputation of the borrower and
the contractor, the amount of the borrower's equity in the
project, independent valuations and reviews of cost estimates,
pre-construction sale and leasing information, and cash flow
projections of the borrower. In addition, the Bank reviews the
builder's current financial reports, tax returns, credit reports
and, if the builder has not previously borrowed from Cooperative
Bank, credit references. The Bank only makes construction loans
within its primary market area.
The Bank has in the past originated loans for the
acquisition and development of unimproved property to be
used for residential purposes. Land development lending is
generally considered to involve a higher level of credit risk
than one- to four family residential lending due to the
concentration of principal in a limited number of loans and
borrowers and the effects of general economic conditions on
development projects.
The following table sets forth certain information as of
December 31, 1997 regarding the dollar amount of construction
loans secured by real estate and real estate mortgage loans
maturing in the Bank's portfolio based on their contractual
terms to maturity. The majority of these loans have provisions
to convert to permanent loans upon completion of construction.
For further information, see Note 5 of Notes to Consolidated
Financial Statements included in the Company's Annual Report to
Stockholders for the Fiscal Year Ended December 31, 1997 (the
"Annual Report").
Due During the
Year Ended
December 31,
1998
---------------
(In thousands)
Real estate - construction
Residential. . . . . . . . . . . . $30,231
Nonresidential . . . . . . . . . . 8,337
Business and Industrial. . . . . . 1,213
-------
Total . . . . . . . . . . . . . $39,781
=======
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Loans secured
by nonresidential real estate constituted approximately $17.8
million, or 5.8%. of the Bank's total loans at December 31,
1997. The Bank originates both construction loans and permanent
loans on nonresidential properties. Nonresidential real estate
loans are generally made in amounts up to 75% of the lesser of
appraised value or purchase price of the property and have
generally been made in amounts under $2.0 million. The Bank's
permanent nonresidential real estate loans are secured by
improved property such as office buildings, retail centers,
warehouses, and other types of buildings located in the Bank's
primary market area. Nonresidential real estate loans are
either fixed or variable rate. The variable rate loans have
interest rates tied to prime or the weekly average yield on U.S.
Treasury Securities adjusted to a constant maturity of one year.
4<PAGE>
<PAGE>
Loans secured by nonresidential properties are generally
larger and involve greater risks than residential
mortgage loans. Because payments on loans secured by
nonresidential properties are often dependent on successful
operation or management of the properties, repayment of such
loans may be subject to a greater extent to adverse
conditions in the real estate market or the economy. The Bank
seeks to minimize these risks in a variety of ways,
including limiting the size of its nonresidential real estate
loans, generally restricting such loans to its primary market
area and attempting to employ conservative underwriting
criteria.
CONSUMER LENDING. At December 31, 1997, the Bank's consumer
loan portfolio totaled approximately $4.4 million, representing
1.4% of the Bank's total loans receivable. Approximately $1.8
million was secured by the borrower's savings deposits. Other
consumer loans including automobile, home improvement, boat and
personal loans totaled approximately $2.6 million as of
December 31, 1997. The Bank also offers home equity loans,
which are made for terms of up to 15 years at adjustable
interest rates. As of December 31, 1997, the Bank's home equity
loan portfolio totaled approximately $8.1 million, representing
2.6% of its total loans receivable.
Consumer loans entail greater risk than do residential
mortgage loans, particularly in the case of consumer loans
which are unsecured or collateralized by rapidly depreciable
assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or
depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the
borrower. In addition, consumer loan collections are dependent
on the borrower's continuing financial stability, and thus are
more likely to be adversely affected by job loss, divorce,
illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Such loans may also give
rise to claims and defenses by a consumer loan borrower against
an assignee of such loans such as the Bank, and a
borrower may be able to assert against such assignee claims and
defenses which it has against the seller of the
underlying collateral.
NON-REAL ESTATE BUSINESS LENDING. In late 1996, the Bank
initiated a program for originating loans to small businesses in
the Bank's market area which are secured by various forms of
non-real estate collateral or are unsecured. At December 31,
1997, these loans totaled approximately $3.8 million.
Management of Cooperative Bank believes that these loans are
attractive to the Bank in light of the typically higher interest
rate yields associated with them and the opportunity they
present for expanding the Bank's relationships with existing
customers and developing broader relationships with new
customers. Accordingly, the Bank plans to actively pursue this
type of lending in the future in an effort to maintain a
profitable spread between the Bank's average loan yield and its
cost of funds.
Unlike residential mortgage loans, which generally are made
on the basis of the borrower's ability to make repayment from
his or her employment and other income and which are
collateralized by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher
risk and typically are made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially
dependent on the success of the business itself. Further, the
collateral securing the loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the
success of the business. The management of Cooperative Bank
will seek to minimize these risks as the Bank's commercial
business loan portfolio grows by attempting to employ
conservative underwriting criteria.
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LOAN SOLICITATION AND PROCESSING. Loan originations are
derived from a number of sources, including "walk-in" customers
at the Bank's offices and solicitations by Cooperative Bank
employees. The Bank also has agreements with third party
solicitors who provide loan applications to the Bank.
Loan applications are accepted at all full-service branches,
and are reviewed by a loan officer or branch manager. Upon
receipt of a loan application, central processing orders a
credit report and verifications to verify specific information
relating to the applicant's employment, income and credit
standing. An appraisal of the real estate intended to secure
the proposed loan is undertaken by an internal appraiser or an
outside appraiser approved by the Bank. In the case of "Low
Doc" loans a tax evaluation is acceptable.
5<PAGE>
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Loan authorities and limits have been delegated by the Board
of Directors to a group of senior officers who function as the
loan committee, except for consumer loans, which may be approved
by branch loan officers. Loans exceeding $700,000 up to
$1,000,000 can be approved by two members of the loan committee.
Any loan exceeding $1,000,000 is approved by the Bank's Board of
Directors. Fire and casualty insurance is required on all loans
secured by improved real estate.
ORIGINATIONS, PURCHASES, AND SALES OF MORTGAGE LOANS. The
Bank's general policy is to originate loans under terms,
conditions and documentation which permit sale to the FHLMC,
FNMA or private investors in the secondary market. The Bank has
from time to time sold fixed rate, long term mortgage loans in
the secondary market to meet liquidity requirements or as part
of the asset/liability management program. In connection with
such sales, the Bank generally retains the servicing of the
loans (i.e., collection of principal and interest payments), for
which it generally receives a fee payable monthly of up to 3/8%
per annum of the unpaid balance of each loan. As of December
31, 1997, the Bank was servicing approximately 1,561 loans for
others aggregating approximately $65 million.
The Bank does not generally purchase loans, and purchased no
loans during the last three fiscal years.
LOAN COMMITMENTS. The Bank issues loan origination
commitments to qualified borrowers primarily for the
construction and purchase of residential real estate. Such
commitments are made on specified terms and conditions and
are typically for terms of up to 30 days. A non-refundable
appraisal, flood certificate and credit report fee is collected
at the time of application. Management estimates that
historically, less than 20% of such commitments expire unfunded.
At December 31, 1997, the Bank had outstanding loan origination
commitments of approximately $14.7 million. For further
information, see Note 5 of Notes to Consolidated Financial
Statements included in the Annual Report.
LOAN ORIGINATION AND OTHER FEES. In addition to receiving
interest at the stated rate on loans, the Bank receives loan
origination fees or "points" for originating loans. Origination
fees generally are calculated as a percentage of the principal
amount of the mortgage loan and are charged to the borrower for
creation of the loan account. Loan-origination fees and certain
direct loan origination costs are deferred, and the net fee or
cost is recognized as an adjustment to interest income over the
contractual life of the related loan.
Loan origination and commitment fees are volatile sources of
funds. Such fees vary with the volume and type of loans and
commitments made and purchased and with competitive conditions
in mortgage markets, which in turn respond to the demand for and
availability of money.
The Bank also recognizes other fees and service charges on
loans. Other fees and service charges consist of late fees,
fees collected with a change in borrower or other loan
modifications.
DELINQUENCIES. The Bank's collection procedures provide
that when a loan is 30 days past due, the borrower is contacted
by mail, and payment is requested. If the delinquency
continues, subsequent efforts are made to contact the borrower.
If the loan continues in a delinquent status for 60 days or
more, the Bank generally initiates legal proceedings. At
December 31, 1997, the Bank owned approximately $251,000, net of
valuation reserves, of property acquired as the result of
foreclosure or by deed in lieu of foreclosure and classified as
"real estate owned."
NON-PERFORMING ASSETS AND ASSET CLASSIFICATION. Loans are
reviewed on a regular basis and are placed on a non-accrual
status when, in the opinion of management, the collection of
additional interest is doubtful. As of December 31, 1997, the
Bank had no loans in non-accrual status.
<PAGE>
Real estate acquired by the Bank as a result of foreclosure
is classified as real estate owned until such time as
it is sold. When such property is acquired, it is recorded at
the lower of the unpaid principal balance plus unpaid accrued
interest of the related loan or its fair value. Any required
write-down of the loan to its fair market value is charged to
the allowance for loan losses. At December 31, 1997, the Bank
had 12 loans in the process of foreclosure and/or
bankruptcy with a principal balance of approximately $300,963.
6<PAGE>
<PAGE>
The following table sets forth information with respect to
the Bank's non-performing assets for the periods
indicated. During the periods shown, the Bank had no
restructured loans within the meaning of Statement of Financial
Accounting Standards ("SFAS") No. 15.
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1997 1996 1995
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Non-accruing loans:
Residential real estate. . . . . . . . . $ -- $ 787 $ 242
Accruing loans which are contractually
past due 90 days or more:
Real Estate:
Residential. . . . . . . . . . . . . . $ 332 $ 657 198
Nonresidential . . . . . . . . . . . . 25 8 3
----- ------ ------
Total . . . . . . . . . . . . . . . $ 357 $1,452 $ 443
===== ====== ======
Percentage of total loans. . . . . . . . . .12% .52% .18%
===== ====== ======
Other non-performing assets (1). . . . . . $ 251 $ 42 $ 329
===== ====== ======
Total non-performing assets. . . . . . . . $ 608 $1,494 $ 772
===== ====== ======
Total non-performing assets to total
assets . . . . . . . . . . . . . . . . . .16% .44% .25%
===== ====== ======
<FN>
__________
(1) Other non-performing assets represents property acquired by the Bank
through foreclosure or repossession. This property is carried at fair
value less estimated costs of sale.
</FN>
</TABLE>
Except as set forth above, the Bank had no loans which were
not classified as non-accrual, 90 days past due or restructured
but which may be so classified in the near future because
management has concerns as to the ability of borrowers to comply
with repayment terms. For further information, see Note 1d of
Notes to Consolidated Financial Statements in the Annual Report.
Allowance for Loan Losses. In establishing the appropriate
levels for the provision and the allowance for possible loan
losses, management considers a variety of factors, in addition
to the fact that an inherent risk of loss always exists in the
lending process. Consideration is given to, among other things,
the current and future impact of economic conditions, the
diversification of the loan portfolio, historical loss
experience, the review of loans by the loan review personnel,
the individual borrower's financial and managerial strengths,
and the adequacy of underlying collateral. Consideration is
also given to examinations performed by regulatory authorities
and the Bank's independent certified public accountants.
<PAGE>
The following table analyzes activity in the Bank's
allowance for possible loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1996 1995
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period . . . . . . . $ 807 $ 737 $ 737
Provision for possible loan losses . . . . . 153 156 3
Loans charged-off. . . . . . . . . . . . . . 86 86 3
----- ----- -----
Balance at end of period . . . . . . . . . . $ 874 $ 807 $ 737
===== ===== =====
Ratio of net charge-offs to average
loans outstanding during the period. . . . .03% .03% .001%
===== ===== =====
Ratio of loan loss reserve to total loans. . .28% .29% .31%
===== ===== =====
</TABLE>
7<PAGE>
<PAGE>
Management believes that it has established the Bank's
existing allowance for loan losses in accordance with
generally accepted accounting principles. Additions to the
allowance may be necessary, however, due to changes in
economic conditions, real estate market values, growth in the
portfolio, and other factors. In addition, bank regulators
may require Cooperative Bank to make additional provisions for
losses in the course of their examinations based on their
judgments as to the value of the Bank's assets.
INVESTMENT ACTIVITIES
The Bank is required under applicable regulations to
maintain liquid assets equal to at least 10% of its total
assets. For purposes of this requirement, liquid assets consist
of cash and readily marketable investments. Cooperative
Bank has generally maintained a liquidity portfolio in excess of
regulatory requirements. Liquidity levels may be increased or
decreased depending upon the yields on investment alternatives
and upon management's judgment as to the attractiveness of the
yields then available in relation to other opportunities and its
expectation of the level of yield that will be available in the
future, as well as management's projections as to the short term
demand for funds to be used in the Bank's loan origination and
other activities.
The following table sets forth the carrying value of the
Bank's investment portfolio at the dates indicated. For
additional information regarding the Bank's investments, see
Notes 2 and 3 of Notes to Consolidated Financial Statements in
the Annual Report.
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1997 1996 1995
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-bearing deposits. . . . . . . . . $12,312 $ 9,084 $ 8,203
Securities:
Available for sale - at estimated
market value . . . . . . . . . . . . . 21,004 5,946 --
Held to maturity . . . . . . . . . . . . 21,044 21,054 21,063
Mortgage-backed and related securities:
Available for sale - at estimated
market value . . . . . . . . . . . . . 12,856 28,825 30,907
------- ------- -------
Total. . . . . . . . . . . . . . . . $67,216 $64,909 $60,173
======= ======= =======
</TABLE>
From time to time, the Bank purchases mortgage-backed and
related securities guaranteed by the FHLMC, the Government
National Mortgage Association ("GNMA") or the FNMA. FHLMC and
FNMA mortgage-backed securities are participation certificates
issued and guaranteed by the FHLMC or the FNMA which represent
interests in pools of conventional mortgages originated by
savings institutions. GNMA mortgage-backed securities are
participation certificates issued and guaranteed by the GNMA
which represent interests in pools of mortgages insured by the
Federal Housing Administration or partially guaranteed by the
Veterans Administration. GNMA obligations are backed by the
full faith and credit of the United States. At December 31,
1997, the Bank held mortgage-backed securities, classified
as available for sale, with an amortized cost of approximately
$12.9 million, which represented 3.5% of the Bank's total
assets. At that date, the estimated aggregate market value and
carrying value of the mortgage-backed securities was $12.9
million. Mortgage-backed securities increase the quality of the
Bank's assets by virtue of the insurance and guarantees that
back them, their greater degree of liquidity over individual
mortgage loans, and their capacity to be used to collateralize
borrowings or other obligations of the Bank. However, a portion
of the Bank's mortgage-backed securities are long term, fixed
rate instruments and, in a rising interest rate environment, the
market value of such securities will decline. For further
information regarding the Bank's mortgage-backed securities
portfolio, see "Management's Discussion & Analysis" and Note 3
of Notes to Consolidated Financial Statements in the Annual
Report.
8<PAGE>
<PAGE>
The following table sets forth the scheduled maturities,
carrying values, market values and average yields for the Bank's
investment portfolio at December
31, 1997.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
----------------- ----------------- -----------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits. . . $12,312 5.35% $ -- -- % $ -- -- %
U.S. government and
agency securities:
Available for sale . . . . . 4,997 5.86 16,007 6.07 -- --
Held to maturity . . . . . . -- -- -- -- 16,044 5.19
Mortgage-backed and related
securities:
Available for sale . . . . . -- -- 2,153 6.52 -- --
Held to maturity . . . . . . -- -- -- -- -- --
------- ------- -------
Total. . . . . . . . . . $17,309 5.50% $18,160 6.12% $16,044 5.19%
======= ======= =======
<CAPTION>
More than Ten Years Total Investment Portfolio
------------------- -----------------------------
Carrying Average Carrying Market Average
Value Yield Value Value Yield
-------- ------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-bearing deposits. . . $ -- -- % $12,312 $12,312 5.35%
U.S. government and
agency securities:
Available for sale . . . . . -- -- 21,004 21,004 6.02
Held to maturity . . . . . . 5,000 6.21 21,004 20,348 5.43
Mortgage-backed and related
securities:
Available for sale . . . . . 10,703 6.35 12,856 12,856 6.38
Held to maturity . . . . . . -- -- -- -- --
------- ------- -------
Total. . . . . . . . . . $15,703 6.31% $67,216 $66,520 5.78
======= ======= =======
</TABLE>
9<PAGE>
<PAGE>
Subsidiary Activities
As a North Carolina-chartered savings bank, the Bank is
authorized to invest up to 10% of its assets in subsidiary or
service corporations engaged in activities that are permissible
to subsidiaries of federal savings associations. Currently,
subsidiaries of state-chartered savings banks generally may not
engage as principal in any activity that is not permissible for
a subsidiary of a national bank unless the FDIC determines that
the activities do not pose a significant risk to the appropriate
insurance fund and the bank complies with all applicable capital
requirements.
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Bank's funds
for lending and other investment purposes. In addition to
deposits, Cooperative Bank derives funds from interest payments,
loan principal repayments, borrowed funds and funds provided by
operations. Scheduled loan repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a
short term basis to compensate for reductions in the
availability of funds from other sources. The Bank intends to
fund its activities primarily through deposits.
DEPOSITS. Deposits are attracted from within the Bank's
primary market area through the offering of a broad selection of
deposit instruments including checking, savings, money market
deposit, and term certificate accounts (including negotiated
jumbo certificates in denominations of $100,000 or more) as well
as individual retirement plans. Deposit account terms vary
according to the minimum balance required, the time periods the
funds must remain on deposit and the interest rate, among other
factors. The Bank does not obtain funds through brokers, nor
does it actively solicit funds outside of its primary market
area. For further information regarding the Bank's deposits,
see "Management's Discussion and Anaysis" and Note 7 of Notes to
Consolidated Financial Statements in the Annual Report.
BORROWINGS. Deposits are the primary source of funds for
Cooperative Bank's lending and investment activities and for its
general business purposes. If the need arises, the Bank may
obtain advances from the FHLB of Atlanta to supplement its
supply of loanable funds and to meet deposit withdrawal
requirements. Advances from the FHLB are typically secured by
the Bank's stock in the FHLB and a lien on a portion of the
Bank's first mortgage loans. The Bank has utilized FHLB
advances in recent periods in order to meet a larger than
typical loan demand in the Bank's market area.
The FHLB of Atlanta functions as a central reserve bank
providing credit for the Bank and other member savings
associations and financial institutions. As a member,
Cooperative Bank is required to own capital stock in the
FHLB and is authorized to apply for advances on the security of
such stock and certain of its home mortgages and other
assets (principally, securities which are obligations of, or
guaranteed by, the United States), provided certain standards
related to creditworthiness have been met. Advances are made
pursuant to several different programs. Each credit
program has its own interest rate and range of maturities.
Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of a member
institution's net worth or on the FHLB's assessment of the
institution's creditworthiness.
From time to time the Bank has borrowed funds under reverse
repurchase agreements and dollar rolls. Under a reverse
repurchase agreement, the Bank sells securities (generally
government securities, mortgage-backed certificates and FHLMC
participation certificates) and agrees to repurchase them (or
substantially identical securities) at a specified price at a
later date. Reverse repurchase agreements are generally for
terms of one week to one month, are subject to renewal, and are
deemed to be borrowings collateralized by the securities sold.
Generally, the cost of borrowed funds using reverse repurchase
agreements is less expensive than other borrowings with
comparable terms. Cooperative Bank had no reverse repurchase
agreements or dollar rolls outstanding during the fiscal year
ended December 31, 1997. All reverse repurchase agreements are
contracted with registered broker-dealers. The dollar rolls
used by the Bank closely resemble reverse repurchase agreements,
except that with dollar rolls, the Bank agrees to repurchase
securities similar to the securities sold, rather than the same
securities, as with reverse repurchase agreements.
10<PAGE>
<PAGE>
For further information regarding the Bank's borrowings, see
Note 8 of Notes to Consolidated Financial Statements in the
Annual Report.
The following tables set forth certain information regarding
short term borrowings by the Bank at the end of and during the
periods indicated:
<TABLE>
<CAPTION>
During the Year Ended December 31,
----------------------------------
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Maximum amount of short-term borrowings
outstanding at any month end:
Securities sold under agreements
to repurchase . . . . . . . . . . . . . $ -- $ -- $ 9,000
FHLB advances . . . . . . . . . . . . . . 50,141 35,145 27,000
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase . . . . . . . . . . . . . -- -- 1,446
FHLB advances . . . . . . . . . . . . . . 39,797 14,839 9,468
Approximate weighted average rate paid on:
Securities sold under agreements
to repurchase . . . . . . . . . . . . . -- -- 5.65%
FHLB advances. . . . . . . . . . . . 6.49% 6.47% 6.25%
</TABLE>
MARKET RISK
The Company's primary market risk is interest rate risk.
Interest rate risk is the result of differing maturities
or repricing intervals of interest earning assets and interest
bearing liabilities and the fact that rates on these financial
instruments do not change uniformly. These conditions may
impact the earnings generated by the Company's interest
bearing assets or the cost of its interest bearing liabilities,
thus directly impacting the Company's overall earnings. The
Company's management actively monitors and manages interest rate
risk. One way this is accomplished is through the development
of and adherence to the Company's asset/liability policy. This
policy sets forth management's strategy for matching the risk
characteristics of the Company's interest bearing assets and
liabilities so as to mitigate the effect of changes in the rate
environment. For additional discussion of interest rate risk,
see "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Interest Rate Sensitivity Analysis" in
the Annual Report.
One way to measure the Company's potential exposure to
interest rate risk is to estimate the effect of a change in
rates on the Company's Economic Value of Equity ("EVE"). The
following table sets forth information relating to the Company's
EVE and the estimated changes under various interest rate change
scenarios.
<TABLE>
<CAPTION>
Change in Economic Estimated Estimated
Interest Rates Value Equity $ Change % Change
- --------------- ------------ --------- ---------
<S> <C> <C> <C>
400 basis point rise $16,482,000 $(17,610,000) 52%
300 basis point rise 21,890,000 (12,202,000) 36%
200 basis point rise 26,910,000 (7,182,000) 21%
100 basis point rise 30,746,000 (3,346,000) 10%
Base Scenario 34,092,000 0
100 basis point decline 35,257,000 1,165,000 3%
200 basis point decline 37,767,000 3,675,000 11%
300 basis point decline 37,790,000 3,698,000 11%
400 basis point decline 40,259,000 6,167,000 18%
</TABLE>
11<PAGE>
<PAGE>
The Company's EVE under the base or 0% change scenario is
defined as the current estimated market value of all assets less
the estimated value of all liabilities. These estimated values
and the changes under the rate scenarios presented were computed
with the assistance of a third party vendor using information
supplied by the Company's management.
COMPETITION
Cooperative Bank encounters strong competition both in the
attraction of deposits and in the making of real estate and
other loans. Its most direct competition for deposits has
historically come from financial institutions in its market
area. Competition for deposits is also realized from brokerage
firms and credit unions. The Bank competes for deposits by
offering depositors competitive rates and a high level of
personal service together with a wide range of banking products
and convenient office locations.
Competition for real estate and other loans comes
principally from financial institutions and mortgage companies.
The Bank competes for loans primarily through the interest rates
and loan fees it charges, and the efficiency and quality of
services it provides borrowers. Factors which affect
competition include the general and local economic conditions,
current interest rate levels and volatility in the mortgage
markets.
EMPLOYEES
At December 31, 1997, the Bank had 114 full-time employees
and six part-time employees. The employees are not represented
by a collective bargaining unit. The Bank believes its
relationship with its employees to be good.
EXECUTIVE OFFICERS
At December 31, 1997, the executive officers of the Bank
who were not also directors were as follows:
<TABLE>
<CAPTION>
Age at
Name December 31, 1997 Position
- ---- ----------------- --------
<S> <C> <C>
Daniel W. Eller 55 Senior Vice President and Corporate
Secretary
Edward E. Maready 56 Senior Vice President and Treasurer,
Principal Financial and Accounting
Officer
Eric R. Gray 55 Senior Vice President of Mortgage
Lending
O.C. Burrell, Jr. 49 Executive Vice President and Chief
Operating Officer
</TABLE>
DANIEL W. ELLER was employed by the Bank in 1979 and served
as the Administrative Vice President until 1993, at which time
he was appointed Senior Vice President and Corporate Secretary.
He is a member of the Board of the Lower Cape Fear Water & Sewer
Authority and has served on the boards of the Southeastern
Economic Development Commission, Downtown Area Revitalization
Effort (DARE), New Hanover County Recreation Advisory
Committee, Cape Fear Area United Way, and past president of
Crimestoppers of New Hanover County. He also is past
president of the Wilmington Civitan Club and past chairman of
the Board of Child Development Center.
EDWARD E. MAREADY was employed by the Bank in 1977. He
served as Controller and Treasurer from 1977 until 1993. In
1993, Mr. Maready was appointed Senior Vice President and
Treasurer. He is a member of the Financial Managers' Society,
Inc. and serves as a member of various civic committees.
12<PAGE>
<PAGE>
ERIC R. GRAY was employed by the Bank in 1971. He served as
Vice President of Mortgage Lending from 1984 until 1993, at
which time he was elected Senior Vice President of Mortgage
Lending. He is past director of the Mortgage Banker's
Association of Wilmington, North Carolina, current member and
past president and director of the Wilmington East Rotary Club,
and current member of the Single Family FNMA/FHLMC of MBAC.
O. C. BURRELL, JR. was employed in May 1993 as Senior Vice
President of Retail Banking. Mr. Burrell was elected Executive
Vice President and Chief Operating Officer in 1997. Mr. Burrell
has been in the banking industry since 1970 and has served in
leadership capacities in various civic and professional
organizations. He is active in the Wilmington Rotary Club and
serves as a director of the Child Development Center and a
member of the Consumer Lending Committee of the North Carolina
Bankers Association.
REGULATION
GENERAL. As a North Carolina savings bank with deposits
insured by the SAIF, Cooperative Bank is subject to extensive
regulation by the Administrator of the North Carolina Savings
Banks Division (the "Administrator") and the FDIC. The Company
is also subject to extensive regulation under federal and state
law. The lending activities and other investments of
Cooperative Bank must comply with various federal regulatory
requirements. The Administrator and the FDIC periodically
examine Cooperative Bank for compliance with various regulatory
requirements. The Bank must file reports with the Administrator
and the FDIC describing its activities and financial condition.
The Bank is also subject to certain reserve requirements
promulgated by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). This supervision and
regulation is intended primarily for the protection of
depositors. Certain of these regulatory requirements are
referred to below or appear elsewhere herein.
The following is a brief summary of certain statutes, rules
and regulations affecting the Company and the Bank. A number of
other statutes and regulations have an impact on their
operations. The following summary of applicable statutes and
regulations does not purport to be complete and is qualified in
its entirety by reference to such statutes and regulations.
BANK HOLDING COMPANY REGULATION. The Company is registered
as a bank holding company under the Bank Holding Company Act of
1956, as amended (the "Holding Company Act") and, as such, is
subject to supervision and regulation by the Federal Reserve
Board. As a bank holding company, the Company is required to
furnish to the Federal Reserve Board annual and quarterly
reports of its operations at the end of each period and to
furnish such additional information as the Federal Reserve Board
may require pursuant to the Holding Company Act. The Company is
also subject to regular examination by the Federal Reserve
Board. In addition, as a savings institution holding company,
the Company is subject to supervision by the Administrator under
North Carolina law.
Under the Holding Company Act, a bank holding company must
obtain the prior approval of the Federal Reserve Board before
(1) acquiring direct or indirect ownership or control of any
voting shares of any bank or bank holding company if, after such
acquisition, the bank holding company would directly or
indirectly own or control more than 5% of such shares; (2)
acquiring all or substantially all of the assets of another bank
or bank holding company; or (3) merging or consolidating with
another bank holding company. In addition to the above
restrictions under the Holding Company Act, the Company's
investments are limited under North Carolina law to those
investments permitted for North Carolina savings banks. See "
- -- State Law and Regulation."
The Holding Company Act prohibits the Federal Reserve Board
from approving an application by a bank holding company to
acquire voting shares of a bank located outside the state in
which the operations of the holding company's bank subsidiaries
are principally conducted, unless such an acquisition is
specifically authorized by state law. The State of North
Carolina has enacted reciprocal interstate banking statutes that
authorize banks and their holding companies in North Carolina to
be acquired by banks or their holding companies in states that
have also enacted reciprocal banking legislation, and permit
North Carolina banks and their holding companies to acquire
banks in such other states.
13<PAGE>
<PAGE>
Under the Holding Company Act, any company must obtain
approval of the Federal Reserve Board prior to acquiring control
of the Company or the Bank. For purposes of the Holding Company
Act, "control" is defined as ownership of more than 25% of any
class of voting securities of the Company or the Bank, the
ability to control the election of a majority of the directors,
or the exercise of a controlling influence over management or
policies of the Company or the Bank.
The Change in Bank Control Act and the regulations of the
Federal Reserve Board thereunder require any person or persons
acting in concert (except for companies required to make
application under the Holding Company Act), to file a written
notice with the Federal Reserve Board before such person or
persons may acquire control of the Company or the Bank. The
Change in Bank Control Act defines "control" as the power,
directly or indirectly, to vote 25% or more of any voting
securities or to direct the management or policies of a bank
holding company or an insured bank.
The Holding Company Act also prohibits, with certain
exceptions, a bank holding company from acquiring direct or
indirect ownership or control of more than 5% of the voting
shares of a company that is not a bank or a bank holding
company, or from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal
exceptions to these prohibitions involve certain non-bank
activities which, by statute or by Federal Reserve Board
regulation or order, have been identified as activities closely
related to the business of banking or managing or controlling
banks. The activities of the Company are subject to these legal
and regulatory limitations under the Holding Company Act and the
Federal Reserve Board's regulations thereunder. Notwithstanding
the Federal Reserve Board's prior approval of specific
nonbanking activities, the Federal Reserve Board has the power
to order a holding company or its subsidiaries to terminate any
activity, or to terminate its ownership or control of any
subsidiary, when it has reasonable cause to believe that the
continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness or
stability of any bank subsidiary of that holding company.
The Federal Reserve Board has adopted guidelines regarding
the capital adequacy of bank holding companies, which require
bank holding companies to maintain specified minimum ratios of
capital to total assets and capital to risk-weighted assets.
See " -- Capital Requirements."
The Federal Reserve Board has the power to prohibit
dividends by bank holding companies if their actions constitute
unsafe or unsound practices. The Federal Reserve Board has
issued a policy statement on the payment of cash dividends by
bank holding companies, which expresses the Federal Reserve
Board's view that a bank holding company should pay cash
dividends only to the extent that the company's net income for
the past year is sufficient to cover both the cash dividends and
a rate of earning retention that is consistent with the
company's capital needs, asset quality, and overall financial
condition.
Bank holding companies generally are required to give the
Federal Reserve Board notice of any purchase or redemption of
outstanding equity securities if the gross consideration for the
purchase or redemption, when combined with the net consideration
paid for all such purchases or redemptions during the preceding
12 months, is equal to 10% or more of the Company's consolidated
net worth. The Federal Reserve Board may disapprove such a
purchase or redemption if it determines that the proposal would
violate any law, regulation, Federal Reserve Board order,
directive, or any condition imposed by, or written agreement
with, the Federal Reserve Board. The requirement to receive
prior Federal Reserve Board approval for such purchases or
redemption does not apply to bank holding companies that are
"well-capitalized," received one of the two highest examination
ratings at their last examination and are not the subject
of any unresolved supervisory issues.
CAPITAL REQUIREMENTS. The regulations of the Federal
Reserve Board and the FDIC require bank holding companies and
state-chartered banks that are not members of the Federal
Reserve System to maintain a minimum leverage capital
requirement consisting of a ratio of Tier 1 capital to total
assets of 3%. Although setting a minimum 3% leverage ratio, the
capital regulations state that only the strongest bank holding
companies and banks, with composite examination ratings of 1
under the rating system used by the federal bank regulators,
would be permitted to
14<PAGE>
<PAGE>
operate at or near such minimum level of capital. For all but
the most highly rated institutions meeting the conditions set
forth above, the minimum leverage capital ratio is 3% plus an
additional "cushion" amount of at least 100 to 200 basis points.
Any bank or bank holding company experiencing or anticipating
significant growth would be expected to maintain capital well
above the minimum levels. In addition, the Federal Reserve
Board has indicated that whenever appropriate, and in particular
when a bank holding company is undertaking expansion, seeking to
engage in new activities or otherwise facing unusual or abnormal
rights, it will consider, on a case-by-case basis, the level of
an organization's ratio of tangible Tier 1 capital (after
deducting all intangibles) to total assets in making an overall
assessment of capital. Tier 1 capital is the sum of common
stockholders' equity, noncumulative perpetual preferred
stock (including any related surplus) and minority interests in
consolidated subsidiaries, minus all intangible assets
(other than certain purchased mortgage servicing rights and
purchased credit card receivables), minus identified losses
and minus investments in certain subsidiaries. As a
SAIF-insured, state-chartered bank, the Bank must also deduct
from Tier 1 capital an amount equal to its investments in, and
extensions of credit to, subsidiaries engaged in activities that
are not permissible to national banks, other than debt and
equity investments in subsidiaries engaged in activities
undertaken as agent for customers or in mortgage banking
activities or in subsidiary depository institutions or their
holding companies.
The risk-based capital rules of the Federal Reserve Board
and the FDIC require bank holding companies and state non-member
banks to maintain minimum regulatory capital levels based upon a
weighting of their assets and off-balance sheet obligations
according to risk. The risk-based capital rules have two basic
components: a core capital (Tier 1) requirement and a
supplementary capital (Tier 2) requirement. Core capital
consists primarily of common stockholders' equity, certain
perpetual preferred stock (which must be noncumulative with
respect to banks), and minority interests in the equity accounts
of consolidated subsidiaries; less all intangible assets, except
for certain purchased mortgage servicing rights and purchased
credit card relationships. Supplementary capital elements
include, subject to certain limitations, the allowance for
losses on loans and leases; perpetual preferred stock that does
not qualify as Tier 1 capital and long-term preferred stock with
an original maturity of at least 20 years from issuance; hybrid
capital instruments, including perpetual debt and mandatory
convertible securities; and subordinated debt and
intermediate-term preferred stock.
The risk-based capital regulations assign balance sheet
assets and credit equivalent amounts of off-balance sheet
obligations to one of four broad risk categories based
principally on the degree of credit risk associated with the
obligor. The assets and off-balance sheet items in the four
risk categories are weighted at 0%, 20%, 50% and 100%. These
computations result in the total risk-weighted assets.
The risk-based capital regulations require all banks and
bank holding companies to maintain a minimum ratio of total
capital to total risk-weighted assets of 8%, with at least 4% as
core capital. For the purpose of calculating these ratios: (i)
supplementary capital will be limited to no more than 100% of
core capital; and (ii) the aggregate amount of certain types of
supplementary capital will be limited. In addition, the
risk-based capital regulations limit the allowance for loan
losses includable as capital to 1.25% of total risk-weighted
assets.
The federal bank regulatory agencies, including the Federal
Reserve Board and the FDIC, have revised their risk-based
capital requirements to ensure that such requirements provide
for explicit consideration by commercial banks of interest rate
risk. Under these requirements, a bank's interest rate risk
exposure is quantified using either the measurement system set
forth in the rule or the bank's internal model for measuring
such exposure, if such model is determined to be adequate by the
bank's examiner. If the dollar amount of a bank's interest rate
risk exposure, as measured under either measurement system,
exceeds 1% of the bank's total assets, the bank is required to
hold additional capital equal to the dollar amount of the
excess. Management of the Bank does not believe that this
interest rate risk component will have an adverse effect on the
Bank's capital.
Under North Carolina law, savings banks must maintain a net
worth of not less than 5% of assets. In computing its
compliance with this requirement, the savings bank must deduct
intangible assets from both net worth and assets.
15<PAGE>
<PAGE>
The Bank was in compliance with both the FDIC capital
requirements and the North Carolina net worth requirement at
December 31, 1997.
LIQUIDITY. North Carolina savings banks must maintain cash
and readily marketable investments in an amount not less than
10% of the assets of the savings banks. The Bank was in
compliance with this requirement at December 31, 1997.
PROMPT CORRECTIVE REGULATORY ACTION. The federal banking
regulators are required under applicable law to take prompt
corrective action if an insured depository institution fails to
satisfy certain minimum capital requirements including a
leverage limit, a risk-based capital requirement, and any other
measure of capital deemed appropriate by the federal banking
regulators for measuring the capital adequacy of an insured
depository institution. All institutions, regardless of their
capital levels, are restricted from making any capital
distribution or paying any management fees that would cause the
institution to fail to satisfy the minimum levels for any of its
capital requirements. An institution that fails to meet the
minimum level for any relevant capital measure (an
"undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within
45 days; (iii) subject to asset growth limits; and (iv) required
to obtain prior regulatory approval for acquisitions, branching
and new lines of business. A significantly undercapitalized
institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader
application of restrictions on transactions with affiliates,
limitations on interest rates paid on deposits, asset growth and
other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company
controlling the institution could also be required to divest the
institution or the institution could be required to divest
subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or
increases in compensation without prior approval and the
institution is prohibited from making payments of principal or
interest on its subordinated debt. If an institution's ratio of
tangible capital to total assets falls below a level established
by the appropriate federal banking regulator, which may not be
less than 2% nor more than 65% of the minimum tangible
capital level otherwise required (the "critical capital level"),
the institution will be subject to conservatorship or
receivership within 90 days unless periodic determinations are
made that forbearance from such action would better protect the
deposit insurance fund.
The federal banking regulators measure a depository
institution's capital adequacy on the basis of the institution's
total risk-based capital ratio (the ratio of its qualifying
total capital to risk-weighted assets), Tier 1 risk-based
capital ratio (the ratio of its Tier 1 capital to risk-weighted
assets) and leverage ratio (the ratio of its Tier 1 capital to
adjusted total assets). Under the regulations, a savings bank
that is not subject to an order or written directive to meet
or maintain a specific capital level will be deemed "well
capitalized" if it also has: (i) a total risk-based capital
ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio
of 6.0% or greater; and (iii) a leverage ratio of 5.0% or
greater. An "adequately capitalized" institution is an
institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of
8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0%
or greater; and (iii) a leverage ratio of 4.0% or greater (or
3.0% or greater if the institution has a composite 1 CAMEL
rating). An "undercapitalized institution" is an institution
that has (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or
(iii) a leverage ratio of less than 4.0% (or 3.0% if the
institution has a composite 1 CAMEL rating). A "significantly
undercapitalized" institution is defined as an institution that
has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or
(iii) a leverage ratio of less than 3.0%. A "critically
undercapitalized" institution is defined as an institution that
has a ratio of "tangible equity" to total assets of less than
2.0%. For purposes of the prompt corrective action regulations,
tangible equity is equivalent to Tier 1 capital plus outstanding
cumulative perpetual preferred stock (and related surplus) minus
all intangible assets other than certain purchased mortgage
servicing rights. The FDIC may reclassify a well capitalized
institution as adequately capitalized and may require an
adequately capitalized or undercapitalized institution to comply
with the supervisory actions applicable to institutions in the
next lower capital category if the FDIC determines, after
notice and an opportunity for a hearing, that the savings
institution is in an unsafe or unsound condition or that the
institution has received and not corrected less-than-
satisfactory rating for any CAMEL rating category. The Bank is
currently classified as "well capitalized" under these
regulations.
16<PAGE>
<PAGE>
COMMUNITY REINVESTMENT ACT. The Bank, like other financial
institutions, is subject to the Community Reinvestment Act
("CRA"). The purpose of the CRA is to encourage financial
institutions to help meet the credit needs of their entire
communities, including the needs of low-and moderate-income
neighborhoods. During the Bank's last compliance examination,
the Bank received a "satisfactory" rating with respect to CRA
compliance. The Bank's rating with respect to CRA compliance
would be a factor to be considered by the Federal Reserve Board
and the FDIC in considering applications submitted by the Bank
to acquire branches or to acquire or combine with other
financial institutions and take other actions and, if such
rating was less than "satisfactory," could result in the denial
of such applications.
DIVIDEND LIMITATIONS. The Bank may not pay dividends on its
capital stock if its regulatory capital would thereby be reduced
below the amount then required for the liquidation account
established for the benefit of certain depositors of the Bank at
the time of its conversion to stock form.
Earnings of the Bank appropriated to bad debt reserves and
deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders
without payment of taxes at the then current tax rate by the
Bank on the amount of earnings removed from the reserves for
such distributions. See "Taxation." The Bank intends to make
full use of this favorable tax treatment and does not
contemplate use of any earnings in a manner which would limit
the Bank's bad debt deduction or create federal tax liabilities.
Under applicable regulations, the Bank is prohibited from
making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based
capital ratio of less than 8.0%; (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; or (iii) a leverage ratio of
less than 4.0%.
DEPOSIT INSURANCE. The Bank is required to pay assessments
based on a percentage of its insured deposits to the FDIC for
insurance of its deposits by the SAIF. Under the FDIC's
risk-based deposit insurance assessment system, the assessment
rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by
the FDIC, which is determined by the institution's capital level
and supervisory evaluations. Based on the data reported to
regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions
are assigned to one of three capital groups -- well capitalized,
adequately capitalized or undercapitalized -- using the same
percentage criteria as in the prompt corrective action
regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of
three subgroups on the basis of supervisory evaluations by the
institution's primary supervisory authority and such other
information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the
deposit insurance fund. The Bank is currently classified as
well capitalized under this assessment system.
RESTRICTIONS ON CERTAIN ACTIVITIES. Under applicable law,
state-chartered banks with deposits insured by the FDIC are
generally prohibited from acquiring or retaining any equity
investment of a type or in an amount that is not permissible for
a national bank. The foregoing limitation, however, does not
prohibit FDIC-insured state banks from acquiring or retaining an
equity investment in a subsidiary in which the bank is a
majority owner. State-chartered banks are also prohibited from
engaging as principal in any type of activity that is not
permissible for a national bank and subsidiaries of
state-chartered, FDIC-insured state banks have been prohibited
from engaging as principal in any type of activity that is not
permissible for a subsidiary of a national bank unless in either
case the FDIC determines that the activity would pose no
significant risk to the appropriate deposit insurance fund and
the bank is, and continues to be, in compliance with applicable
capital standards.
The FDIC has adopted regulations to clarify the foregoing
restrictions on activities of FDIC-insured state-chartered banks
and their subsidiaries. Under the regulations, the term
activity refers to the authorized conduct of business by an
insured state bank and includes acquiring or retaining any
investment other than an equity investment. An activity
permissible for a national bank includes any activity expressly
authorized for national banks by statute or recognized as
permissible in regulations, official circulars or bulletins or
in any order or written interpretation issued by the Office of
the Comptroller of the Currency ("OCC"). In its regulations,
the FDIC indicates that it will not permit state banks to
directly engage in commercial ventures or directly or indirectly
engage in any insurance underwriting
17<PAGE>
<PAGE>
activity other than to the extent such activities are
permissible for a national bank or a national bank subsidiary or
except for certain other limited forms of insurance underwriting
permitted under the regulations. Under the regulations, the
FDIC permits state banks that meet applicable minimum capital
requirements to engage as principal in certain activities that
are not permissible to national banks including guaranteeing
obligations of others, activities which the Federal Reserve
Board has found by regulation or order to be closely related to
banking and certain securities activities conducted through
subsidiaries.
Subject to limitation by the Administrator, North
Carolina-chartered savings banks may make any loan or
investment or engage in any activity which is permitted to
federally chartered institutions. However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total
assets in business, commercial, corporate and agricultural
loans. In addition to such lending authority, North
Carolina-chartered savings banks are authorized to invest
funds, in excess of loan demand, in certain statutorily
permitted investments, including but not limited to (i)
obligations of the United States, or those guaranteed by it;
(ii) obligations of the State of North Carolina; (iii) bank
demand or time deposits; (iv) stock or obligations of the
federal deposit insurance fund or a FHLB; (v) savings accounts
of any savings institution as approved by the board of
directors; and (vi) stock or obligations of any agency of the
State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal
business is to make education loans.
SAFETY AND SOUNDNESS STANDARDS. The federal banking
regulatory agencies, including the FDIC, have adopted standards
for the safe and sound operation of financial institutions, as
mandated by the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). These regulations require
insured depository institutions to maintain internal controls
and information systems and internal audit systems that are
appropriate for the size, nature and scope of the institution's
business. The rules also require certain basic standards to be
observed in loan documentation, credit underwriting, interest
rate risk exposure, and asset growth. Depository institutions
are also required to maintain safeguards to prevent the payment
of compensation, fees and benefits that are excessive or that
could lead to material financial loss, and to take into account
factors such as comparable compensation practices at
comparable institutions.
The regulations also require a depository institution to
maintain a ratio of classified assets to total capital and
ineligible allowances that is no greater than 1.0, and require
that depository institutions have minimum earnings sufficient to
absorb losses without impairing capital. The FDIC may require
institutions to file safety and soundness plans to cure any
deficiency. The FDIC may issue orders directing an institution
to correct a deficiency or to take or refrain from taking
actions prohibited by Section 39 of FDICIA, and may assess civil
money penalties or take other enforcement action if such an
order is violated.
TRANSACTIONS WITH AFFILIATES. Transactions between savings
banks and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings bank is any
company or entity which controls, is controlled by or is under
common control with the savings bank. Generally, Sections 23A
and 23B (i) limit the extent to which the savings bank or its
subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of such institution's
capital stock and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20%
of such capital stock and surplus and (ii) require that all such
transactions be on terms substantially the same, or at least as
favorable, to the institution or subsidiary as those provided to
a non-affiliate. A bank holding company and its subsidiaries
are considered "affiliates" of the bank under Section 23A and
23B. The term "covered transaction" includes the making of
loans, purchase of assets, issuance of a guarantee and similar
other types of transactions. In addition to the restrictions
imposed by Sections 23A and 23B, the Bank may not (i) lend
or otherwise extend credit to an affiliate, except for any
affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of
any affiliate, except for affiliates which are subsidiaries of
the Bank.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the
FHLB System, which consists of 12 district FHLBs subject to
supervision and regulation by the Federal Housing Finance Board
("FHFB"). The FHLBs provide a central credit facility primarily
for member institutions. As a member of the FHLB of Atlanta,
the Bank is required
18<PAGE>
<PAGE>
to acquire and hold shares of capital stock in the FHLB of
Atlanta in an amount at least equal to 1% of the aggregate
unpaid principal of its home mortgage loans, home purchase
contracts, and similar obligations at the beginning of each
year, or 1/20 of its advances (borrowings) from the FHLB of
Atlanta, whichever is greater. Cooperative Bank was in
compliance with this requirement with investment in FHLB of
Atlanta stock at December 31, 1997 of $2.7 million. The
FHLB of Atlanta serves as a reserve or central bank for its
member institutions within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes advances to
members in accordance with policies and procedures established
by the FHFB and the Board of Directors of the FHLB
of Atlanta. Long term advances may only be made for the purpose
of providing funds for residential housing finance.
FEDERAL RESERVE BOARD REGULATION. Pursuant to regulations
of the Federal Reserve Board, all FDIC-insured depository
institutions must maintain average daily reserves against their
transaction accounts. Because required reserves must be
maintained in the form of vault cash or in a noninterest bearing
account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's
interest-earning assets. At December 31, 1997, the Bank met its
reserve requirements.
UNIFORM LENDING STANDARDS. Under FDIC regulations which
became effective March 19, 1993, banks must adopt and maintain
written policies that establish appropriate limits and standards
for extensions of credit that are secured by liens or interests
in real estate or are made for the purpose of financing
permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are
clear and measurable, loan administration procedures and
documentation, approval and reporting requirements. The real
estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies (the
"Interagency Guidelines") that have been adopted by the federal
bank regulators.
The Interagency Guidelines, among other things, call upon
depository institutions to establish internal loan-to-
value limits for real estate loans that do not exceed the
following supervisory limits: (i) for loans secured by raw land,
the supervisory loan-to-value limit is 65% of the value of the
collateral; (ii) for land development loans (i.e., loans for
the purpose of improving unimproved property prior to the
erection of structures), the supervisory limit is 75%; (iii) for
loans for the construction of commercial, multifamily or other
nonresidential property, the supervisory limit is 80%;
(iv) for loans for the construction of one-to four-family
properties, the supervisory limit is 85%; and (v) for loans
secured by other improved property (e.g., farmland, completed
commercial property and other income-producing property
including non-owner-occupied one-to four-family property), the
limit is 85%. Although no supervisory loan-to-value limit has
been established for owner-occupied, one-to four-family and home
equity loans, the Interagency Guidelines state that for any such
loan with a loan-to-value ratio that equals or exceeds 90% at
origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily
marketable collateral.
The Interagency Guidelines state that it may be appropriate
in individual cases to originate or purchase loans with
loan-to-value ratios in excess of the supervisory loan-to-value
limits, based on the support provided by other credit factors.
The aggregate amount of loans in excess of the supervisory
loan-to-value limits, however, should not exceed 100% of total
capital and the total of such loans secured by commercial,
agricultural, multifamily and other non-one-to four-family
residential properties should not exceed 30% of total capital.
The supervisory loan-to-value limits do not apply to certain
categories of loans including loans insured or guaranteed by the
U.S. government and its agencies or by financially capable
state, local or municipal governments or agencies, loans backed
by the full faith and credit of a state government, loans that
are to be sold promptly after origination without recourse to a
financially responsible party, loans that are renewed,
refinanced or restructured without the advancement of new funds,
loans that are renewed, refinanced or restructured in connection
with a workout, loans to facilitate sales of real estate
acquired by the institution in the ordinary course of collecting
a debt previously contracted and loans where the real estate is
not the primary collateral.
STATE LAW AND REGULATION. North Carolina law contains
comprehensive provisions for the regulation of a savings bank
business in the State of North Carolina, including the manner of
chartering a savings bank, capital requirements, the composition
and qualifications of boards of directors, the number and manner
of selection of officers, and record keeping requirements.
19<PAGE>
<PAGE>
The Bank derives its investment power from these laws and
regulations and must structure its lending policies and
procedures to comply with the various applicable provisions.
Likewise, the investments by the Bank are regulated, including
investments in certain types of specific properties. The manner
of establishing savings accounts and evidencing the same is
prescribed, as are the obligations of the Bank with respect to
withdrawals from savings accounts. As a North Carolina savings
bank, Cooperative Bank is also permitted to make any investment
permitted to a federal savings association.
North Carolina savings banks may conduct operations through
branch offices located in the State of North Carolina. The
North Carolina Savings Banks Commission of the Department of
Commerce conducts hearings on all branch applications, and any
interested person may present evidence and argument.
Any plan adopted by the directors of a savings bank under
which the savings bank would reorganize or merge or consolidate
with another savings bank must be approved by the Administrator.
The plan must also be approved by the members or stockholders
who are entitled to vote, at an annual or special meeting.
The Administrator is required to conduct a periodic
examination of each institution under his jurisdiction. The
examination provides directors with an independent assessment of
the Bank's operations and compliance with applicable law,
regulations and prudent operating policies. The Administrator
may make such examination jointly with examiners of the FDIC.
TAXATION
Savings associations are subject to the provisions of the
Internal Revenue Code of 1986, as amended (the "Code") in the
same general manner as other corporations. Through tax years
beginning before December 31, 1995, savings associations such as
Cooperative Bank which meet certain definitional tests and other
conditions prescribed by the Code benefitted from certain
favorable provisions regarding their deductions from taxable
income for annual additions to their bad debt reserve. For
purposes of the bad debt reserve deduction, loans are separated
into "qualifying real property loans," which generally are loans
secured by interests in real property, and nonqualifying real
property loans, which are all other loans. The bad debt reserve
deduction with respect to nonqualifying loans must be based on
actual loss experience. The amount of the bad debt reserve
deduction with respect to qualifying real property loans may
be based upon actual loss experience (the "experience method")
or a percentage of taxable income determined without regard to
such deduction (the "percentage of taxable income method"). The
Bank generally elected to use the method which resulted in the
greatest deduction for federal income tax purposes in any given
year.
Legislation that is effective for tax years beginning after
December 31, 1995 requires institutions to recapture into
taxable income over a six taxable year period the portion of the
tax loan reserve that exceeds the pre-1988 tax loan loss
reserve. The Bank will no longer be allowed to use the reserve
method for tax loan loss provisions, but would be allowed to use
the experience method of accounting for bad debts used by
commercial banks under Code section 585. There will be no
future effect on net income from the recapture because the taxes
on these bad debt reserves has already been accrued as a
deferred tax liability.
The Bank's federal income tax returns were most recently
audited in 1970.
For additional information regarding federal and state
taxes, see Note 12 of Notes to Consolidated Financial
Statements in the Annual Report.
STATE INCOME TAXATION
Under North Carolina law, the Bank is subject to an annual
corporate minimum tax of 7.50% of its federal taxable income as
computed under the Code, subject to certain prescribed
adjustments. The North Carolina corporate income tax will be
reduced to 6.9% for years beginning on or after January 1, 2000.
This reduction is being phased in over a four year period with
the tax rate being reduced to 7.5% for taxable years beginning
on or after January 1, 1997,
20 <PAGE>
<PAGE>
7.25% for 1998, and 7% for 1999. In addition to the state
corporate income tax, the Bank is subject to an annual state
franchise tax, which is imposed at a rate of .15% applied to the
greatest of the Bank's (i) capital stock, surplus and undivided
profits, (ii) investment in tangible property in North Carolina
or (iii) appraised valuation of property in North Carolina. The
filing of consolidated returns is not permitted under North
Carolina law.
ITEM 2. PROPERTIES
- -------------------
The following table sets forth the location of the Bank's
offices, as well as certain additional information
relating to these offices as of December 31, 1997.
<TABLE>
<CAPTION>
Year Net Book Square
Location Opened Value Footage Title Deposits
- -------- ------ -------- ------- ----- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C>
201 Market St., Wilmington, NC 1959 $2,058 27,976 Owned $37,890
24 N. Second St., Wilmington, NC (1) 1980 -- 4,176 Owned(1) --
827 New Bridge St., Jacksonville, NC 1954 5 4,213 Owned(2) 18,491
205 E. Main St., Wallace, NC 1954 124 2,880 Owned 43,069
922 E. Arendell St., Morehead City, NC 1958 56 1,984 Owned 16,435
Broad Street, Elizabethtown, NC 1961 274 2,016 Leased(7) 18,384
4 E. Fifth St., Tabor City, NC 1980 179 3,880 Owned 26,430
3605 Oleander Dr., Wilmington, NC 1970 35 1,296 Owned(3) 23,754
2405 S. College Rd., Wilmington, NC 1974 178 2,000 Owned 28,280
1501 Live Oak St., Beaufort, NC 1975 16 1,685 Owned(4) 8,908
400 Western Blvd., Jacksonville, NC 1982 373 2,050 Owned 9,311
132 W. 2nd St., Washington, NC 1983 76 7,298 Owned(5) 19,448
Railroad St., Robersonville, NC 1983 56 2,500 Owned(5) 8,539
2007 Croatan Ave., Kill Devil
Hills, NC 1983 106 2,337 Owned(5) 7,165
1296 John Small Ave., Washington, NC 1987 204 1,920 Owned 6,552
Corner By-pass, Business 264,
Belhaven, NC 1989 352 1,482 Owned 8,061
821 Ocean Trail, Corolla, NC 1993 14 565 Leased(6) --
7028 Market Street, Wilmington, NC 1995 766 1,925 Owned 7,974
------ --------
$4,872 $288,691
====== ========
<FN>
____________
(1) Operations center for the Bank. Net book value included in 201 Market Street.
(2) Building is owned, but land is leased. Original lease dated 1958. Current
lease terminates 1998. The Bank has signed a contract to purchase the land and
building on February 28, 1998.
(3) Building is owned, but land is leased. Current lease terminates June 2000.
(4) Building is owned, but land is leased. Current lease terminates December 31,
1999.
(5) Acquired through merger.
(6) Loan production office. Month to month rental.
(7) Building is now leased. New building is under construction with
completion anticipated by summer of 1998.
</FN>
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended
December 31, 1997.
21<PAGE>
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- ----------------------------------------------------------
The information contained under the section captioned
"Corporate Information" in the Annual Report is incorporated by
reference.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information required by this item is incorporated herein
by reference to the tables captioned "Selected
Financial and Other Data" in the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ----------------------------------------------------------
The information contained in the section captioned
"Management's Discussion & Analysis" in the Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements contained in the Annual Report
which are listed under Item 14 herein are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------
None, other than as previously reported.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
(a) Directors of the Registrant
The information contained under the section captioned
"Proposal I -- Election of Directors" in the Proxy Statement for
the 1998 Annual Meeting of Stockholders (the "Proxy Statement")
is incorporated herein by reference.
(b) Principal Officers of the Bank
The information contained under the caption "Executive
Officers" under Part I of this Form 10-K is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the section captioned
"Proposal I -- Election of Directors" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
- -------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated
herein by reference to the sections captioned
"Voting Securities and Principal Holders Thereof" in
the Proxy Statement.
22<PAGE>
<PAGE>
(b) Security Ownership of Management
Information required by this item is incorporated
herein by reference to the sections captioned
"Proposal I -- Election of Directors" in the Proxy
Statement.
(c) Changes in Control
Management of the Bank knows of no arrangements,
including any pledge of any person of securities of the
Bank, the operation of which may at a subsequent
date result in a change in control of the Bank.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein
by reference to the sections captioned "Proposal I -- Election
of Directors" and "Voting Securities and Principal Holders
Thereof" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
- --------------------------------------------------------------
(a) Contents. The following financial statements are filed
as part of this Annual Report on Form 10-K.
(1) Consolidated Financial Statements*
1. Report of Independent Accountants
2. Consolidated Statements of Financial
Condition as of December 31, 1997 and 1996
3. Consolidated Statements of Income for the
Years Ended December 31, 1997, 1996 and 1995
4. Consolidated Statements of Stockholders'
Equity for the Years Ended December 31, 1997,
1996 and 1995
5. Consolidated Statements of Cash Flows for the
Year Ended December 31, 1997, 1996, and 1995
6. Notes to Consolidated Financial Statements
___________
* Incorporated by reference to the Annual Report,
attached hereto as Exhibit 13.
(2) Financial Statement Schedules (All financial
statement schedules have been omitted as the
required information is either inapplicable
or included in the Consolidated Financial
Statements or related notes.)
(b) No Current Reports on Form 8-K were filed by the
Company during the final quarter of the fiscal year ended
December 31, 1997.
23<PAGE>
<PAGE>
(c) The following exhibits are either filed as part of this
report or are incorporated herein by reference:
No. Description Page
- --- ----------- ----
3.1 Articles of Incorporation *
3.2 Bylaws *
10.1 Cooperative Bank for Savings, Inc. 1990 Stock *
Option Plan
10.2 Employment Agreement with Frederick Willetts, III *
10.3 Termination Agreements with Daniel W. Eller, *
Edward E. Maready, Eric R. Gray, Todd L. Sammons
and O.C. Burrell, Jr.
10.4 Amendments to Severance Agreements with Daniel *
W. Eller, Edward E. Maready, Eric R. Gray, and
Todd L. Sammons
10.5 Indemnity Agreement with Directors and Executive *
Officers
10.6 Severance Agreement with O. C. Burrell
11 Statement re: computation of per share earnings -
Reference is made to the Company's Consolidated
Statements of Operations attached hereto as
Exhibit 13, which are incorporated herein by
reference
13 Annual Report to Stockholders for the year
ended December 31, 1997
21 Subsidiaries
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
___________
* Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (Reg. No. 33-79206).
24<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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.
Date: February 27, 1998 By: /s/ Frederick Willetts, III
------------------------------
Frederick Willetts, III
President and Chief Executive
Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Frederick Willetts, III Date: February 27, 1998
-------------------------------
Frederick Willetts, III
President, Chief Executive Officer
and Director
(Principal Executive Officer
and Director)
By: /s/ Frederick Willetts, Jr. Date: February 27, 1998
-------------------------------
Frederick Willetts, Jr.
Senior Vice President, Chairman
of the Board
By: /s/ Edward E. Maready Date: February 27, 1998
-------------------------------
Edward E. Maready
Senior Vice President and Treasurer
(Principal Financial and
Accounting Officer)
By: /s/ James D. Hundley, M.D. Date: February 27, 1998
-------------------------------
James D. Hundley, M.D.
(Director)
By: /s/ O. Richard Wright, Jr. Date: February 27, 1998
-------------------------------
O. Richard Wright, Jr.
(Director)
By: /s/ Paul G. Burton Date: February 27, 1998
-------------------------------
Paul G. Burton
(Director)
By: /s/ H. Thompson King, III Date: February 27, 1998
-------------------------------
H. Thompson King, III
(Director)
By: /s/ F. Peter Fensel, Jr. Date: February 27, 1998
-------------------------------
F. Peter Fensel, Jr.
(Director)
By: /s/ William H. Wagoner Date: February 27, 1998
-------------------------------
William H. Wagoner
(Director)
By: /s/ R. Allen Rippy Date: February 27, 1998
-------------------------------
R. Allen Rippy
(Director)
<PAGE>
<PAGE>
INDEX TO EXHIBITS
Exhibit Description Page
- ------- ----------- ----
3.1 Articles of Incorporation *
3.2 Bylaws *
10.1 Cooperative Bank for Savings, Inc. 1990
Stock Option Plan *
10.2 Employment Agreement with Frederick
Willetts, III *
10.3 Termination Agreements with Daniel
W. Eller, Edward E. Maready, Eric R.
Gray, Todd L. Sammons and O.C.
Burrell, Jr. *
10.4 Amendments to Severance Agreements
with Daniel W. Eller, Edward E. Maready,
Eric R. Gray and Todd L. Sammons *
10.5 Indemnity Agreement with Directors
and Executive Officers *
10.6 Severance Agreement with O.C. Burrell
11 Statement re: computation of per share
earnings - Reference is made to the
Company's Consolidated Statements of
Operations attached hereto as Exhibit 13,
which are incorporated herein by reference
13 Annual Report to Stockholders for the year
ended December 31, 1997
21 Subsidiaries
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
___________
* Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (Reg. No. 33-79206).
<PAGE>
AGREEMENT
THIS AGREEMENT entered into this 18th day of December 1997,
by and between Cooperative Bank for Savings, Inc., SSB,
(hereinafter referred to as the "Bank") and O. C. Burrell, Jr.
(hereinafter referred to as the "Employee").
WHEREAS, the Employee has heretofore been employed by the
Bank as Executive Vice-President and Chief Operating Officer;
and
WHEREAS, the Bank deems it to be in its best interest to
enter into this Agreement as additional incentive to the
Employee to continue as an executive employee of the Bank; and
WHEREAS, the parties desire by this writing to set forth
their understandings as to their respective rights and
obligations in the event of termination of Employee's
employment under the circumstances set forth in this Agreement.
NOW, THEREFORE, it is AGREED as follows:
1. PAYMENT IN THE EVENT OF CHANGE IN CONTROL.
(a) In the event of the involuntary termination of
Employee's employment with the Bank in connection with, or
within one year after, any change in control of the Bank,
Employee shall be paid an amount equal to one times the total
cash compensation paid to such Employee during the 12 month
period preceding such termination, but in no event in an amount
greater than the product of 2.99 and the Employee's "base
amount" as defined in Section 280G(b)(3) of the Internal Revenue
Code of 1986, as amended. Said sum shall be paid in one lump
sum within thirty (30) days of such termination. The term
"control" shall refer to the ownership, holding or power to
vote more than 25% of the Bank's voting stock, the control of
the election of a majority of the Bank's directors, or the
exercise of a controlling influence over the management or
policies of the Bank by any person or by persons acting as a
group within the meaning of Section 13(d) of the Securities
Exchange Act of 1934; provided, however, that the term "control"
shall not include a transaction in which the Bank forms a
holding company without change in the respective beneficial
ownership interests of its stockholders other than pursuant to
the exercise of any dissenter and apppraisal rights. The term
"person" means an individual or a corporation, partnership,
trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form
of entity not specifically listed herein.
(b) In the event of a change in control of the Bank,
and the occurrence of certain conditions to which the
Employee has not consented to in advance in writing as
hereinafter specified, or within thirty days thereafter,
Employee may voluntarily terminate his employment and payments
shall be made to the Employee in accordance with Paragraph
1(a) above. Said conditions shall be as follows: (i) if
Employee would be required to move his
<PAGE>
<PAGE>
personal residence or perform his principal executive functions
outside the metropolitan area of Wilmington, North Carolina;
(ii) if in the organizational structure of the Bank the Employee
would be required to report to a person or persons other than
the President; (iii) if the Bank should fail to maintain
employee benefit plans at levels at least equal to those
prevailing immediately prior to the date of the change of
control; (iv) if the Employee would be assigned duties and
responsibilities other than those normally associated with his
position as Executive Vice-President and Chief Operating
Officer; or (v) if the Employee's responsibilities or authority
have in anyway been diminished.
2. TERM. This Agreement shall remain in effect for so
long as the Employee remains in the employ of the Bank, and the
Employee's rights hereunder shall continue following the
termination of his employment with the Bank under any of the
circumstances described in Paragraphs 1(a) or (b) hereof.
3. REIMBURSEMENT OF EXPENSES. In the event any dispute
shall arise between the Employee and the Bank as to the terms or
interpretation of this Agreement, whether instituted by
formal legal proceedings or otherwise, including any action
taken by the Employee to enforce the terms hereof or in
defending against any action taken by the Bank, the Bank shall
reimburse the Employee for all costs and expenses, including
reasonable attorneys' fees, arising from such dispute,
proceedings or actions, if the ultimate outcome is substantially
in favor of the Employee. Such reimbursement shall be paid
within 10 days of Employee furnishing to the Bank written
evidence, which may be in the form, among other things, of a
canceled check or receipt, of any costs or expenses incurred by
the Employee. Any such request for reimbursement by the
Employee shall be made no more frequently than at 30 day
intervals.
4. REGULATORY REQUIREMENTS.
(a) The Board of Directors may terminate the
Employee's employment at any time, but any termination by the
Board of Directors other than termination for "Just Cause",
shall not prejudice the Employee's right to compensation or
other benefits under the Agreement. The Employee shall have no
right to receive compensation or other benefits for any period
after termination for "Just Cause". Termination for "Just
Cause" shall include termination because of the Employee's
personal dishonesty, incompetence, willful misconduct, breach
of fiduciary duty involving personal profit, intentional failure
to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses)
or final cease-and-desist order, or material breach of any
provision of the contract.
(b) If the Employee is suspended and/or temporarily
prohibited from participating in the conduct of the Bank's
affairs by a notice served under Section 8(e)(3) or (8)(1) of
the Federal Deposit Insurance Act ("FDIA") (12 U.S.C,.
1818(e)(3) and (g)(1)), the Bank's obligations under the
contract shall be suspended as of the date of service, unless
stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Bank may in its discretion (i) pay the
Employee all or part of the compensation withheld while its
contract obligations were suspended and (ii) reinstate in whole
or in part) any of its obligations which were suspended.
<PAGE>
<PAGE>
(c) If the Employee is removed and/or permanently
prohibited from participating in the conduct of the Bank's
affairs by an order issued under Section 8(e)(4) or (g)(1) of
the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all the obligations
of the Bank under the Agreement shall terminate as of the
effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default (as defined in
Section 3(x)(1) of the FDIA), all obligations under this
Agreement shall terminate as of the date of default, but this
subparagraph shall not affect any vested rights of the
contracting parties.
5. SUCCESSORS AND ASSIGNS.
(a) This Agreement shall be binding upon any
corporate or other successor of the Bank which shall acquire,
directly or indirectly by merger, consolidation, purchase or
otherwise, all or substantially all of the assets of the Bank.
(b) The Employee shall be precluded from assigning or
delegating his rights or duties hereunder without first
obtaining the written consent of the Bank.
6. AMENDMENTS. No amendments or additions to this
Agreement shall be binding unless in writing and signed by both
parties, except as herein otherwise provided.
7. APPLICABLE LAW. This Agreement shall be governed in
all respects whether as to validity, construction, capacity,
performance or otherwise, by the laws of the State of North
Carolina, except to the extent that Federal law shall be deemed
applicable.
8. SEVERABILITY. The provisions of this Agreement shall
be deemed severable and the invalidity or unenforceability of
any provision shall not affect the validity or
enforceability of the other provisions thereof.
9. NO GUARANTEE OF EMPLOYMENT. Nothing contained herein,
either expressed or implied, shall confer on the Employee any
guarantee or promise of continued employment with the Bank in
any capacity whatsoever, either prior to or following any
change in control of Bank, or otherwise.
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties have executed this
Agreement on the day and year first hereinabove written.
COOPERATIVE BANK FOR SAVINGS,
INC., SSB
By:_____________________________
ATTEST:
_________________________
WITNESS:
_________________________ ______________________________
Employee
<PAGE>
COOPERATIVE
BANKSHARES, INC.
Full-Service Community Banking Since 1898
Annual Report
December 31, 1997
<PAGE>
<PAGE>
COOPERATIVE BANKSHARES, INC.
________________________________________________________________
Profile Cooperative Bankshares, Inc., is the parent company
of Cooperative Bank For Savings, Inc., SSB. The Bank
is chartered under the laws of the state of North
Carolina to engage in general banking business.
Cooperative 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, boat
loans and check reserve.
Chartered in 1898, Cooperative's headquarters is
located in Wilmington, North Carolina. Cooperative
operates 17 offices throughout the coastal and
inland communities of eastern North Carolina from
Corolla located on the Outer Banks of North Carolina
to Tabor City located on the South Carolina border.
The common stock of Cooperative Bankshares, Inc., is
traded on the NASDAQ National Market under the symbol
"COOP".
________________________________________________________________
Mission It is the mission of Cooperative to provide the
maximum in safety and security for our depositors, an
equitable rate of return for our stockholders,
and excellent service for our customers. We do this
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.
________________________________________________________________
Table of
Contents Selected Financial and Other Data . . . . . . . . . 2
President's Message . . . . . . . . . . . . . . . . 3
Management's Discussion & Analysis. . . . . . . .4-11
Report of Independent Accountants . . . . . . . . 12
Consolidated Statements of Financial
Condition . . . . . . . . . . . . . . . . . . . 13
Consolidated Statements of Operations . . . . . . 14
Consolidated Statements of Stockholders' Equity . 15
Consolidated Statements of Cash Flows . . . . . . 16
Notes to Consolidated Financial Statements. . . 17-30
Directors, Officers, and Office Locations . . . . 31
Corporate Information . . . . . . . . . . . . . . 32
1<PAGE>
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
December 31, December 31, December 31, December 31, March 31,
Financial Condition (Dollars in Thousands) 1997 1996 1995 1994 1994
________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Assets. . . . . . . . . . . . . . . . . . . $ 369,121 $ 341,300 $ 311,843 $ 324,252 $ 312,513
Loans receivable, net . . . . . . . . . . . 286,692 263,313 234,008 240,194 215,497
Mortgage-backed and related securities. . . 12,856 28,825 30,907 31,658 37,202
Cash, securities and other investments. . . 61,944 40,942 35,540 40,320 47,039
Goodwill. . . . . . . . . . . . . . . . . . 0 0 3,602 3,894 4,113
Deposits. . . . . . . . . . . . . . . . . . 288,691 278,139 270,071 266,079 273,704
Borrowed funds. . . . . . . . . . . . . . . 50,226 35,435 10,089 30,000 9,650
Stockholders' equity. . . . . . . . . . . . $ 28,294 $ 25,470 $ 29,083 $ 26,923 $ 26,148
________________________________________________________________________________________________________________
Summary of Operations (Dollars in thousands Year Ended Year ended Year ended 9 Mo. ended Year ended
except per share amounts) December 31, December 31, December 31, December 31, March 31,
1997 1996 1995 1994 1994
________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Interest income. . . . . . . . . . . . . . . $ 26,093 $ 22,793 $ 21,904 $ 16,610 $ 22,079
Interest expense . . . . . . . . . . . . . . 15,732 13,630 13,701 8,302 10,565
Net interest income. . . . . . . . . . . . . 10,361 9,163 8,203 8,308 11,514
Provision for loan losses. . . . . . . . . . 153 156 3 0 30
Non-interest income. . . . . . . . . . . . . 608 570 620 502 1,538
Non-interest expenses (1). . . . . . . . . . 7,188 12,251 7,121 4,967 6,269
Income (loss) before income taxes and
accounting change. . . . . . . . . . . . . 3,628 (2,674) 1,699 3,843 6,753
Income (loss) before accounting change . . . 2,234 (3,250) 1,024 2,487 4,032
Cumulative effect of a change in
accounting for income taxes. . . . . . . . 0 0 0 0 203
Net income (loss). . . . . . . . . . . . . . $ 2,234 $ (3,250) $ 1,024 $ 2,487 $ 4,235
________________________________________________________________________________________________________________
Other Selected Data
Return on average assets (2) . . . . . . . . . 0.63% (1.01)% 0.32% 1.01% 1.35%
Return on average equity (2) . . . . . . . . . 8.26% (11.40)% 3.62% 12.28% 17.46%
Stockholders' equity to total assets . . . . . 7.67% 7.46% 9.33% 8.30% 8.37%
Non-performing assets to total assets. . . . . 0.16% 0.44% 0.25% 0.15% 0.30%
Allowance for loan losses to total loans . . . 0.28% 0.29% 0.31% 0.31% 0.34%
________________________________________________________________________________________________________________
Per Share Data (3)
Earnings (loss) per:
Common share . . . . . . . . . . . . . . . $ 0.75 $ (1.09) $ 0.34 $ 0.83 $ 1.42
Common share - assuming dilution . . . . . 0.70 (1.09) 0.32 0.78 1.34
Tangible book value. . . . . . . . . . . . . . $ 9.48 $ 8.54 $ 8.54 $ 7.72 $ 7.38
Number of common shares outstanding. . . . . . 2,984,396 2,983,396 2,983,396 2,983,396 2,983,396
________________________________________________________________________________________________________________
<FN>
(1) Includes one time special assessment for deposit insurance of $1.8 million and a charge-off of impaired
goodwill of $3.4 million for the year ended December 31, 1996.
(2) Return on average assets and return on average equity for the nine months ended December 31, 1994 have been
annualized for comparative purposes.
(3) All per share amounts are adjusted for all stock dividends, splits, and recent issued accounting
pronouncements.
</FN>
</TABLE>
2<PAGE>
<PAGE>
PRESIDENT'S MESSAGE
TO OUR STOCKHOLDERS:
The year 1997 was one marked by continued improvement in
the overall condition of Cooperative Bankshares, Inc. As the
year progressed, the Bank's net interest income increased
steadily.
EARNINGS
Net income for the year ended December 31, 1997, rose 50%
over the previous year to $2,233,738 or $.70 per share. Income
for the year ended December 31, 1996 was $1,487,895 or $.47 per
share, excluding a one time, special assessment for deposit
insurance of $1,782,810, and a charge-off of goodwill of
$3,359,791 relating to an acquisition made in 1983. Net loss
for 1996, after the one time charges was $3,249,853 or $1.09 per
share.
LOANS
During the year, 713 mortgage loans were originated
totaling $74,145,340, a 10% increase over the level of
originations in the previous year. Despite this increase in the
overall level of loan volume, we continue to adhere to strict
underwriting criteria. Also during the year, the Retail Banking
Division originated 1,345 loans in an amount of $15,362,244.
Continued growth in our Retail Banking operation impacts
favorably our net interest income, as these loans generally
carry a higher rate of interest than one-to-four family mortgage
loans. While the primary focus during the past year continued
to be on origination of one-to-four family residential loans,
Retail Banking loans will play an ever increasing role in
the Company's asset structure.
ASSET QUALITY
The quality of our assets remains a top priority for the
Bank. As of December 31, 1997, nonperforming loans and real
estate owned totaled $608,000, or 0.16% of assets, a 59% decline
from $1,494,000 at December 31, 1996. The allowance for loan
losses has been increased to $874,000, and while this is
considered to be adequate at the present time to cover any
potential loan loss exposure, the Bank is continuing to add to
this allowance to further protect our investment in loans.
RECENT DEVELOPMENTS
As previously mentioned, the Bank was assessed a one time
special assessment of $1,782,810 for deposit insurance, and
charged off goodwill of $3,359,791 relating to an acquisition
made in 1983. While these charges were made in 1996, they have
positively impacted earnings during 1997, and will favorably
impact earnings in the future. Assets as of December 31, 1997
rose to an all time high of $369.1 million, an 8.2% increase
over the previous year. On August 25th, the Board of Directors
approved a 2 for 1 stock split in the form of a 100% stock
dividend on the Bank's outstanding common stock. The split was
payable on September 22nd to stockholders of record as of
September 8th. This marked the fourth time the Company's stock
has split since the public offering in 1991.
During the past year, the Bank implemented its Web Page on
the Internet, and may now be reached at www.coop-bank.com.
During 1997, the Bank made a decision to invest significantly in
new technology, equipment and communications systems, which
allows the Bank to offer a wider range of products and services
in the future, as well as prepare our information systems
for the year 2000.
<PAGE>
The Retail Banking Division continues to develop and market
new products, and now offers a full range of banking services as
well as alternative investments, thus allowing us to be a full
service, community bank.
SUMMARY
It has been another busy year at Cooperative and, as
anticipated, benefits from the above mentioned charge-offs
continue to positively affect earnings. During the coming year
Cooperative will celebrate its 100th anniversary, representing a
century of service to the people of eastern North Carolina. As
I look toward our second century in operation, I am optimistic
about our future and appreciate your continued confidence and
support.
/S/ Frederick Willetts, III
Sincerely,
Frederick Willetts, III
President
3
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
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 December 31, 1997, $272.3
million, or 88.5%, of the Bank's loan portfolio consisted of
loans secured by one-to- four family residential properties.
Also at that date, approximately 91.6% 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 December 31,
1997, adjustable rate loans totaled $208.3 million, or
67.7%, and fixed rate loans totaled $99.3 million or 32.3% 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 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 December 31,
1997, Cooperative had a one-year negative gap position of 9.2%.
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
4
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
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.
The following table indicates the time periods in which
interest-earning assets and interest-bearing liabilities will
mature or reprice in accordance with their contractual terms.
The table assumes prepayments and scheduled principal
amortization of fixed-rate loans and mortgage-backed securities,
and assumes that adjustable rate loans will reprice
at contractual repricing intervals.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS Over One Over Five
One Year Through Through Over Ten
December 31, 1997 or Less Five Years Ten Years Years Total
____________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities and other
interest-earning assets. . . . $ 25,001 $ 16,003 $ 11,044 $ 5,000 $ 57,048
Mortgage-backed and related
securities . . . . . . . . . . 7,831 3,146 1,176 703 12,856
Loan portfolio . . . . . . . . . 155,046 92,824 22,698 16,124 286,692
-------- -------- -------- ------- --------
Total. . . . . . . . . . . $187,878 $111,973 $ 34,918 $21,827 $356,596
======== ======== ======== ======= ========
Interest-bearing liabilities:
Deposits (1) . . . . . . . . . $216,794 $ 62,129 $ 9,768 $ - $288,691
Borrowed funds . . . . . . . . 5,002 45,016 24 99 50,141
-------- -------- -------- ------- --------
Total. . . . . . . . . . . $221,796 $107,145 $ 9,792 $ 99 $338,832
======== ======== ======== ======= ========
Interest rate sensitivity gap. . . $(33,918) $ 4,828 $ 25,126 $21,728 $ 17,764
======== ======== ======== ======= ========
Cumulative interest rate
sensitivity gap. . . . . . . . . $(33,918) $(29,090) $ (3,964) $17,764
======== ======== ======== =======
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities. . . . . . . 84.7% 91.2% 98.8% 105.2%
======== ======== ======== =======
Ratio of cumulative gap to
total assets . . . . . . . . . . (9.2%) (7.9%) (1.1%) 4.8%
======== ======== ======== =======
<FN>
___________
(1) Includes noninterest bearing checking accounts of $4,204,000
</FN>
</TABLE>
5
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
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 December 31, 1997, the estimated market value of liquid
assets (cash, cash equivalents, and marketable securities) was
approximately $74.1 million, which represents 21.9% of deposits
and borrowed funds as compared to $68.4 million or 21.8% of
deposits and borrowed funds at December 31, 1996. The temporary
increase in liquid assets during the twelve months ended
December 31, 1997, is in cash and cash equivalents. This excess
cash will be used in the near future for the funding of home
and commercial loan commitments.
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
included $15 million of collateralized mortgage obligations
("CMO") for the period ended December 31, 1996. The $15 million
in CMOs securities were sold during 1997 at break even. The
funds were reinvested in U.S. Government agency securities with
a maturity ranging from one to three years.
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.
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 December 31, 1997, outstanding
off-balance sheet commitments to extend credit totaled $14.7
million, and the undisbursed portion of construction loans was
$18.7 million. Management considers current liquidity levels
adequate to meet the Company's cash flow requirements.
CAPITAL
Stockholders' equity at December 31, 1997, was $28.3
million, up 11% from $25.5 million at December 31, 1996. The
total at December 31, 1997 and December 31, 1996, includes $7
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 December 31,
1997, the Bank's ratio of Tier I capital
6
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
was 7.8%. 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 December 31, 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. For further information, see Note 9 of
Notes to Consolidated Financial Statements.
OTHER INFORMATION
Pursuant to enacted legislation, the FDIC levied an
assessment on institutions with deposits insured by the Savings
Association Insurance Fund (the "SAIF") in order to recapitalize
the SAIF. The assessment, set by the FDIC at 0.657% of
SAIF-insured deposits as of March 31, 1995, was paid on November
27, 1996. The effect of this assessment was to reduce the
Company's net income, before income taxes, for the year ended
December 31, 1996, by $1.8 million. As a result of this
legislation, the Company's deposit insurance premiums declined
substantially commencing January 1, 1997.
During 1996, the Company's ongoing evaluation of the
realizability of its goodwill relating to the 1983 purchase of a
savings and loan indicated that the related branches were
experiencing decreased profitability that had permanently
impaired the goodwill. Due to this permanent impairment the
Company recognized a charge-off of goodwill of $3.4 million to
non-interest expense during the year ended December 31, 1996.
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 a minimal cost to
the Company. Although the cost to bring the Company's
software in compliance can not be determined at this time, it is
not expected to be material. However, there can be no guarantee
that the system 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 AND RESULTS OF
OPERATIONS AT DECEMBER 31, 1997
COMPARED TO DECEMBER 31, 1996
FINANCIAL CONDITION
The Company's total assets increased 8.2% to $369.1 million
at December 31, 1997, as compared to $341.3 million at December
31, 1996. The two major changes in the assets were the increase
of $6.0 million in cash and the $23.4 million (8.9%) increase in
loans receivable. The increases in cash and loans during the
current period were funded by retail deposits and borrowed
funds. 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 December 31, 1997, over 88.5%
of the Company's loan portfolio consisted of loans secured by
one- to- four family residential properties.
The increase in retail deposits was used in part to
fund the increase in loans receivable. Borrowed funds,
collateralized through an agreement with the Federal Home Loan
Bank ("FHLB") for advances, are secured by the Company's
investment in FHLB stock and qualifying first mortgage loans.
Borrowed funds at December 31, 1997, in the amount of $5.0
million, mature in September 1998 with the remaining amount
7
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
maturing in later years. For further information, see Note 8 of
Notes to Consolidated Financial Statements.
The Company's non-performing assets (loans 90 days or more
delinquent and foreclosed real estate) were $608 thousand, or
0.16% of assets, at December 31, 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 $874 thousand at December 31, 1997, is adequate to
cover potential losses.
RESULTS OF OPERATION
The net income of the Company depends primarily upon net
interest income. Net interest income is the difference between
the interest earned on loans and securities portfolios and the
cost of funds, consisting principally of the interest paid on
deposits and borrowings. The Company's operations are
materially affected by general economic conditions, the monetary
and fiscal policies of the Federal government, and the
policies of regulatory authorities.
NET INCOME (LOSS)
Net income for the year ended December 31, 1997, rose 50%
over the previous year to $2.2 million as compared to core
earnings for the previous year of $1.5 million. Pursuant to
legislation enacted in 1996, the FDIC levied an assessment on
institutions with deposits insured by the Savings Association
Insurance Fund (the "SAIF") in order to recapitalize the SAIF.
The effect of this assessment was to reduce the Company's net
income, before income taxes, for the year ended December 31,
1996, by $1.8 million. In addition to the SAIF assessment the
Company recognized a charge-off of permanently impaired goodwill
of $3.4 million to non-interest expense during the same period.
After the one time charges the Company showed a net loss for the
period ended December 31, 1996, of $3.3 million.
INTEREST INCOME
Interest income increased 14% for the year ended December
31, 1997, as compared to the same period a year ago. The
increase in income can be principally attributed to an increase
in yield and the average balance of the loan portfolio as
compared to the same period last year. This was partially
offset by decreases in the average volume of mortgage-backed and
related securities. Overall, the yield on average interest-
earning assets increased to 7.60% as compared to 7.38% for the
same period a year ago, and the average balance of interest-
earning assets increased 11%.
INTEREST EXPENSE
Interest expense increased 15% for the year ended December
31, 1997, as compared to the same period a year ago. The
increase in interest expense can be principally attributed to an
increase in the average balance of interest-bearing liabilities.
Interest-bearing liabilities increased 12% during the year ended
December 31, 1997, as compared to the same period a year ago.
Although the cost of the average interest-bearing liabilities
increased by 15 basis points to 4.92% as compared to 4.77% last
year, this had only a minimal effect on the increase in interest
expense.
<PAGE>
NET INTEREST INCOME
Net interest income for the year ended December 31, 1997,
as compared to the same period a year ago, increased 13%. During
the year ended December 31, 1997, the yield on average
interest-earning assets increased 22 basis points, while the
cost of average interest-bearing liabilities increased 15 basis
points, causing net interest income to increase. The percentage
of average interest-earning assets to average interest-bearing
liabilities decreased slightly to 107.3% for the year ended
December 31, 1997, as compared to 108.0% for the same period in
1996.
8
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
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 PERIOD ENDED
------------------------------------------------------------
December 31, 1997 December 31, 1996
------------------------------------------------------------
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 . .$ 36,586 $ 2,102 5.75% $ 32,511 $ 1,819 5.60%
Mortgage-backed and related
securities . . . . . . . . . 25,954 1,771 6.82% 30,397 2,048 6.74%
Loan portfolio . . . . . . . . 280,684 22,220 7.92% 246,038 18,927 7.69%
-------- ------- -------- -------
Total interest-earning
assets . . . . . . . . . . 343,224 $26,093 7.60% 308,946 $22,794 7.38%
------- -------
Non-interest earning assets. . 10,599 11,956
-------- --------
Total assets . . . . . . . . .$353,823 $320,902
======== ========
Interest-bearing liabilities:
Deposits. . . . . . . . . . 280,152 13,148 4.69% 271,156 12,670 4.67%
Borrowed funds. . . . . . . 39,797 2,584 6.49% 14,839 960 6.47%
-------- ------- -------- -------
Total interest-bearing
liabilities. . . . . . . 319,949 $15,732 4.92% 285,995 $13,630 4.77%
------- -------
Non-interest bearing
liabilities. . . . . . . . . 6,882 6,389
-------- --------
Total liabilities. . . . . 326,831 292,384
Stockholders' equity . . . 26,992 28,518
-------- --------
Total liabilities and
stockholders' equity . . . .$353,823 $320,902
======== ========
Net interest income. . . . . . $10,361 $ 9,164
======= =======
Interest rate spread . . . . . 2.68% 2.61%
==== ====
Net yield on interest-earning
assets . . . . . . . . . . . 3.02% 2.97%
==== ====
Percentage of average
interest-earning assets
to average interest-
bearing liabilities. . . . . 107.3% 108.0%
===== =====
/TABLE
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
------------------------------
December 31, 1995
------------------------------
Average
Average Yield/
Balance Interest Cost
--------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Securities and other
interest-earning assets. .$ 37,046 $ 2,325 6.28%
Mortgage-backed and related
securities . . . . . . . . . 32,438 2,200 6.78%
Loan portfolio . . . . . . . . 237,431 17,379 7.32%
-------- -------
Total interest-earning
assets . . . . . . . . . . 306,915 $21,904 7.14%
-------
Non-interest earning assets. . 12,454
--------
Total assets . . . . . . . . .$319,369
========
Interest-bearing liabilities:
Deposits. . . . . . . . . . 269,468 12,642 4.69%
Borrowed funds. . . . . . . 16,794 1,058 6.30%
-------- -------
Total interest-bearing
liabilities. . . . . . . 286,262 $13,700 4.79%
-------
Non-interest bearing
liabilities. . . . . . . . . 4,842
--------
Total liabilities. . . . . 291,104
Stockholders' equity . . . 28,265
--------
Total liabilities and
stockholders' equity . . . .$319,369
========
Net interest income. . . . . . $ 8,204
=======
Interest rate spread . . . . . 2.35%
====
Net yield on interest-earning
assets . . . . . . . . . . . 2.67%
====
Percentage of average
interest-earning assets
to average interest-
bearing liabilities. . . . . 107.2%
=====
</TABLE>
9<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
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>
December 31, 1996 Vs. December 31, 1997 December 31, 1995 Vs. December 31, 1996
Increase (Decrease) Increase (Decrease)
Due to Due to
(Dollars in thousands)
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
_________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Securities and other
interest-earning
assets . . . . . . . .$ 228 $ 49 $ 6 $ 283 $(285) $(252) $31 $ (506)
Mortgage-backed and
related securities . . (299) 26 (4) (277) (138) (14) 1 (151)
Loan portfolio. . . . . . 2,665 550 78 3,293 630 885 32 1,547
------------------------------------- ------------------------------------
Total interest-
earning assets. . . 2,594 625 80 3,299 207 619 64 890
------------------------------------- ------------------------------------
Interest expense:
Deposits. . . . . . . . 420 56 2 478 79 (51) - 28
Borrowed funds. . . . . 1,615 3 6 1,624 (123) 28 (3) (98)
------------------------------------- ------------------------------------
Total interest-bearing
liabilities . . . . 2,035 59 8 2,102 (44) (23) (3) (70)
------------------------------------- ------------------------------------
Net interest income. . . $ 559 $566 $72 $1,197 $ 251 $ 642 $67 $ 960
===================================== ====================================
</TABLE>
PROVISION FOR LOAN LOSSES
During the year ended December 31, 1997, the Company had
charge-offs against the allowance for loan losses of $86
thousand consisting of $8 thousand for consumer loans and $78
thousand for loans secured by real estate. The Company added
$153 thousand to the allowance for loan losses for the twelve
month period ended December 31, 1997, bringing the balance up to
$874 thousand. 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
There were no gains or losses on securities for the year
ended December 31, 1997. The $52 thousand gain on sale of
securities for the year ended December 31, 1996, was the cash
liquidation of equity securities. The corporation in which the
Company had invested was purchased by a third party and the
stock was redeemed at a gain of $46 thousand. The remaining $6
thousand was from bonds with call options that were called
during the year. During the year ended December 31, 1997, the
Bank sold $14 million in fixed rate mortgage loans at a gain of
$51 thousand. There
10<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
were no sales during the same period a year ago. The funds from
the loan sale were used in the operation of the Bank to extend
credit to home and commercial loan customers. Real estate owned
expense and losses decreased by 54% to $18 thousand as a result
of management's commitment to disposing of these properties in a
timely manner. Loan fees for the year ended December 31, 1997,
as compared to last year decreased by 11% due to a decrease in
the average balance of loans serviced for others. Fee income
from deposit operations increased due to a more aggressive
position in offering checking accounts.
NONINTEREST EXPENSES
Except for the one time FDIC assessment of $1.8 million and
the goodwill charges of $3.6 million, for the year ended
December 31, 1996, noninterest expense increased only 1.1%, as
compared to the same period last year. The changes in
noninterest expense are listed as follows. Compensation and
related cost increased 8.7%. This 8.7% can be broken down as
follows: 7.7% 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 14%. This increase
can be attributed to additional maintenance necessary to keep
the Bank's buildings and equipment in good repair. The 60%
decrease in Federal insurance premium can be attributed to the
legislation enacted in September 1996 that resulted in a
reduction in the premium. Advertising increased 25% due to a
more aggressive advertising campaign. The impaired goodwill
was charged off during September 1996 eliminating a $242
thousand annual 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 7%.
INCOME TAXES
The effective tax rates for the years ended December 31,
1997 and 1996 approximate the statutory rate after giving effect
to nontaxable interest, write-off of impaired goodwill, other
permanent tax differences, and adjustments to certain deferred
tax liabilities.
11<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Cooperative Bankshares, Inc.
Wilmington, North Carolina
We have audited the accompanying consolidated statements of
financial condition of Cooperative Bankshares, Inc. and
subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1997, 1996
and 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Cooperative Bankshares, Inc. and
subsidiary as of December 31, 1997 and 1996 and the consolidated
results of their operations and their cash flows for each of the
years in the three year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Raleigh, North Carolina
January 30, 1998
12<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . $ 17,207,777 $ 11,507,283
Securities:
Available for sale. . . . . . . . . . . . . . . . . . 21,004,067 5,946,250
Held to maturity (estimated market value,
1997 - $20,348,130; 1996 - $19,705,629) . . . . . . 21,043,946 21,053,628
Mortgage-backed and related securities available
for sale. . . . . . . . . . . . . . . . . . . . . . . 12,856,337 28,824,918
Other investments . . . . . . . . . . . . . . . . . . . 2,688,200 2,435,000
Loans receivable, net . . . . . . . . . . . . . . . . . 286,691,769 263,312,730
Foreclosed real estate owned. . . . . . . . . . . . . . 251,141 42,146
Accrued interest receivable . . . . . . . . . . . . . . 2,172,335 1,917,447
Premises and equipment, net . . . . . . . . . . . . . . 4,872,202 4,786,292
Prepaid expenses and other assets . . . . . . . . . . . 333,316 1,474,164
------------ ------------
$369,121,090 $341,299,858
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits. . . . . . . . . . . . . . . . . . . . . . . . $288,690,634 $278,138,909
Borrowed funds. . . . . . . . . . . . . . . . . . . . . 50,141,002 35,145,362
ESOP note payable . . . . . . . . . . . . . . . . . . . 84,824 289,160
Escrow deposits . . . . . . . . . . . . . . . . . . . . 427,983 620,808
Accrued interest payable on deposits. . . . . . . . . . 126,155 351,295
Deferred income taxes, net. . . . . . . . . . . . . . . 1,051,800 1,075,883
Accrued expenses and other liabilities. . . . . . . . . 305,123 208,891
------------ ------------
Total liabilities. . . . . . . . . . . . . . . . 340,827,521 315,830,308
------------ ------------
Commitments and contingencies (Notes 5, 9 and 17)
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, 2,984,396 and 1,491,698 shares
issued and outstanding. . . . . . . . . . . . . . . 2,984,396 1,491,698
Additional paid-in capital. . . . . . . . . . . . . . 6,022,454 6,003,111
Unearned ESOP shares. . . . . . . . . . . . . . . . . (84,824) (289,160)
Net unrealized loss on securities available
for sale. . . . . . . . . . . . . . . . . . . . . . (6,663) (372,265)
Retained earnings . . . . . . . . . . . . . . . . . . 19,378,206 18,636,166
------------ ------------
Total stockholders' equity . . . . . . . . . . . 28,293,569 25,469,550
------------ ------------
$369,121,090 $341,299,858
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
13<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable. . . . . . . . . . . . . .$22,220,197 $18,926,560 $17,379,495
Mortgage-backed and related securities. . . 1,771,023 2,048,268 2,199,582
Securities. . . . . . . . . . . . . . . . . 2,102,462 1,818,629 2,324,569
----------- ----------- -----------
Total interest income. . . . . . . . . 26,093,682 22,793,457 21,903,646
----------- ----------- -----------
Interest expense:
Deposits. . . . . . . . . . . . . . . . . . 13,148,297 12,669,984 12,642,461
Borrowed funds. . . . . . . . . . . . . . . 2,584,143 960,408 1,058,457
----------- ----------- -----------
Total interest expense . . . . . . . . 15,732,440 13,630,392 13,700,918
----------- ----------- -----------
Net interest income . . . . . . . . . . . . . 10,361,242 9,163,065 8,202,728
Provision for loan losses. . . . . . . . . . 153,000 155,809 2,658
----------- ----------- -----------
Net interest income after provision
for loan losses. . . . . . . . . . . 10,208,242 9,007,256 8,200,070
----------- ----------- -----------
Noninterest income:
Net gains on sale of securities . . . . . . - 52,496 22,629
Net gains on sale of loans and
mortgage-backed and related securities. . 51,026 - 205,091
Real estate owned expenses and losses . . . (18,154) (39,833) (159,546)
Loan fees . . . . . . . . . . . . . . . . . 264,404 295,625 310,783
Deposit and related fees. . . . . . . . . . 311,047 257,011 232,353
Other income, net . . . . . . . . . . . . . (256) 4,217 9,151
----------- ----------- -----------
Total noninterest income . . . . . . . 608,067 569,516 620,461
----------- ----------- -----------
Other operating expenses:
Compensation and fringe benefits. . . . . . 3,957,154 3,638,832 3,634,205
Occupancy and equipment . . . . . . . . . . 1,428,944 1,257,639 1,170,871
Federal insurance premiums. . . . . . . . . 218,811 543,526 658,706
Advertising . . . . . . . . . . . . . . . . 434,454 348,356 343,020
Amortization of goodwill. . . . . . . . . . - 242,398 292,069
Other . . . . . . . . . . . . . . . . . . . 1,149,278 1,077,727 1,022,762
SAIF assessment . . . . . . . . . . . . . . - 1,782,810 -
Goodwill impairment . . . . . . . . . . . . - 3,359,791 -
----------- ----------- -----------
Total other operating expenses . . . . 7,188,641 12,251,079 7,121,633
----------- ----------- -----------
Income (loss) before income taxes . . . . . . 3,627,668 (2,674,307) 1,698,898
Income tax expense. . . . . . . . . . . . . . 1,393,930 575,546 674,517
----------- ----------- -----------
Net income (loss) . . . . . . . . . . . . . .$ 2,233,738 $(3,249,853) $ 1,024,381
=========== =========== ===========
Earnings (loss) per:
Common share. . . . . . . . . . . . . . . .$ 0.75 $ (1.09) $ 0.34
=========== =========== ===========
Common share - assuming dilution. . . . . .$ 0.70 $ (1.09) $ 0.32
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
14<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Loss
Additional Unearned on Securities Total
Common Paid-In ESOP Available Retained Stockholders'
Stock Capital Shares for Sale, Net Earnings Equity
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $1,491,698 $6,003,111 $ - $(1,433,690) $20,861,638 $26,922,757
Change in unrealized loss
on securities available
for sale, net of taxes - - - 1,135,752 - 1,135,752
Net income for year - - - - 1,024,381 1,024,381
------------------------------------------------------------------------------
Balance, December 31, 1995 1,491,698 6,003,111 - (297,938) 21,886,019 29,082,890
Change in unrealized loss
on securities available
for sale, net of taxes - - - (74,327) - (74,327)
Guaranty of ESOP borrowing - - (800,000) - - (800,000)
Release of ESOP shares - - 510,840 - - 510,840
Net loss for year - - - - (3,249,853) (3,249,853)
------------------------------------------------------------------------------
Balance, December 31,1996 1,491,698 6,003,111 (289,160) (372,265) 18,636,166 25,469,550
Two for one stock split,
effected in the form of a
stock dividend 1,491,698 - - - (1,491,698) -
Exercise of stock options 1,000 7,679 - - - 8,679
Change in unrealized loss
on securities available
for sale, net of taxes - - - 365,602 - 365,602
Release of ESOP shares - 11,664 204,336 - - 216,000
Net income for year - - - - 2,233,738 2,233,738
------------------------------------------------------------------------------
Balance, December 31, 1997 $2,984,396 $6,022,454 $ (84,824) $ (6,663) $19,378,206 $28,293,569
==============================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
15<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $2,233,738 $(3,249,853) $ 1,024,381
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Net accretion, amortization, and
depreciation 591,844 801,129 802,695
Net gain on sale of securities - (52,496) (22,629)
Net gain on sale of loans and mortgage-
backed and related securities (51,026) - (205,091)
Provision (benefit) for deferred income
taxes (286,101) 290,700 (151,600)
Goodwill impairment - 3,359,791 -
Release of ESOP shares 11,664 - -
Loss (gain) on sale of premises and
equipment (3,345) 1,000 -
Loss on sales of foreclosed real estate 725 13,266 48,972
Valuation losses on foreclosed real
estate 10,653 76,566 86,836
Provision for loan losses 153,000 155,809 2,658
Changes in assets and liabilities:
Accrued interest receivable (254,888) (174,858) 297,706
Prepaid expenses and other assets 1,109,408 (992,802) 160,020
Accrued interest payable on deposits (225,140) (511,082) 840,502
Accrued expenses and other liabilities 96,233 (319,256) 237,247
---------------------------------------
Net cash provided by (used in)
operating activities 3,386,765 (602,086) 3,121,697
---------------------------------------
Investing activities:
Purchase of securities available for sale (17,000,000) (9,997,883) -
Proceeds from sales of securities available
for sale - - 14,698,750
Proceeds from maturity of securities available
for sale 2,000,000 4,000,000 -
Proceeds from sale of mortgage-backed and
related securities available for sale 15,038,128 - -
Proceeds from principal repayments of
mortgage-backed and related securities
available for sale 1,429,317 1,906,819 1,646,885
Proceeds from sales of loans 14,028,855 - 22,472,343
Loan originations, net of principal
repayments (38,117,697) (29,661,834) (16,219,011)
Proceeds from disposals of foreclosed real
estate 387,456 605,626 132,280
Purchases of premises and equipment (572,338) (241,238) (621,601)
Proceeds from sale of premises and equipment 9,989 16,202 -
Net purchases of other investments (253,200) - (38,600)
Net proceeds from (repayments of) sales of
other investments - 199,471 -
---------------------------------------
Net cash provided by (used in)
investing activities (23,049,490) (33,172,837) 22,071,046
---------------------------------------
<PAGE>
Financing activities:
Net increase in deposits 10,551,725 8,068,248 3,991,578
Proceeds from FHLB advances 25,000,000 25,000,000 17,000,000
Principal payments on FHLB advances (10,000,000) - (28,000,000)
Net decrease in other borrowings - - (9,000,000)
Net proceeds from (repayments of) FHLB
program (4,360) 56,345 89,017
Proceeds from issuance of common stock 8,679 - -
Net change in escrow deposits (192,825) 268,140 (317,120)
---------------------------------------
Net cash provided by (used in)
financing activities 25,363,219 33,392,733 (16,236,525)
---------------------------------------
Increase (decrease) in cash and cash
equivalents 5,700,494 (382,190) 8,956,218
Cash and cash equivalents:
Beginning of year 11,507,283 11,889,473 2,933,255
---------------------------------------
End of year $17,207,777 $11,507,283 $11,889,473
=======================================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
16<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements
include the accounts and transactions of Cooperative Bankshares,
Inc. (the "Company"), a bank holding company incorporated under
the laws of the State of North Carolina, and its wholly-owned
subsidiary Cooperative Bank for Savings, Inc., SSB, and its
wholly-owned subsidiary CS&L Services, Inc. All significant
intercompany transactions have been eliminated.
Nature of Operations - The Company operates 17 offices
(including 16 full service branches) in Eastern North Carolina
and offers a wide range of banking services including deposit
services, banking cards, and alternative investment products.
The funds are used for the extension of credit through home
loans, commercial loans, consumer loans, and other installment
credit such as home equity loans, auto and boat loans, and check
reserves. The Company's primary sources of revenue are its loan
and securities portfolios.
Use of Estimates in the Preparation of Financial Statements -
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at December 31, 1997 and 1996 and the reported
amounts of revenues and expenses during the years ended December
31, 1997, 1996 and 1995. Actual results could differ from those
estimates.
Significant Accounting Policies - The significant accounting
policies of the Company are summarized below:
a. Cash and Cash Equivalents - Cash and cash
equivalents include demand and time deposits (with
original maturities of ninety days or less) at other
institutions. Interest-bearing deposits aggregated
$12,311,582 and $9,084,216 at December 31, 1997 and
1996, respectively.
b. Securities and Mortgage-Backed and Related Securities
- Investments in certain securities are classified
into three categories and accounted for as follows:
(1) debt securities that the entity has the positive
intent and the ability to hold to maturity are
classified as held to maturity and reported at
amortized cost; (2) debt and equity securities that
are bought and held principally for the purpose of
selling them in the near term are classified as
trading securities and reported at fair value, with
unrealized gains and losses included in earnings; (3)
debt and equity securities not classified as either
held to maturity securities or trading securities are
classified as available for sale securities and
reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a
separate component of stockholders' equity.
Other investments are carried at cost, which
approximates market value.
Premiums are amortized and discounts are accreted
using the interest method over the remaining terms of
the related securities. Gains and losses on the sales
of securities are determined using the specific-
identification method and are included in noninterest
income at the time of sale.
<PAGE>
c. Loans Receivable and Allowance for Loan Losses - Loans
receivable are stated at the amount of unpaid
principal, reduced by an allowance for loan losses,
unearned discounts and net deferred loan origination
fees and costs. Interest income on loans is recorded
on the accrual basis based upon the principal amount
outstanding. Deferred loan fees and costs are
amortized to interest income over the contractual life
of the loan using the interest method.
The Company evaluates its loan portfolio in accordance
with Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan", as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosure". Under these
standards, a loan is considered impaired, based on
current information and events, if it is probable that
the Company will be unable to collect the scheduled
payments of principal and interest when due according
to the contractual terms of the loan agreement.
Uncollateralized loans are measured for impairment
based on the present value of expected future cash
flows discounted at the original contractual interest
rate, while all collateral-dependent loans are
measured for impairment based on the fair value of the
collateral.
17<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
c. Loans Receivable and Allowance for Loan Losses
(Continued) - At December 31, 1997 and 1996, the
recorded investment in loans considered impaired in
accordance with SFAS No. 114 totaled $454,176 and
$1,064,261, respectively, with corresponding valuation
allowances of $0 and $70,385, respectively. For the
years ended December 31, 1997 and 1996, the average
recorded investment in impaired loans was
approximately $654,000 and $485,000, respectively.
The amount of interest recognized on impaired loans
during the portion of the year that they were impaired
was immaterial. The Company uses several factors
in determining if a loan is impaired. The internal
asset classification procedures include a thorough
review of significant loans and lending relationships
and 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.
The allowance for loan losses is established through a
provision for loan losses charged to expense to reduce
the recorded balance of loans to their estimated net
realizable value or fair value, as applicable. Loans
are charged against the allowance for loan losses when
management believes that the collectibility of the
principal is unlikely. The allowance is an amount
that management believes will be adequate to absorb
possible losses on existing loans that may become
uncollectible, based on the evaluations of the
collectibility of loans and prior loan loss
experience. The evaluations take into consideration
such factors as changes in the nature and volume of
the loan portfolio quality, review of specific problem
loans, and current economic conditions and trends that
may affect the borrowers' ability to pay.
d. Income Recognition on Impaired and Nonaccrual Loans -
Loans, including impaired loans, are generally
classified as nonaccrual if they are past due as to
maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are
well-secured and in the process of collection. If a
loan or a portion of a loan is classified as doubtful
or is partially charged off, the loan is generally
classified as nonaccrual. Loans that are on a current
payment status or past due less than 90 days may also
be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all
principal and interest amounts contractually due
(including arrearages) are reasonably assured of
repayment within an acceptable period of time, and
there is a sustained period of repayment performance
(generally a minimum of six months) by the borrower,
in accordance with the contractual terms of interest
and principal.
While a loan is classified as nonaccrual and the
future collectibility of the recorded loan balance is
doubtful, collections of interest and principal are
generally applied as a reduction to the principal
outstanding, except in the case of loans with
scheduled amortization where the payment is generally
applied to the oldest payment due. When the future
collectibility of the recorded loan balance is
expected, interest income may be recognized on a cash
basis. In the case where a nonaccrual loan had been
partially charged-off, recognition of interest on a
cash basis is limited to that which would have been
recognized on the recorded loan balance at the
contractual interest rate. Receipts in excess of that
amount are recorded as recoveries to the allowance for
loan losses until prior charge-offs have been fully
recovered.
e. Foreclosed Real Estate - Foreclosed real estate is
recorded initially at the lower of the loan balance or
estimated fair value of the property less estimated
costs to sell at the date of foreclosure and
subsequently reduced by additional allowances which
are charged to earnings if the estimated fair value
declines below its initial value plus any capitalized
costs. Costs related to the improvement of the
property are capitalized, whereas those related to
holding the property are expensed.
f. Premises and Equipment - Premises and equipment are
carried at cost less accumulated depreciation and
amortization. The provision for depreciation is
computed using the straight-line method over the
18<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
f. Premises and Equipment (Continued) - estimated useful
lives of the various classes of assets. Useful lives
range from 15 to 40 years for buildings and 5 to 10
years for furniture and equipment. The cost of
leasehold improvements is amortized on the
straight-line method over the lesser of the lives of
the improvements or the terms of the leases. Repairs
and maintenance are charged to expense as incurred.
g. Income Taxes - Deferred tax asset and liability
balances are determined by application to temporary
differences of the tax rate expected to be in effect
when taxes will become payable or receivable.
Temporary differences are differences between the tax
basis of assets and liabilities and their reported
amounts in the consolidated financial statements that
will result in taxable or deductible amounts in future
years.
The Company and its subsidiary file consolidated
federal income tax returns.
h. Goodwill - Goodwill is amortized using the
straight-line method over 25 years. The Company
evaluates intangible assets for potential impairment
by analyzing the operating results, trends and
prospects for the Company, as well as by comparing
them to their competitors. The Company also takes
into consideration recent acquisition patterns within
the banking industry and any other events or
circumstances which might indicate potential
impairment. During fiscal year 1996, it was
determined that the recorded investment in goodwill
was impaired. Accordingly, the carrying value was
written off to net realizable value through a charge
to earnings of $3,359,791.
i. New Accounting Pronouncements - The Company will adopt
SFAS No. 130, "Reporting Comprehensive Income" on
January 1, 1998. SFAS No. 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.
The Company will adopt SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related
Information" on January 1, 1998. SFAS No. 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.
2. SECURITIES
Securities at December 31, 1997 and 1996 are summarized as
follows:
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1997
U.S. Government and agency securities:
Held to maturity . . . . . . . . .$21,043,946 $ - $ 695,816 $20,348,130
Available for sale . . . . . . . . 21,002,969 18,283 17,185 21,004,067
---------------------------------------------
$42,046,915 $18,283 $ 713,001 $41,352,197
=============================================
1996:
U.S. Government and agency securities:
Held to maturity . . . . . . . . .$21,053,628 $ - $1,347,999 $19,705,629
Available for sale . . . . . . . . 6,003,733 1,250 58,733 5,946,250
---------------------------------------------
$27,057,361 $ 1,250 $1,406,732 $25,651,879
=============================================
</TABLE>
19<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES (CONTINUED)
The maturities of securities at December 31, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------------------
<S> <C> <C>
Held to maturity:
After 5 years through 10 years. . .$16,043,946 $15,496,254
After 10 years. . . . . . . . . . . 5,000,000 4,851,876
------------------------
Total . . . . . . .$21,043,946 $20,348,130
========================
Available for sale:
Within 1 year . . . . . . . . . . .$ 5,000,000 $ 4,996,875
After 1 year through 5 years. . . . 16,002,969 16,007,192
------------------------
$21,002,969 $21,004,067
========================
</TABLE>
Gross realized gains and losses on the sale of securities are
summarized as follows for the years ended December 31, 1997,
1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------
<S> <C> <C> <C>
Gross realized gains. . . . . .$ - $52,496 $29,545
Gross realized losses . . . . . - - 6,916
</TABLE>
3. MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities available for sale at
December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1997
GNMA certificates . . . . . . . .$ 5,010,422 $ 72,544 $ - $ 5,082,966
FNMA certificates . . . . . . . . 5,715,904 21,272 117,044 5,620,132
FHLMC certificates. . . . . . . . 2,142,572 10,667 - 2,153,239
----------------------------------------------
Total $12,868,898 $104,483 $117,044 $12,856,337
==============================================
1996:
GNMA certificates . . . . . . . .$ 5,081,604 $ - $143,357 $ 4,938,247
FNMA certificates . . . . . . . . 6,720,961 19,185 166,425 6,573,721
FHLMC certificates. . . . . . . . 2,565,813 9,073 - 2,574,886
Collateralized mortgage
obligations . . . . . . . . . . 15,038,140 - 300,076 14,738,064
----------------------------------------------
Total $29,406,518 $ 28,258 $609,858 $28,824,918
==============================================
</TABLE>
The Company realized gross gains of $9,375 and gross losses of
$9,387 on sales of mortgage backed and related securities
for the year ended December 31, 1997. There were no sales of
mortgage backed and related securities in 1996 or 1995.
Expected maturities for mortgage-backed and related securities
will differ from contractual maturities because borrowers
have the right to call or prepay obligations with or without
call or prepayment penalties.
4. OTHER INVESTMENTS
Other investments at December 31, 1997 and 1996 consist of
Federal Home Loan Bank of Atlanta ("FHLB") stock. The amortized
cost and estimated market value of the FHLB stock was $2,688,200
and $2,435,000 at December 31, 1997 and 1996, respectively.
The Company, as member of the Federal Home Loan Bank System, is
required to maintain an investment in capital stock of the FHLB
in an amount equal to the greater of 1% of its outstanding home
loans or 5% of its outstanding FHLB advances. No ready market
exists for FHLB stock, and it has no quoted market value.
20<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS RECEIVABLE
Loans receivable at December 31, 1997 and 1996 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
Mortgage loans collateralized by real estate:
1-4 family residential properties. . . . . . . . .$232,977 $226,765
Multi-family residential properties. . . . . . . . 4,835 4,959
Nonresidential properties. . . . . . . . . . . . . 4,891 5,205
1-4 family residential properties under. . . . . .
construction . . . . . . . . . . . . . . . . . 24,908 23,152
Nonresidential properties under construction . . . 469 752
Multi-family residential properties under
construction . . . . . . . . . . . . . . . . . . - 267
Installment loans collateralized by real estate:
1-4 family residential properties. . . . . . . . . 12,134 8,820
Multi-family residential properties. . . . . . . . 1,442 212
Nonresidential properties. . . . . . . . . . . . . 4,526 475
Multi-family residential properties under
construction . . . . . . . . . . . . . . . . . . 2,996 2,400
1-4 family residential properties under
construction . . . . . . . . . . . . . . . . . . 2,327 -
Nonresidential properties under construction . . . 7,868 -
Consumer loans. . . . . . . . . . . . . . . . . . . . . 4,397 3,564
Business loans. . . . . . . . . . . . . . . . . . . . . 2,586 510
Consumer and business loans under construction. . . . . 1,213 525
------------------------
Total loans . . . . . . . . . . . . 307,569 277,606
Less:
Undisbursed portion of construction loans. . . . . 18,729 12,205
Discounts and other. . . . . . . . . . . . . . . . 1,274 1,281
Loan loss reserve. . . . . . . . . . . . . . . . . 874 807
------------------------
Net loans $286,692 $263,313
========================
</TABLE>
Activity in the allowance for loan losses for the years ended
December 31, 1997, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------
<S> <C> <C> <C>
Balance at beginning of year. . $807,539 $737,000 $737,000
Provision for loan losses . . . 153,000 155,809 2,658
Loans charged-off . . . . . . . (86,737) (85,270) (2,658)
------------------------------
Balance at end of year. . . . . $873,802 $807,539 $737,000
==============================
</TABLE>
The following is a summary of nonperforming assets at December
31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
Loans 90 days past due and still accruing interest. . .$ 357 $ 665
Nonaccrual loans. . . . . . . . . . . . . . . . . . . . - 787
Other real estate owned . . . . . . . . . . . . . . . . 251 42
------------------------
Total. . . . . . . . . . . . . . . . . . . . .$ 608 $1,494
========================
</TABLE>
In the normal course of business, the Company enters into
off-balance sheet commitments to extend credit. The Company
maintains the same credit policies in making off-balance sheet
commitments as it does for its on-balance sheet instruments.
Commitments to extend credit are agreements to lend which
generally have fixed expiration dates or other termination
clauses and may require a fee.
21<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS RECEIVABLE (CONTINUED)
The following table summarizes the Company's outstanding
off-balance sheet commitments to extend credit at December
31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Undisbursed portion of home equity lines of
credit collateralized primarily by junior liens
on 1-4 family properties . . . . . . . . . . . . . . $ 6,374 $ 5,274
Other commitments and credit lines . . . . . . . . . . 3,318 2,807
Fixed-rate mortgage loan commitments . . . . . . . . . 2,571 1,565
Adjustable-rate mortgage loan commitments. . . . . . . 2,408 3,287
------------------------
Total. . . . . . . . . . . . $14,671 $12,933
========================
</TABLE>
As commitments may expire unused, the total commitment amount
does not necessarily represent future cash requirements.
The Company, through its normal lending activity, originates and
maintains loans which are substantially concentrated in Eastern
North Carolina, where its offices are located. The Company's
policy calls for collateral or other forms of repayment
assurance to be received from the borrower at the time of loan
originations. Such collateral or other form of repayment
assurance is subject to changes in economic value due to various
factors beyond the control of the Company and such changes could
be significant.
The Company originates both adjustable and fixed interest rate
loans. The adjustable-rate loans have interest rate adjustment
limitations and are indexed to various nationally recognized
indexes or financial instruments.
Future market factors may affect the correlation of the interest
rate adjustment with rates the Company pays on the short term
deposits that have been primarily utilized to fund these loans.
Mortgage loans serviced for others (previously sold without
recourse) approximated $65,061,000, $62,753,000 and
$73,843,000 at December 31, 1997, 1996 and 1995, respectively.
Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing
payments to investors and foreclosure processing. Loan
servicing income is recorded on the cash basis and includes
servicing fees from investors and certain charges collected from
borrowers, such as late payment fees.
On January 1, 1997 the Company adopted SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement requires that
enterprises recognize as separate assets rights to service
mortgage loans for others, however those rights are acquired.
There were no purchases of servicing rights during 1997 or
1996, nor were there any loan sales in 1996. Fees on loans sold
in 1997 are considered to adequately compensate the
Company, therefore no servicing assets were recorded on those
sales.
<PAGE>
6. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . .$ 1,626,553 $ 1,446,531
Buildings. . . . . . . . . . . . . . . . . . . . . . . 4,796,885 4,785,996
Leasehold improvements . . . . . . . . . . . . . . . . 438,739 438,739
Furniture and equipment. . . . . . . . . . . . . . . . 3,711,528 3,486,791
-----------------------------
10,573,705 10,158,057
Less accumulated depreciation and amortization . . . . (5,701,503) (5,371,765)
-----------------------------
Total . . . . . . . . . . . .$ 4,872,202 $ 4,786,292
=============================
</TABLE>
22<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEPOSITS
Certificates of deposit of $100,000 or more at December 31, 1997
and 1996, are summarized by maturity as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------------
<S> <C> <C>
3 months or less . . . . . . . . . . . . . . . . . . .$ 13,957 $ 11,265
Over 3 through 6 months. . . . . . . . . . . . . . . . 8,708 9,198
Over 6 through 12 months . . . . . . . . . . . . . . . 21,591 15,948
Over 12 months . . . . . . . . . . . . . . . . . . . . 6,180 6,655
---------------------------
Total . . . . . . . . . . . . . . . . . . .$ 50,436 $ 43,066
===========================
</TABLE>
The average balance of, and weighted average rates ("WAR") paid
on deposits for the years ended December 31, 1997, 1996
and 1995 (in thousands) are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------
Average Average Average
Balance WAR Balance WAR Balance WAR
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NOW accounts. . . . . . . $ 12,208 0.92% $ 11,513 1.00% $ 9,701 1.40%
Money market. . . . . . . 7,472 2.83% 7,866 2.10% 9,461 2.21%
Savings . . . . . . . . . 34,050 1.94% 35,881 2.00% 41,159 2.27%
Certificates of deposit . 226,422 5.37% 215,896 5.41% 209,147 5.43%
------------------------------------------------------
Total. . . . . . . . . $280,152 4.69% $271,156 4.67% $269,468 4.69%
======================================================
</TABLE>
Non-interest bearing deposits totaled $4,204,000 and $4,231,000
at December 31, 1997 and 1996, respectively.
8. BORROWED FUNDS
Borrowed funds and the corresponding weighted average rates
("WAR") at December 31, 1997 and 1996 are summarized
as follows:
<TABLE>
<CAPTION>
1997 WAR 1996 WAR
--------------------------------------
<S> <C> <C> <C> <C>
Advances from FHLB. . . . $50,000,000 6.48% $35,000,000 6.43%
Affordable Housing
Program . . . . . . . .
advances from FHLB. . . 141,002 3.50% 145,362 3.50%
-------------------------------------
Total. . . . . $50,141,002 6.47% $35,145,362 6.42%
=====================================
</TABLE>
Pursuant to a collateral agreement with the FHLB, advances are
collateralized by all the Company's FHLB stock and qualifying
first mortgage loans. This agreement provides for an $82
million line of credit with the FHLB. The maximum month end
balances were $50 million, $35 million, and $27 million during
the years ended December 31, 1997, 1996 and 1995. Annual
principal maturities of Federal Home Bank advances for each of
the five years subsequent to December 31, 1997 are as follows:
<PAGE>
1998. . . . . . . . . . . . . . . . . . . . .$ 5,000,000
1999. . . . . . . . . . . . . . . . . . . . . 10,000,000
2000. . . . . . . . . . . . . . . . . . . . . 10,000,000
2001. . . . . . . . . . . . . . . . . . . . . 15,000,000
2002. . . . . . . . . . . . . . . . . . . . . 10,000,000
-----------
Total. . . . . . . . . . . . . . . . $50,000,000
===========
The Affordable Housing Program advances are funds advanced by
the FHLB for the Company to re-lend to borrowers who might not
otherwise qualify for a home mortgage. These advances have an
interest rate of 3.5% and mature at various times between
November 2015 and January 2016.
Interest expense on borrowed funds is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Advances from FHLB . . . . . . . . . $ 2,575,273 $ 960,408 $ 976,707
Securities sold under agreement
to repurchase. . . . . . . . . . . - - 81,750
ESOP loan. . . . . . . . . . . . . . 8,870 - -
---------------------------------------
Total. . . . . . . . . . . . . $ 2,584,143 $ 960,408 $1,058,457
=======================================
</TABLE>
23<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. REGULATORY MATTERS AND CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital
requirements administered by federal and state banking agencies.
Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary,
actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements.
Quantitative measures established by regulation to ensure
capital adequacy require the Company to maintain minimum amounts
and ratios, as set forth in the table below. Management
believes, as of December 31, 1997, that the Company meets all
capital adequacy requirements to which it is subject. As of
December 31, 1997, the most recent notification from the FDIC
categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as
well capitalized the Company must maintain minimum amounts and
ratios, as set forth in the table below. There are no
conditions or events since that notification that management
believes have changed the Company's category. The Company's
actual capital amounts and ratios are also presented in the
table below (dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
- -----------------------
Total Capital (to Risk
Weighted Assets) . . . .$29,174 14.9% $15,623 8.0% $19,529 10.0%
Tier I Capital (to Risk
Weighted Assets) . . . . 28,300 14.5% 7,812 4.0% 11,717 6.0%
Tier I Capital (to
Average Assets). . . . . 28,300 7.8% 14,153 4.0% 17,691 5.0%
Total Tangible Capital
(to Total Tangible
Assets). . . . . . . . . 28,294 7.7% 18,455 5.0% 18,456 5.0%
As of December 31, 1996:
- -----------------------
Total Capital (to Risk
Weighted Assets) . . . .$26,649 15.0% $14,215 8.0% $17,768 10.0%
Tier I Capital (to Risk
Weighted Assets) . . . . 25,842 14.5% 7,107 4.0% 10,661 6.0%
Tier I Capital (to
Average Assets). . . . . 25,842 7.8% 13,286 4.0% 16,608 5.0%
Total Tangible Capital
(to Total Tangible
Assets). . . . . . . . . 25,470 7.5% 17,065 5.0% 17,065 5.0%
</TABLE>
A liquidation account was established at the time of conversion
to a stock institution in an amount equal to the total net worth
of the Bank as of March 31, 1991. Each eligible deposit account
holder is entitled to a proportionate share of this account
in the event of a complete liquidation of the Bank, and only in
such an event . This share will be reduced if the account
holder's eligible deposits fall below the amount on the date of
record and will cease to exist if the account is closed. The
liquidation account will never be increased despite any increase
after the conversion in the related eligible deposits of an
account holder. The liquidation account was approximately
$4,002,000 at December 31, 1997.
The Company may not declare or pay a cash dividend, or
repurchase any of its capital stock, if the effect would cause
the regulatory net worth of the Company to fall below the amount
required for the liquidation account established in connection
with the conversion, or to an amount which is less than the
minimum required by the FDIC and the North Carolina Savings
Institutions Administrator ("N.C. Administrator").
On September 30, 1996, Congress passed into law a
recapitalization plan for the Savings Association Insurance Fund
(the "SAIF"), the insurance fund covering deposits of savings
institutions. The approved plan provided for a special
assessment of 0.66% on certain deposits as of March 31, 1996.
The Company's assessment amounted to approximately $1,783,000.
10. BENEFIT PLANS
The Company has a qualified, noncontributory defined-
benefit retirement plan (the "Plan") covering substantially all
of its employees. The benefits are based on each employee's
years of service and the employee's compensation during the last
ten years of employment.
On October 25, 1996 the Plan was amended to change the Plan from
a single employer plan to a multi-employer plan. The effective
date of the amendment is January 1, 1996. All other provisions
of the Plan remain substantially the same, with the exception of
Plan funding. Under the multi-employer plan, the Company is
required to contribute its share of the Plan's total pension
liability as determined by the plan administrator. There were
no contributions required or made to the Plan during 1997 or
1996.
At December 31, 1995, the Company had accrued pension cost
related to the Plan of $300,784. Upon conversion to a multi-
employer plan, the liability was eliminated and recognized as a
reduction of pension expense.
Until January 1, 1997, the Company maintained an Employee Stock
Ownership Plan (the "ESOP") for the exclusive benefit of
participating employees with the Company. Participating
employees were full-time employees age 21 or
24<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. BENEFIT PLANS (CONTINUED)
older who had completed one year of service. The Company's
contributions to the ESOP were allocated among participants
on the basis of total compensation paid each plan year and were
determined solely at the discretion of the Board of Directors.
On December 23, 1996 the ESOP borrowed $800,000 from another
financial institution and purchased 84,374 shares of the
Company's common stock from the defined benefit plan at $9.46
per share. These shares serve as collateral for the loan and
the loan is guaranteed by the Company. Accordingly, the loan
was recorded by the Company as a liability and the shares
recorded as a separate component of stockholders' equity.
On January 1, 1997 the ESOP was merged into a combined ESOP and
401(k) plan (the "KSOP"). The employees' ESOP accounts were
transferred to their KSOP accounts on that date. Employees are
able to contribute up to 15% of their eligible annual
compensation to the KSOP, subject to Internal Revenue Service
limitations. The Company will match employee contributions up
to a limit determined annually by the Board of Directors. The
match was established by the Board as 6% for 1997 and 1998.
During the year ended December 31, 1997 the Company matched
employee contributions by contributing $204,000 to the KSOP to
repay a portion of the note. This released 21,600 shares from
serving as collateral for the loan. These shares were allocated
to the participants according to the plan specifications on
December 31, 1997. At December 31, 1997 there are 8,774
unearned ESOP shares, with an estimated market value of
approximately $228,124, held in suspense.
The net expense incurred by the Company for these benefit plans,
including the effect of the change in the defined benefit
plan noted earlier, was $232,164, $209,216, and $179,350 for the
years ended December 31, 1997, 1996, and 1995, respectively.
11. 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. There are no material differences between
earnings per share reported under SFAS No. 128 and the
previously reported amounts for the years ended December 31,
1996 and 1995.
The following table provides a reconciliation of income
available to common stockholders and the average number of
shares outstanding (less unearned ESOP shares) for the years
ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Net income (loss) (numerator). . . . .$2,233,738 $(3,249,853) $1,024,381
=======================================
Shares for basic EPS (denominator) . . 2,972,686 2,981,954 2,983,396
Dilutive effect of stock options . . . 211,611 - 181,382
---------------------------------------
Adjusted shares for diluted EPS. . . . 3,184,297 2,981,954 3,164,778
=======================================
</TABLE>
For the year ended December 31, 1996, there were 276,802 options
outstanding that were antidilutive due to the net loss for
the year. These common stock equivalents have been omitted from
the calculation of diluted earnings per share.
12. INCOME TAXES
Income tax expense consists of the following components for the
years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Current tax provision . . . . . . . . $1,680,031 $284,846 $ 826,117
Deferred tax provision (benefit). . . (286,101) 290,700 (151,600)
-------------------------------------
Total. . . . . . . . . . . . . . $1,393,930 $575,546 $ 674,517
=====================================
</TABLE>
25<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES (CONTINUED)
The components of the net deferred tax liability at December 31,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
Deferred tax assets:
Unrealized loss on securities
available for sale. . . . . . . . . . . . . . .$ 4,800 $ 266,818
Other . . . . . . . . . . . . . . . . . . . . . . - 9,534
------------------------
Total . . . . . . . . . . . . . . . . . . . . 4,800 276,352
------------------------
Deferred tax liabilities:
Deferred loan fees. . . . . . . . . . . . . . . . 482,731 578,299
Allowance for loan losses . . . . . . . . . . . . 225,559 394,412
FHLB stock. . . . . . . . . . . . . . . . . . . . 231,784 212,381
Excess servicing fees . . . . . . . . . . . . . . - 24,011
Excess of book over tax basis of equipment. . . . 116,526 143,132
------------------------
Total. . . . . . . . . . . . . . . . . . . . 1,056,600 1,352,235
------------------------
Net deferred tax liability . . . . . . . . .$ 1,051,800 $1,075,883
========================
</TABLE>
Reconciliations of income taxes computed at the statutory
federal income tax rate (34%) to the provisions for income tax
for the years ended December 31, 1997, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
Income taxes at federal tax rate. . . $1,233,407 $ (909,265) $577,625
Increase (decrease) resulting from:
Amortization and impairment of
goodwill . . . . . . . . . . . . - 1,216,807 99,303
State income taxes, net of
federal income tax benefit . . . 152,196 59,071 20,130
Other. . . . . . . . . . . . . . . 8,327 208,933 (22,541)
-------------------------------------
Total. . . . . . . . . . . . . $1,393,930 $ 575,546 $674,517
=====================================
</TABLE>
On August 21, 1996, The Small Business Job Protection Act was
signed into law. This Act repealed the favorable tax bad
debt deduction method available to savings banks. The Company
changed its tax bad debt method to the experience method
under Internal Revenue Code Section 585 on December 31, 1996.
The change in method will result in future taxable income
of approximately $2,166,000, which represents the excess of the
Company's tax bad debt reserve at December 31, 1996 over
the reserve that arose in tax years beginning before December
31, 1987 (base year amount). Generally, the income will be
recognized for tax purposes ratably over a six-year period. A
deferred tax liability has been established for the effect of
this legislation.
As of December 31, 1997, the Bank's bad debt reserve for federal
tax purposes was approximately $5,169,000 which represents the
base year amount. A deferred tax liability has not been
recognized for the base year amount. If the Bank uses
the base year reserve for any reason other than to absorb loan
losses, a tax liability could be incurred. It is not
anticipated that the reserve will be used for any other purpose.
13. STOCK OPTION PLAN
The Company has a Stock Option Plan (the "Option Plan") for
selected employees of the Company and for the nonemployee
directors. The purpose of the Option Plan is to attract and
retain the best available personnel for positions of substantial
responsibility and to provide additional incentive to key
employees and directors by facilitating their purchase of a
stock interest in the Company.
The Option Plan provides for a term of ten years, after which no
awards may be made, unless earlier terminated by the Board
of Directors pursuant to the Option Plan. The option exercise
price is the market price of the common stock on the date the
option is granted. Options are fully vested upon being granted.
The Option Plan is administered by the Option Plan Committee, a
group consisting of four nonemployee directors of the
Company, who are "disinterested persons" within the meaning of
the federal securities law.
During the year ended December 31, 1997 11,628 options were
granted at market value on the date of award. The weighted
average grant price was $13.75. Also during 1997, 1,000 options
were exercised at $1.78 per share. No options were granted or
exercised during the years ended December 31, 1996 and 1995. No
options expired or were forfeited during the years ended
December 31, 1997, 1996 and 1995.
26<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTION PLAN (CONTINUED)
Stock options, after giving retroactive effect to stock
dividends and splits, are summarized as follows:
<TABLE>
<CAPTION>
ALL DIRECTORS
WHO ARE NOT
EXECUTIVE
ALL OFFICERS OFFICERS RESERVED
AS A GROUP AS A GROUP FOR FUTURE
(6 PERSONS) (8 PERSONS) TOTAL ISSUANCE
----------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997. . . . . 230,726 56,704 287,430 -
===================================================
Balance, December 31, 1996
and 1995. . . . . . . . . . . . . 226,520 50,282 276,802 11,628
===================================================
</TABLE>
The weighted average exercise price of these options for all
periods is $3.28.
On January 1, 1996 the Company adopted SFAS No. 123, "Accounting
for Stock Based Compensation". As permitted by SFAS No. 123,
the Company has chosen to apply APB opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations.
Accordingly, no compensation cost has been recognized for
options granted under the Option Plan. Had compensation cost
for the Company's Option Plan been determined based on the fair
value at the grant dates for awards under the Option Plan
consistent with the method of SFAS No. 123, the Plan's net
income and net income per share would have been reduced to the
pro forma amounts indicated below. The Company did not grant
any options during the years ended December 31, 1996 or 1995,
therefore, there are no pro forma amounts for those periods.
<TABLE>
<CAPTION>
1997
---------------------
AS
REPORTED PRO FORMA
---------------------
<S> <C> <C>
Net income. . . . . . . . . . . . . . . .$2,233,738 $2,213,554
Earnings per common share . . . . . . . .$ 0.75 $ 0.74
Earnings per common share - assuming
dilution. . . . . . . . . . . . . . . .$ 0.70 $ 0.70
</TABLE>
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997;
dividend yield of 0%, as there has been no regular dividend
payment history; expected volatility of 7.7%; risk-free interest
rates of 5.5%; and expected lives of 3.75 years. The weighted
average fair value of options granted in 1997 is $3.87.
The following table summarizes additional information about the
Option Plan at December 31, 1997:
<TABLE>
<CAPTION>
NUMBER REMAINING NUMBER
OUTSTANDING CONTRACTUAL EXERCISABLE
EXERCISE PRICE AT 12/31/97 LIFE AT 12/31/97
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
$1.78. . . . . . . . . . . . . . . . . . . . . 212,954 3.75 years 212,954
$2.67. . . . . . . . . . . . . . . . . . . . . 7,424 3.75 years 7,424
$3.20. . . . . . . . . . . . . . . . . . . . . 7,424 3.75 years 7,424
$7.50. . . . . . . . . . . . . . . . . . . . . 48,000 3.75 years 48,000
$10.50 . . . . . . . . . . . . . . . . . . . . 7,424 3.75 years 7,424
$19.50 . . . . . . . . . . . . . . . . . . . . 4,204 3.75 years 4,204
-------------------------------------
287,430 3.75 years 287,430
=====================================
</TABLE>
27<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of Cooperative Bankshares, Inc.,
the parent company, at December 31, 1997 and 1996 and for the
years ended December 31, 1997, 1996 and 1995 is presented below:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1997 1996
-----------------------
<S> <C> <C>
Assets:
Cash. . . . . . . . . . . . . . .$ 4,707 $ 4,072
Equity investment in . . . . . .
subsidiary. . . . . . . . . . . 28,264,866 25,426,326
Deferred organization costs . . . 23,996 39,152
------------------------
$28,293,569 $25,469,550
========================
Liabilities and stockholders' equity:
Stockholders' equity. . . . . . .$28,293,569 $25,469,550
========================
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Dividends from subsidiary. . . . . . . . . . . . .$ 13,709 $ - $ -
Equity in earnings (loss) of subsidiary. . . . . . 2,248,259 (3,222,121) 1,052,137
Miscellaneous expenses . . . . . . . . . . . . . . 28,230 27,732 27,756
-----------------------------------
Net income (loss) . . . . . . . . . . . . . . .$2,233,738 $(3,249,853) $1,024,381
===================================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss). . . . . . . . . . . . . . . $ 2,233,738 $(3,249,853) $ 1,024,381
Equity in undistributed earnings of
subsidiary . . . . . . . . . . . . . . . . . (2,248,259) 3,222,121 (1,052,137)
Amortization of deferred organization costs. . 15,156 15,155 15,156
---------------------------------------
Cash flows provided by (used in) operating
activities . . . . . . . . . . . . . . . 635 (12,577) (12,600)
Cash and cash equivalents, beginning of year . . 4,072 16,649 29,249
---------------------------------------
Cash and cash equivalents, end of year . . . . . $ 4,707 $ 4,072 $ 16,649
=======================================
</TABLE>
15. CASH FLOW SUPPLEMENTAL DISCLOSURES
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Cash paid for:
Interest on deposits and borrowed funds. . . .$ 15,957,580 $ 14,141,474 $ 12,860,416
Income taxes . . . . . . . . . . . . . . . . . 1,247,000 836,685 859,000
Summary of noncash investing and financing
activities:
Transfer of securities to available for sale-
Mortgage-backed and related securities . . . - - 13,370,795
Transfer from loans to foreclosed real
estate . . . . . . . . . . . . . . . . . . . 843,477 239,729 333,594
Loans to facilitate the sale of foreclosed
real estate. . . . . . . . . . . . . . . . . 235,648 38,348 198,250
</TABLE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of
financial instruments is made in accordance with the
requirements of SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments". The estimated fair value amounts have
been determined by the Company using the methods and assumptions
described below. However, considerable judgment is
required to interpret market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
28<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which
it is practicable to estimate that value.
Cash and Cash Equivalents
-------------------------
The carrying amount is a reasonable estimate of fair value.
Securities, Mortgage-Backed and Related Securities, and
Other Investments
-------------------------------------------------------
For investments in debt securities, fair values are based on
quoted market prices or dealer quotes. For other
securities, fair value equals quoted market price, if
available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar
securities.
Loans Receivable
----------------
The fair value of loans receivable is estimated by
discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Deposits
--------
The fair value of NOW, savings, and money market deposit
accounts is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
Borrowed Funds and ESOP Note Payable
------------------------------------
Borrowed funds consist of FHLB borrowings with varying
maturities. The fair values of these liabilities and the
ESOP note payable are estimated using the discounted values
of the contractual cash flows. The discount rate is
estimated using the rates currently in effect for similar
borrowings.
Off-Balance Sheet Financial Instruments
---------------------------------------
The fair value of off-balance sheet financial instruments
has not been considered in determining on-balance sheet fair
value. As discussed in Note 5, these off-balance sheet
financial instruments are commitments to extend credit and
are either short term in nature or subject to immediate
repricing.
The carrying amounts and estimated fair values of the
Company's financial instruments at December 31, 1997 and
1996 are as follows (in thousands):<PAGE>
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents. . . . . . . . . $ 17,208 $ 17,208 $ 11,507 $ 11,507
Securities:
Available for sale . . . . . . . . . . . 21,004 21,004 5,946 5,946
Held to maturity . . . . . . . . . . . . 21,044 20,348 21,054 19,706
Mortgage-backed and related securities:
Available for sale . . . . . . . . . . . 12,856 12,856 28,825 28,825
Loans receivable:
Gross loans. . . . . . . . . . . . . . . 287,566 289,777 264,120 266,467
Allowance for loan losses. . . . . . . . (874) (874) (807) (807)
------------------------------------------
Loans receivable, net. . . . . . . . . . 286,692 288,903 263,313 265,660
Other investments. . . . . . . . . . . . . 2,688 2,688 2,435 2,435
------------------------------------------
Total. . . . . . . . . . . . . . . $361,492 $363,007 $333,080 $334,079
==========================================
Financial liabilities:
Deposits . . . . . . . . . . . . . . . . . $288,690 $284,040 $278,139 $272,503
Borrowed funds . . . . . . . . . . . . . . 50,226 50,579 35,435 35,252
------------------------------------------
Total $338,916 $334,619 $313,574 $307,755
==========================================
</TABLE>
The Company's remaining assets and liabilities are not
considered financial instruments.
29<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. YEAR 2000 ISSUE
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 a minimal cost to
the Company. Although the cost to bring the Company's software
in compliance can not be determined at this time it is not
expected to be material. However, there can be no guarantee
that the system 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.
30<PAGE>
<PAGE>
DIRECTORS, OFFICERS AND OFFICE LOCATIONS
BOARD OF DIRECTORS
FREDERICK WILLETTS, JR., CHAIRMAN JAMES D. HUNDLEY, M.D.
Cooperative Bankshares, Inc. and President, Wilmington
Cooperative Bank For Savings, Orthopaedic Group P.A.
Inc., SSB
FREDERICK WILLETTS, III H.T. KING, III
President and Chief Executive Officer, President, Hanover
Cooperative Bankshares, Inc. and Iron Works, Inc.
Cooperative Bank For Savings,
Inc., SSB
PAUL G. BURTON R. ALLEN RIPPY
President, Burton Steel Company Vice President,
Rippy Cadillac
Oldsmobile, Inc.
F. PETER FENSEL, JR. Dr. William H. Wagoner
President, F.P. Fensel Supply Company Chancellor Emeritus of
the University of
North Carolina at
Wilmington
O. RICHARD WRIGHT, JR.
Attorney, McGougan
Wright Worley & Harper
OFFICERS OF COOPERATIVE BANK FOR SAVINGS, INC., SSB
Frederick Willetts, Jr..................Chairman of the Board &
Senior Vice President
Frederick Willetts,III..... ............President & Chief
Executive Officer
O.C. Burrell, Jr. ......................Executive Vice President
& Chief Operating
Officer
Daniel W. Eller.........................Senior Vice President -
Corporate Secretary
Eric R. Gray............................Senior Vice President -
Mortgage Lending
Edward E. Maready.......................Senior Vice President -
Treasurer
Sandra B. Carr..........................Vice President- Retail
Banking Operations
Linda B. Garland........................Vice President -
Marketing
Carl N. Mathis.........................Vice President -
Appraising
Donna H. Mitchell......................Vice President -
Mortgage Operations
Dare C. Rhodes..........................Vice President - Human
Resources
Todd L. Sammons.........................Vice President -Auditing
Raymond A. Martin.......................Assistant Vice President
- Data Processing
OFFICE LOCATIONS
(Number of Offices in Parentheses)
Beaufort Morehead City
Belhaven Robersonville
Corolla Tabor City
Elizabethtown Wallace
Jacksonville (2) Washington (2)
Kill Devil Hills Wilmington (4)
31<PAGE>
<PAGE>
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Cooperative Bankshares, Inc.
201 Market Street
P.O. Box 600
Wilmington, North Carolina 28402
(910) 343-0181
TRANSFER AGENT
First Citizens Bank
Corporate Trust Department
P.O. Box 29522
Raleigh, North Carolina 27626-0522
SPECIAL COUNSEL
Housley Kantarian & Bronstein, P.C.
Suite 700
1220 19th Street, NW
Washington, DC 20036
ANNUAL MEETING
The Annual Meeting of Stockholders of Cooperative Bankshares,
Inc. will be held at the Howard Johnson Plaza, 5032 Market
Street, Wilmington, North Carolina, on April 24, 1998 at 11:00
a.m. All stockholders are cordially invited to attend.
FORM 10K
Copies of Cooperative Bankshares, Inc. Form 10K may be
obtained by stockholders without charge by writing to Linda B.
Garland at the Cooperative Headquarters address.
ADDITIONAL INFORMATION
For additional information, please contact
Frederick Willetts, III, Daniel W. Eller or
Linda B. Garland at (910) 343-0181
www.coop-bank.com
CAPITAL STOCK
Cooperative's common stock is traded on the NASDAQ National
Market under the symbol "COOP". As of December 31, 1997 there
were 2,984,396 shares outstanding which were held by 591
stockholders of record. No cash dividends have been paid on the
common stock since its issuance. Stock performance for 1997 and
1996 is given in the following table. All prices have been
adjusted for the stock dividends as described in the notes to
the consolidated financial statements.
QUARTERLY COMMON STOCK DATA
<TABLE>
<CAPTION>
1997 1996
-----------------------------
QUARTERS ENDED HIGH LOW HIGH LOW
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
December $20.25 $15.50 $10.44 $9.13
September 17.50 10.63 9.50 8.25
June 11.00 10.25 9.38 8.50
March 10.75 10.00 10.25 9.00
</TABLE>
Subsidiaries
State or Other
Jurisdiction of
Incorporation
---------------
Cooperative Bank for Savings, Inc., SSB North Carolina
CS&L Services, Inc. (1) North Carolina
___________
(1) Wholly owned subsidiary of Cooperative Bank for Savings,
Inc., SSB.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Cooperative Bankshares, Inc. on Form S-8 (File No.
333-22335) of our report dated January 30, 1998, on our
audits of the consolidated financial statements of Cooperative
Bankshares, Inc. as of December 31, 1997 and 1996, and for each
of the three years in the period ended December 31, 1997, which
is incorporated by reference in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Raleigh, North Carolina
March 30, 1998
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