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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File Number: 0-24626
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
- ---------------------------------------------------------------
(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
---------------------------------------
(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 .
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 17, 1999, 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 $34,921,110 (2,660,656 shares at
$13.125 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 17, 1999 there were issued and outstanding
3,047,284 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, 1998. (Parts I and II)
2. Portions of Proxy Statement for the 1999 Annual Meeting of
Stockholders. (Part III)
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PART I
ITEM 1. BUSINESS
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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, 1998, Cooperative Bank had total assets of
$389.8 million, deposits of $301.7 million and stockholders'
equity of $31.6 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 76,000, is also reliant upon summer tourism but is
diversified into the chemicals, shipping, aircraft engines, and
fiber optics industries. Wilmington also serves as a regional
retail center, a regional medical center and is home of the
University of North Carolina at Wilmington. 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
residential properties. As of December 31, 1998, $302.8
million, or 88.7%, of the Bank's loan portfolio consisted of
loans collateralized by residential properties. 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, 1998, adjustable rate loans totaled
60.6%, and fixed rate loans totaled 39.4%, of the Bank's total
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,
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1998 1997 1996
--------------- --------------- ----------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans secured by real estate:
1-4 family residential properties. . . . . . $235,644 73.34% $232,977 81.26% $226,765 86.12%
Multi-family (5 or more) residential
properties . . . . . . . . . . . . . . . . 5,575 1.74 4,835 1.69 4,959 1.88
Nonresidential property. . . . . . . . . . . 3,697 1.15 4,891 1.71 5,205 1.98
1-4 family residential properties under
construction . . . . . . . . . . . . . . . 25,244 7.86 24,908 8.69 23,152 8.79
Multi-family (5 or more) residential
property under construction. . . . . . . . -- -- -- -- 267 .10
Nonresidential properties under
construction. . . . . . . . . . . . . . . -- -- 469 .16 752 .29
Installment loans secured by real estate:
1-4 family residential properties (1). . . . 18,737 5.83 12,134 4.23 8,820 3.35%
Multi-family (5 or more) residential
properties . . . . . . . . . . . . . . . . 7,649 2.38 1,442 .50 212 .08
Nonresidential property. . . . . . . . . . . 12,940 4.03 4,526 1.58 475 .18
1-4 family residential properties under
construction . . . . . . . . . . . . . . . 8,810 2.74 2,327 .81 -- --
Multi-family (5 or more) residential
property under construction. . . . . . . . 1,128 .35 2,996 1.05 2,400 .91
Nonresidential properties under
construction . . . . . . . . . . . . . . . 11,735 3.65 7,868 2.74 -- --
Consumer loans, secured and unsecured. . . . . 5,073 1.58 4,397 1.53 3,564 1.35
Business loans, secured and unsecured. . . . . 4,021 1.25 2,586 .90 510 .19
Business and consumer loans, secured and
unsecured under construction . . . . . . . . 964 .30 1,213 .42 525 .20
-------- ------ -------- ------ -------- ------
Total loans . . . . . . . . . . . . . . 341,217 106.20 307,569 107.27 277,606 105.42
-------- ------ -------- ------ -------- ------
Less:
Undisbursed portion of construction loans. . 17,499 5.45 18,729 6.53 12,205 4.63
Discounts and other. . . . . . . . . . . . . 1,216 .38 1,274 .44 1,281 .49
Loan loss reserve. . . . . . . . . . . . . . 1,178 .37 874 .30 807 .30
-------- ------ -------- ------ -------- ------
Net loans. . . . . . . . . . . . . . . . $321,324 100.00% $286,692 100.00% $263,313 100.00%
======== ====== ======== ====== ======== ======
<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% 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, 1998, the Bank had $14.4
million of such loans, representing 4.2% 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 $47.9 million, or 14.04%, of the
Bank's total loan portfolio at December 31, 1998. 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, 1998 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, 1998 (the
"Annual Report").
Due During the
Year Ended
December 31,
1999
--------------
(In thousands)
Real estate - construction
Residential. . . . . . . . . . . . $35,181
Nonresidential . . . . . . . . . . 11,036
Business and Industrial. . . . . . 1,664
-------
Total . . . . . . . . . . . . . $47,881
=======
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Loans
secured by nonresidential real estate constituted approximately
$28.4 million, or 8.3% of the Bank's total loans at December 31,
1998. The Bank is emphasizing the origination of these loans
because of their profitability, since they generally carry a
higher interest rate than single family residential mortgage
loans. 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,
4<PAGE>
<PAGE>
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.
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, 1998, the Bank's
consumer loan portfolio totaled approximately $5.1 million,
representing 1.5% of the Bank's total loans receivable. 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,
1998, the Bank's home equity loan portfolio totaled
approximately $11.3 million, representing 3.3% 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,
1998, these loans totaled approximately $5.0 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
seeks to minimize these risks as the Bank's commercial business
loan portfolio grows by attempting to employ conservative
underwriting criteria.
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
5<PAGE>
<PAGE>
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.
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 three 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, 1998, the Bank was servicing approximately 1,305 loans for
others aggregating approximately $59.0 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, credit report and underwriting fee
is collected at the time of application. Management estimates
that historically, less than 20% of such commitments expire
unfunded. At December 31, 1998, the Bank had outstanding loan
origination commitments of approximately $19.3 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, 1998, the Bank owned approximately $2.4 million,
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, 1998, the
Bank had no loans in non-accrual status.
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
6<PAGE>
<PAGE>
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, 1998, the Bank
had four loans in the process of foreclosure and/or bankruptcy
with a principal balance of approximately $188,932.
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,
-----------------------------
1998 1997 1996
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Non-accruing loans:
Residential real estate. . . . . . . $ -- $ -- $ 787
Accruing loans which are contractually
past due 90 days or more:
Real Estate:
Residential. . . . . . . . . . . . $1,606 $ 332 $ 657
Nonresidential . . . . . . . . . . 66 25 8
Consumer . . . . . . . . . . . . . . 39 -- --
Business . . . . . . . . . . . . . . 54 -- --
------ ----- ------
Total . . . . . . . . . . . . . $1,765 $ 357 $1,452
====== ===== ======
Percentage of total loans. . . . . . . .52% .12% .52%
====== ===== ======
Other non-performing assets (1). . . . $2,439 $ 251 $ 42
====== ===== ======
Total non-performing assets. . . . . . $4,204 $ 608 $1,494
====== ===== ======
Total non-performing assets to total
assets . . . . . . . . . . . . . . . 1.08% .16% .44%
====== ===== ======
<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.
(2) Included three residential lot development loans totaling approximately
$3.1 million. During the first quarter of 1999, the Bank foreclosed on
these loans and sold the underlying properties (with the Bank financing
the purchase by another borrower) at a nominal loss, thereby reducing
total nonperforming assets to approximately $1.1 million or .27% of
assets.
</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.
7<PAGE>
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The following table analyzes activity in the Bank's
allowance for possible loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997 1996
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period. . . . . . . . $ 874 $ 807 $ 737
Provision for possible loan losses. . . . . . 330 153 156
Loans charged-off - net . . . . . . . . . . . 26 86 86
------ ----- -----
Balance at end of period. . . . . . . . . . . $1,178 $ 874 $ 807
====== ===== =====
Ratio of net charge-offs to average
loans outstanding during the period . . . . .01% .03% .03%
====== ===== =====
Ratio of loan loss reserve to total loans . . .35% .28% .29%
====== ===== =====
</TABLE>
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.<PAGE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Interest-bearing deposits. . . . . . . . . $ 7,904 $12,312 $ 9,084
Securities:
Available for sale - at estimated market
value. . . . . . . . . . . . . . . . . 21,163 21,004 5,946
Held to maturity . . . . . . . . . . . . 13,034 21,044 21,054
Mortgage-backed and related securities:
Available for sale - at estimated market
value. . . . . . . . . . . . . . . . . 10,551 12,856 28,825
------- ------- -------
Total. . . . . . . . . . . . . . . . $52,652 $67,216 $64,909
======= ======= =======
</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
8<PAGE>
<PAGE>
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, 1998, the Bank held
mortgage-backed securities, classified as available for sale,
with an amortized cost of approximately $10.6 million which
represented 2.7% of the Bank's total assets. At that date, the
estimated aggregate market value and carrying value of the
mortgage-backed securities was $10.6 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.
9<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, 1998.
<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. . . $ 7,904 4.45% $ -- -- % $ -- -- %
U.S. government and
agency securities:
Available for sale . . . . . 2,010 5.98 19,153 5.80 -- --
Held to maturity . . . . . . -- -- 8,034 4.49 5,000 6.21
Mortgage-backed and related
securities:
Available for sale . . . . . 1,307 6.52 -- -- -- --
Held to maturity . . . . . . -- -- -- -- -- --
------- ------- -------
Total. . . . . . . . . . $11,221 4.97% $27,187 5.41% $ 5,000 6.21%
======= ======= =======
<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. . . $ -- -- % $ 7,904 $ 7,904 4.45%
U.S. government and
agency securities:
Available for sale . . . . . -- -- 21,163 21,163 5.82
Held to maturity . . . . . . -- -- 13,034 12,780 5.15
Mortgage-backed and related
securities:
Available for sale . . . . . 9,244 6.50 10,551 10,551 6.50
Held to maturity . . . . . . -- -- -- -- --
------- ------- -------
Total. . . . . . . . . . $ 9,244 6.50% $52,652 $52,398 5.58%
======= ======= =======
</TABLE>
10<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 Analysis" 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.
<PAGE>
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, 1998. All reverse repurchase agreements are
contracted with registered broker-dealers. The dollar rolls
used by the Bank closely
11<PAGE>
<PAGE>
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.
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,
----------------------------------
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Maximum amount of short-term borrowings
outstanding at any month end:
Securities sold under agreements to
repurchase. . . . . . . . . . . . . . . . $ -- $ -- $ --
FHLB advances . . . . . . . . . . . . . . . 55,141 50,141 35,145
Maximum amount of short-term borrowings
outstanding at end of period
Securities sold under agreements to
repurchase. . . . . . . . . . . . . . . . -- -- --
FHLB advances . . . . . . . . . . . . . . . 55,109 50,141 35,145
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . -- -- --
FHLB advances. . . . . . . . . . . . . . . 51,506 39,797 14,839
Approximate weighted average rate paid on:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . -- -- --
FHLB advances. . . . . . . . . . . . . . . 6.33% 6.49% 6.47%
</TABLE>
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, 1998, the Bank had 121 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.
12<PAGE>
<PAGE>
EXECUTIVE OFFICERS
At December 31, 1998, the executive officers of the Bank
who were not also directors were as follows:
<TABLE>
<CAPTION>
Age at
Name December 31, 1998 Position
- ---- ----------------- --------
<S> <C> <C>
Daniel W. Eller 56 Senior Vice President and Corporate
Secretary
Edward E. Maready 57 Senior Vice President and Treasurer,
Principal Financial and Accounting Officer
Eric R. Gray 56 Senior Vice President of Mortgage Lending
O.C. Burrell, Jr. 50 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 was 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.
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. Mr.
Gray serves as a member of the Project Impact Committee for New
Hanover County.
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 deposi-
tors. Certain of these regulatory requirements are referred to
below or appear elsewhere herein.
13<PAGE>
<PAGE>
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.
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
14<PAGE>
<PAGE>
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 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
15<PAGE>
<PAGE>
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.
The Bank was in compliance with both the FDIC capital
requirements and the North Carolina net worth requirement at
December 31, 1998.
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, 1998.
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
16<PAGE>
<PAGE>
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 a less-than-satisfactory rating for
any CAMEL rating category. The Bank is currently classified as
"well capitalized" under these regulations.
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.
<PAGE>
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.
17<PAGE>
<PAGE>
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 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.
18<PAGE>
<PAGE>
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 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, 1998 of $2.8 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, 1998, the Bank met its
reserve requirements.
UNIFORM LENDING STANDARDS. Under FDIC regulations 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
19<PAGE>
<PAGE>
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.
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.
20<PAGE>
<PAGE>
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 7.25% 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 with the tax rate being
reduced to 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.
21<PAGE>
<PAGE>
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, 1998.
<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 $2,236 27,976 Owned $36,278
24 N. Second St., Wilmington, NC (1) 1980 -- 4,176 Owned(1) --
827 New Bridge St., Jacksonville, NC 1954 216 4,213 Owned 18,070
205 E. Main St., Wallace, NC 1954 146 2,880 Owned 44,434
922 E. Arendell St., Morehead City, NC 1958 82 1,984 Owned 16,966
232 W. Broad Street, Elizabethtown, NC 1961 1,043 3,400 Owned 21,180
4 E. Fifth St., Tabor City, NC 1980 208 3,880 Owned 27,121
3605 Oleander Dr., Wilmington, NC 1970 104 1,296 Owned(2) 25,471
2405 S. College Rd., Wilmington, NC 1974 200 2,000 Owned 29,056
1501 Live Oak St., Beaufort, NC 1975 48 1,685 Owned(3) 10,115
400 Western Blvd., Jacksonville, NC 1982 389 2,050 Owned 11,828
132 W. 2nd St., Washington, NC 1983 115 7,298 Owned(4) 19,139
Railroad St., Robersonville, NC 1983 78 2,500 Owned(4) 8,562
2007 Croatan Ave., Kill Devil Hills, NC 1983 138 2,337 Owned(4) 7,140
1296 John Small Ave., Washington, NC 1987 226 1,920 Owned 7,066
Corner By-pass, Business 264,
Belhaven, NC 1989 375 1,482 Owned 8,573
821 Ocean Trail, Corolla, NC 1993 15 565 Leased(5) --
7028 Market Street, Wilmington, NC 1995 753 1,925 Owned 10,657
------ --------
$6,372 $301,656
====== ========
<FN>
_________
(1) Operations center for the Bank. Net book value included in 201 Market Street.
(2) Building is owned, but land is leased. Current lease terminates June 2000.
(3) Building is owned, but land is leased. Current lease terminates December 31, 1999.
(4) Acquired through merger.
(5) Loan production office. Month to month rental.
</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,
1998.
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.
22<PAGE>
<PAGE>
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 1999 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.
(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.
23<PAGE>
<PAGE>
(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, 1998 and 1997
3. Consolidated Statements of Income for the Years
Ended December 31, 1998, 1997 and 1996
4. Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and
1996
5. Consolidated Statements of Cash Flows for the
Year Ended December 31, 1998, 1997, and 1996
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, 1998.
(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 *
24<PAGE>
<PAGE>
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, 1998
21 Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
_________
* Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (Reg. No. 33-79206).
** Incorporated by reference to the Registrant's Form 10-K for
the fiscal year ended December 31, 1997.
25
<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: March 18, 1999 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: March 18, 1999
-------------------------------
Frederick Willetts, III
President, Chief Executive Officer
and Director
(Principal Executive Officer
and Director)
By: /s/ Frederick Willetts, Jr. Date: March 18, 1999
-------------------------------
Frederick Willetts, Jr.
Senior Vice President, Chairman
of the Board
By: /s/ Edward E. Maready Date: March 18, 1999
-------------------------------
Edward E. Maready
Senior Vice President and Treasurer
(Principal Financial and
Accounting Officer)
By: /s/ James D. Hundley, M.D. Date: March 18, 1999
-------------------------------
James D. Hundley, M.D.
(Director)
By: /s/ O. Richard Wright, Jr. Date: March 18, 1999
-------------------------------
O. Richard Wright, Jr.
(Director)
By: /s/ Paul G. Burton Date: March 18, 1999
-------------------------------
Paul G. Burton
(Director)
By: /s/ H. Thompson King, III Date: March 18, 1999
-------------------------------
H. Thompson King, III
(Director)
By: /s/ F. Peter Fensel, Jr. Date: March 18, 1999
-------------------------------
F. Peter Fensel, Jr.
(Director)
By: /s/ William H. Wagoner Date: March 18, 1999
-------------------------------
William H. Wagoner
(Director)
By: /s/ R. Allen Rippy Date: March 18, 1999
-------------------------------
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, 1998
21 Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
___________
* Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (Reg. No. 33-79206).
** Incorporated by reference to the Registrant's Form 10-K for
the fiscal year ended December 31, 1997.
<PAGE>
COOPERATIVE
BANKSHARES, INC.
Full-Service Community Banking Since 1898
Annual Report
December 31, 1998<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 and commercial banking services
including numerous 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 . . . . . . . . . .. 3-4
Management's Discussion & Analysis. . . 5-14
Report of Independent Accountants . . . 15
Consolidated Statements of Financial
Condition . . . . . . . . . . . . . . 16
Consolidated Statements of Operations. . 17
Consolidated Statements of Comprehensive
Income. . . . . . . . . . . . . . . . 18
Consolidated Statements of Stockholders'
Equity. . . . . . . . . . . . . . . . 18
Consolidated Statements of Cash Flows. . 19
Notes to Consolidated Financial
Statements. . . . . . . . . . . . ..20-41
Directors, Officers, and Office
Locations . . . . . . . . . . . . . . 42
Corporate Information. . . . . . . . . . 43
<PAGE>
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
DECEMBER 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994
___________________________________________________________________
<S> <C> <C> <C> <C> <C>
Dollars in Thousands
Selected Financial Condition Data:
Assets. . . . . . . . . . . . . . . . . . . $ 389,773 $369,121 $341,300 $311,843 $ 324,252
Loans receivable, net . . . . . . . . . . . 321,324 286,692 263,313 234,008 240,194
Mortgage-backed and related securities. . . 10,551 12,856 28,825 30,907 31,658
Cash, securities and other investments. . . 45,882 61,944 40,942 35,540 40,320
Goodwill. . . . . . . . . . . . . . . . . . -- -- -- 3,602 3,894
Deposits. . . . . . . . . . . . . . . . . . 301,656 288,691 278,139 270,071 266,079
Borrowed funds. . . . . . . . . . . . . . . 55,109 50,226 35,435 10,089 30,000
Stockholders' equity. . . . . . . . . . . . $ 31,613 $ 28,294 $ 25,470 $ 29,083 $ 26,923
____________________________________________________________________
<CAPTION>
YEAR ENDED Year ended Year ended Year ended 9 Mo. ended
DECEMBER 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994
____________________________________________________________________
<S> <C> <C> <C> <C> <C>
Dollars in Thousands
Selected Operations Data:
Interest income. . . . . . . . . . . . . . . $ 28,411 $ 26,093 $ 22,793 $ 21,904 $ 16,610
Interest expense . . . . . . . . . . . . . . 17,212 15,732 13,630 13,701 8,302
Net interest income. . . . . . . . . . . . . 11,199 10,361 9,163 8,203 8,308
Provision for loan losses. . . . . . . . . . 330 153 156 3 --
Non-interest income. . . . . . . . . . . . . 878 608 570 620 502
Non-interest expenses (1). . . . . . . . . . 7,973 7,188 12,251 7,121 4,967
Income (loss) before income taxes. . . . . . 3,774 3,628 (2,674) 1,699 3,843
Net income (loss). . . . . . . . . . . . . . 2,385 2,234 (3,250) 1,024 2,487
____________________________________________________________________________________________________________________
Selected Financial Ratios and Other Data:
Return on average assets (2). . . . . . . . 0.62% 0.63% (1.01)% 0.32% 1.01%
Return on average equity (2) . . . . . . . 7.86% 8.26% (11.27)% 3.62% 12.28%
Stockholders' equity to total assets . . . 8.11% 7.67% 7.46% 9.33% 8.30%
Non-performing assets to total assets . . . 1.08% 0.08% 0.02% 0.25% 0.15%
Allowance for loan losses to total loans. . 0.35% 0.28% 0.29% 0.31% 0.31%
Per Share Data (3)
Earnings (loss) per:
Common share . . . . . . . . . . . . . $ 0.79 $ 0.75 $ (1.09) $ 0.34 $ 0.83
Common share - assuming dilution. . . . $ 0.74 $ 0.70 $ (1.09) $ 0.32 $ 0.78
Tangible book value . . . . . . . . . . . . $ 10.38 $ 9.48 $ 8.54 $ 8.54 $ 7.72
Number of common shares outstanding . . . . 3,046,284 2,984,396 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 and splits.
</FN>
</TABLE>
2<PAGE>
<PAGE>
PRESIDENT'S MESSAGE
TO OUR STOCKHOLDERS:
The year 1998 was one of celebration as we observed our
centennial, having been founded in 1898. Our official birthday
celebration was held on March 19th at the main office in
Wilmington as the Chamber of Commerce, city and state officials,
friends and family joined together to enjoy an evening of
entertainment, reminiscing and celebration of 100 years. All
offices held a celebration for customers on March 20th with
refreshments and gifts for customers. Throughout the year
promotions in our branches continued as we celebrated our
yearlong centennial birthday. These promotions were
particularly helpful in generating deposit growth.
On a sad note, Frederick Willetts, Jr., Chairman of the
Board, passed away on May 27th. Mr. Willetts, Jr. served the
Bank for over 50 years, and is greatly missed. Frederick
Willetts, III was elected Chairman, succeeding his father. He
continues to hold the position of President and Chief Executive
Officer of the Holding Company and the Bank.
Net income for the year ended December 31, 1998, rose 6.78%
over the previous year to $2,385,235 or $.74 per diluted share
as compared to $2,233,738 or $.70 per diluted share for the year
ended December 31, 1997. Despite record mortgage loan
refinancing at lower rates, the Bank's net interest margin
increased from 3.02% as of December 31, 1997 to 3.04% at
December 31, 1998.
During the year, 853 mortgage loans were originated totaling
$93.8 million, a 26.5% increase over the level of originations
in the previous year. Also during the year the Retail Banking
Division originated 753 commercial and consumer loans in the
amount of $57.5 million. Total loan originations for 1998
easily surpassed the previous high. Despite this increase in
the overall level of loan volume, we continue to adhere to
strict underwriting criteria.
At December 31, 1998, loans made by the Retail Banking
Division comprised 20.8% of our total loans as compared to 12.8%
at December 31, 1997. 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.
The quality of our assets remains a top priority for the
Bank. As of December 31, 1998, nonperforming loans and real
estate owned totaled 1.08% of assets. While this figure is
higher than the same period in 1997, nonperforming loans and
real estate owned had declined to $1.1 million or .27% of assets
as of January 27, 1999, as the bulk of assets in this category
were sold. The allowance for loan losses has been increased to
$1.2 million, 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.
On September 21, 1998 we held the grand opening of our new
building in Elizabethtown. This new, modern structure, complete
with ATM and safe deposit boxes, brings state of the art
facilities to this market, and replaces an antiquated building,
which we had operated from since the opening of this office. In
addition to the ATM in Elizabethtown, an ATM was also installed
at our Hanover Center office in Wilmington. Additional ATMs are
planned for the year 1999 to provide better service for our many
checking account customers.
3<PAGE>
<PAGE>
During the past year, we have completely upgraded our
computer network with state of the art computer equipment and
communications lines. This updates old equipment and provides
us with additional opportunities for enhanced customer service.
It also allowed us to begin preparations for the year 2000.
After installation of our new system, we began testing for
compliance with year 2000 requirements. Our people spent many
nights and weekends running sample transactions to help assure
compliance with the year 2000. Testing of all our mission
critical systems has been completed, and it is our belief that
all of our systems will be compliant with the year 2000, thus
assuring uninterrupted service to our customers. During this
year we will continue to communicate with our customers through
quarterly messages as well as in our lobbies and in our
statements. In addition, we have communicated to all our
business customers, suggesting items that they might check as
well as giving them the opportunity to visit
us for a workshop discussing matters which we see as critical to
the operation of their business. Additionally, our Web Page
will continue to update visitors as to our progress on this
important task.
It has been another busy year at Cooperative as we
celebrated our 100th anniversary, mourned the passing of our
Chairman, installed new computer equipment, witnessed the
continued growth of our Retail Banking Division, and completed
testing for the year 2000. With the groundwork that has been
laid, I look forward to our second century in operation, and to
the new millennium with a great deal of optimism. Your
continued confidence and support is appreciated.
Sincerely,
/s/ Frederick Willetts, III
Frederick Willetts, III
President
4<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Cooperative Bankshares, Inc. (the "Company") is a
registered 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 residential
properties. As of December 31, 1998, $302.8 million, or 88.7%,
of the Bank's loan portfolio consisted of loans secured by
residential properties. To a lesser extent, the Bank originates
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, 1998,
adjustable rate loans totaled 60.6%, and fixed rate loans
totaled 39.4% 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.
5<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Gap is considered negative when the amount of interest rate
sensitive liabilities exceed the amount of interest rate
sensitive assets. At December 31, 1998, Cooperative had a
one-year negative gap position of 11.7%. During a period of
rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period
of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would
tend to adversely affect net interest income. It is important
to note that certain shortcomings are inherent in static gap
analysis. Although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in
different degrees to changes in market interest rates. For
example, a large part 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, 1998 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. . . . $ 17,571 $ 22,035 $ 5,000 $ 163 $ 44,769
Mortgage-backed and related
securities . . . . . . . . . . 7,704 2,469 268 110 10,551
Loan portfolio . . . . . . . . . 164,394 116,521 26,852 13,557 321,324
-----------------------------------------------
Total. . . . . . . . . . . $189,669 $141,025 $ 32,120 $13,830 $376,644
===============================================
Interest-bearing liabilities:
Deposits (1) . . . . . . . . . $220,420 $ 71,078 $ 10,158 $ - $301,656
Borrowed funds . . . . . . . . 15,002 40,012 18 77 55,109
-----------------------------------------------
Total. . . . . . . . . . . $235,422 $111,090 $ 10,176 $ 77 $356,765
===============================================
Interest rate sensitivity gap. . . $(45,753) $ 29,935 $ 21,944 $13,753 $ 19,879
===============================================
Cumulative interest rate
sensitivity gap. . . . . . . . . $(45,753) $(15,818) $ 6,126 $19,879
======================================
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities. . . . . . . 80.6% 95.4% 101.7% 105.6%
======================================
Ratio of cumulative gap to
total assets . . . . . . . . . . (11.7%) (4.1%) 1.6% 5.1%
======================================
<FN>
___________
(1) Includes noninterest bearing checking accounts of $7,878,000
</FN>
</TABLE>
6<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
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 of Equity $ Change % Change
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
400 basis point rise $14,414,000 (17,825,000) -55%
300 basis point rise 19,233,000 (13,006,000) -40%
200 basis point rise 24,395,000 (7,844,000) -24%
100 basis point rise 28,214,000 (4,025,000) -12%
Base Scenario 32,239,000 --
100 basis point decline 34,269,000 2,030,000 6%
200 basis point decline 36,734,000 4,495,000 14%
300 basis point decline 38,315,000 6,076,000 19%
400 basis point decline 41,059,000 8,820,000 27%
</TABLE>
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, 1998, the estimated market value of liquid
assets (cash, cash equivalents, and marketable securities) was
approximately $56.2 million, which represents 15.7% of deposits
and borrowed funds as compared to $74.1 million or 21.9% of
deposits and borrowed funds at December 31, 1997. The decrease
in liquid assets was primarily due to the funding of new loans.
The Company's security portfolio consists of U.S. Government
agency, mortgage-backed and other permissible securities. The
mortgage-backed securities are guaranteed by the following
agencies: Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA"), and the
Government National Mortgage Association ("GNMA"). Mortgage-
backed securities entitle the Company to receive a pro rata
portion of the cash flows from an identified pool of mortgages.
Although mortgage-backed securities generally offer lesser
yields than the loans for which they are exchanged, they present
substantially lower credit risk by virtue of the guarantees that
back them. Mortgage-backed securities are more liquid than
individual mortgage loans, and may be used to collateralize
borrowings or other obligations of the Company.
7<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 1998, outstanding
off-balance sheet commitments to extend credit totaled $19.3
million, and the undisbursed portion of construction loans was
$17.5 million. Management considers current liquidity levels
adequate to meet the Company's cash flow requirements.
CAPITAL
Stockholders' equity at December 31, 1998, was $31.6
million, up 11.7% from $28.3 million at December 31, 1997. The
total at December 31, 1998 and December 31, 1997, includes
unrealized gains of $154 thousand and unrealized losses of $7
thousand, respectively, net of tax, 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,
1998, the Bank's ratio of Tier I capital was 8.1%. 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, 1998, the Bank had a ratio of qualifying total
capital to risk-weighted assets of 14.3%.
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.
On September 17, 1998, the Company' Board of Directors
approved a Stock Repurchase Program. The Stock Repurchase
Program authorized the Company to repurchase up to 150,000
shares, or approximately 5% of the currently outstanding shares
of common stock. The first purchase was made February 5, 1999,
and was substantially completed by February 26, 1999.
8<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
YEAR 2000 READINESS DISCLOSURE
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. With respect to the
Company's teller/platform system, the Company has installed a
new system that is Year 2000 compliant and fully tested.
Installation has been completed and the new system is currently
in use. Since the installation of the new system was not a
result of the Year 2000 issue, the costs of such system,
approximately $1.0 million, have been capitalized. The Company
expects that testing of the remaining hardware and software will
be completed by March 1, 1999. The Company presently believes
that the remaining hardware and software will be made in
compliance at what we believe will be a minimal cost to the
Company. Although the precise cost to bring the Company's
software in compliance cannot be determined at this time, it is
not expected to be material. The Company has developed a
contingency plan to deal with any possible risk that such
changes to its hardware and software are not fully successful as
well as the risk to the Company from the failure of third
parties with which the Company does business to make all
necessary corrections.
Computer problems experienced by its borrowers could have
an adverse effect on its business operations and their ability
to repay their loans when due. The Company has evaluated its
major borrowers and does not anticipate that any problems will
be material to its operations.
9<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AT DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
FINANCIAL CONDITION
The Company's total assets increased 5.6% to $389.8 million
at December 31, 1998, as compared to $369.1 million at December
31, 1997. The major changes in the assets are as follows: a
decrease of $8.4 million (48.5%) in cash, a decrease of $8.0
million (38.1%) in held to maturity securities, an increase of
$34.6 million (12.1%) in loans receivable, an increase in
foreclosed real estate to $2.4 million from $251 thousand at
December 31, 1997, and an increase of $1.5 million (30.8%) in
premises and equipment. Borrowed funds, retail deposits and
available liquid assets funded the increase in assets during the
current period. Due to a high loan demand, the Bank sold $14
million in fixed rate loans during the year ended December 31,
1998 and used the funds to reinvest in new loans. Although the
Company concentrates its lending activities on the origination
of conventional mortgage loans for the purpose of the
construction, financing or refinancing of residential
properties, it is becoming more active in the origination of
small loans secured by commercial properties. At December 31,
1998, approximately 11.3% of the Company's loan portfolio were
loans other than residential properties. With a $13 million
(4.5%) increase in retail deposits, an additional $5 million
borrowed funds from the Federal Home Loan Bank ("FHLB"), and
the sale of $14 million in loans, the Bank had adequate funds to
meet its loan demand. Borrowed funds, collateralized through an
agreement with the FHLB for advances, are secured by the Bank's
investment in FHLB stock and qualifying first mortgage loans.
At December 31, 1998, $15.0 million in borrowed funds mature in
1 year and the remaining amount of funds mature in 2 to 5 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 $4.2 million, or
1.08% of assets, at December 31, 1998, compared to $608
thousand, or 0.16% of assets, at December 31, 1997. Three
residential lot development loans totaling approximately $3.1
million was the major factor for the increase in non-performing
assets. Subsequent to the year-end these three properties were
sold and financed by the Bank which reduced non-performing
assets (loans 90 days or more delinquent and foreclosed real
estate) to 0.27% of assets. The Company assumes an aggressive
position in collecting delinquent loans and disposing of
foreclosed assets to minimize balances of non-performing assets
and continues to evaluate the loan and real estate portfolios to
provide loss reserves as considered necessary. While there can
be no guarantee, in the opinion of management, the allowance for
loan losses of $1.2 million at December 31, 1998 is adequate to
cover potential losses. In addition to the above, premises and
equipment increased 30.8%. The increase is due to two major
projects. The Bank completed the installation of a new
teller/platform system during the third quarter of 1998. The
Bank also completed a replacement office in Elizabethtown, North
Carolina, during the third quarter of 1998.
<PAGE>
RESULTS OF OPERATIONS
The net income of the Company depends primarily upon net
interest income. Net interest income is the difference between
the interest earned on loans and securities portfolios and the
cost of funds, consisting principally of the interest paid on
deposits and borrowings. The Company's operations are
materially affected by general economic conditions, the monetary
and fiscal policies of the Federal government, and the policies
of regulatory authorities.
NET INCOME
Net income for the year ended December 31, 1998, increased
6.8% over the previous year to $2.4 million as compared to the
previous year of $2.2 million. The increase in net income can
be attributed to an 8.1% increase in net interest income and a
44.5% increase in noninterest income, offset in part by 115.7%
increase in provision for loan losses and a 10.9% increase in
other operating expenses.
10<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTEREST INCOME
Interest income increased 8.9% for the year ended December
31, 1998, 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 7.71% as compared to 7.60% for the
same period a year ago, and the average balance of
interest-earning assets increased 7.4%.
INTEREST EXPENSE
Interest expense increased 9.4% for the year ended December
31, 1998, as compared to the year ended December 31, 1997. The
7% increase in the average balance of interest-bearing
liabilities and the related increase in cost of funds
principally contributed to this increase in interest expense.
The cost of interest-bearing liabilities increased 11 basis
points to 5.03% as compared to 4.92% for the same period last
year.
NET INTEREST INCOME
Net interest income for the year ended December 31, 1998,
as compared to the same period a year ago, increased 8.1%.
During the year ended December 31, 1998, the yield on average
interest-earning assets increased 11 basis points, while the
cost of average interest-bearing liabilities increased 11 basis
points as compared to the same period a year ago. The increase
in net interest income is primarily due to the higher volume of
earning assets. Interest-earning assets increased 7.4% while
interest-bearing liabilities increased 7.0%. The percentage of
average interest-earning assets to average interest-bearing
liabilities increased to 107.6% for the year ended December 31,
1998, as compared to 107.3% for the same period in 1997.
11<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND 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 assets or
liabilities, respectively, for the periods presented.
<TABLE>
<CAPTION>
For The Year Ended
------------------------------------------------------------
DECEMBER 31, 1998 December 31, 1997
------------------------------ ----------------------------
(DOLLARS IN THOUSANDS) AVERAGE Average
AVERAGE YIELD/ Average Yield/
BALANCE INTEREST COST Balance Interest Cost
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities and other
interest-earning assets . .$ 55,344 $ 3,107 5.61% $ 36,586 $ 2,102 5.75%
Mortgage-backed and related
securities . . . . . . . . . 11,725 738 6.29% 25,954 1,771 6.82%
Loan portfolio . . . . . . . . 301,412 24,566 8.15% 280,684 22,220 7.92%
------------------ ------------------
Total interest-earning
assets . . . . . . . . . . 368,481 28,411 7.71% 343,224 26,093 7.60%
------- -------
Non-interest earning assets. . 13,370 10,599
-------- --------
Total assets . . . . . . . . .$381,851 $353,823
======== ========
Interest-bearing liabilities:
Deposits. . . . . . . . . .$290,851 13,891 4.78% $280,152 13,148 4.69%
Borrowed funds. . . . . . . 51,506 3,321 6.45% 39,797 2,584 6.49%
------------------ ------------------
Total interest-bearing
liabilities. . . . . . . 342,357 17,212 5.03% 319,949 15,732 4.92%
------- -------
Non-interest bearing
liabilities. . . . . . . . . 9,149 6,882
-------- --------
Total liabilities. . . . . 351,506 326,831
Stockholders' equity . . . 30,345 26,992
-------- --------
Total liabilities and
stockholders' equity . . . .$381,851 $353,823
======== ========
Net interest income. . . . . . $11,199 $10,361
======= =======
Interest rate spread . . . . . 2.68% 2.68%
==== ====
Net yield on interest-earning
assets . . . . . . . . . . . 3.04% 3.02%
Percentage of average
interest-earning assets
to average interest-
bearing liabilities. . . . . 107.6% 107.3%
===== =====
/TABLE
<PAGE>
<TABLE>
<CAPTION>
For The Year Ended
------------------------------
December 31, 1996
------------------------------
(DOLLARS IN THOUSDANDS) Average
Average Yield/
Balance Interest Cost
--------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Securities and other
interest-earning assets. .$ 32,511 $ 1,819 5.60%
Mortgage-backed and related
securities . . . . . . . . . 30,397 2,048 6.74%
Loan portfolio . . . . . . . . 246,038 18,927 7.69%
------------------
Total interest-earning
assets . . . . . . . . . . 308,946 22,794 7.38%
-------
Non-interest earning assets. . 11,956
--------
Total assets . . . . . . . . .$320,902
========
Interest-bearing liabilities:
Deposits. . . . . . . . . .$271,156 12,670 4.67%
Borrowed funds. . . . . . . 14,839 960 6.47%
------------------
Total interest-bearing
liabilities. . . . . . . 285,995 13,630 4.77%
-------
Non-interest bearing
liabilities. . . . . . . . . 6,389
--------
Total liabilities. . . . . 292,384
Stockholders' equity . . . 28,518
--------
Total liabilities and
stockholders' equity . . . .$320,902
========
Net interest income. . . . . . $ 9,164
=======
Interest rate spread . . . . . 2.61%
====
Net yield on interest-earning
assets . . . . . . . . . . . 2.97%
Percentage of average
interest-earning assets
to average interest-
bearing liabilities. . . . . 108.0%
=====
</TABLE>
12<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 assets and interest-
bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in volume
multiplied by old rate) and (ii) changes in rates (change in
rate multiplied by old volume). The change attributable to
changes in rate-volume have been allocated to the other
categories based on absolute values.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 VS. DECEMBER 31, 1998 December 31, 1996 vs. December 31, 1997
INCREASE (DECREASE) Increase (Decrease)
DUE TO Due to
______________________________________ _______________________________________
(DOLLARS IN THOUSANDS)
VOLUME RATE TOTAL Volume Rate Total
______________________________________ _______________________________________
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Securities and other
interest-earning
assets . . . . . . . .$1,054 $ (49) $ 1,005 $ 233 $ 50 $ 283
Mortgage-backed and
related securities . . . (905) (128) (1,033) (303) 26 (277)
Loan portfolio. . . . . . 1,675 671 2,346 2,730 563 3,293
------------------------------------- ------------------------------------
Total interest-
earning assets. . . 1,824 494 2,318 2,660 639 3,299
------------------------------------- ------------------------------------
Interest expense:
Deposits. . . . . . . . 508 235 743 422 56 478
Borrowed funds. . . . . 755 (18) 737 1,621 3 1,624
------------------------------------- ------------------------------------
Total interest-bearing
liabilities . . . . 1,263 217 1,480 2,043 59 2,102
------------------------------------- ------------------------------------
Net interest income. . . $ 561 $ 277 $ 838 $ 617 $580 $1,197
===================================== ====================================
</TABLE>
RESERVE FOR LOAN LOSSES
The reserve for loan losses increased to $1.2 million as
of December 31, 1998, as compared to $874 thousand for the same
period a year ago. The Company added $330 thousand to the
reserve and had net charge-offs of $26 thousand for the year
ended December 31, 1998. The increase in the reserve was
necessary due to the 12.1% increase in net loans receivable. At
December 31, 1998, the loan loss reserve was 0.37% of net loans
as compared to 0.30% for the same period a year ago. Management
considers this level to be appropriate based on lending volume,
the current level of delinquencies and other non-performing
assets, overall economic conditions and other factors. Future
increases to the allowance may be necessary, however, due to
changes in loan composition or loan volume, changes in economic
or market area conditions and other factors.
NONINTEREST INCOME
During the year ended December 31, 1998, the Bank sold $14
million in fixed rate mortgage loans at a gain of $270,000 as
compared to the sale of $14 million at a gain of $51,000 for the
same period a year ago. The funds from the loan sales were used
in the operation of the Bank to extend credit to home and
commercial loan customers. The balance in real estate owned
expense represents operating expense and further reduction of
the carrying amount of foreclosed real estate owned. For the
years 1998 and 1997 the Bank aggressively pursued disposal of
the foreclosed real estate owned, thereby incurring various
charges in the sales of these properties. Loan fees for the
year ended December 31, 1998 as compared to last year increased
18.2% due to an increase in the volume of loans serviced. For
the same period, fee income from deposit operations increased
25.0% due to an increase in the volume of checking accounts.
13<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
NONINTEREST EXPENSE
For the year ended December 31, 1998, noninterest expense
increased 10.9% as compared to the same period last year.
Compensation and related costs increased 9.4% due to normal
increases in salaries and benefits, and additional employees
needed to handle the 5.6% growth in assets. Occupancy and
equipment expense increased 13.8%. This increase can be
attributed to additional maintenance necessary to keep the
buildings in good repair, depreciation on the new
teller/platform system, and depreciation on the new
Elizabethtown office. The decrease of 18.8% in Federal
insurance premium can be attributed to a reduction
in the premium. Other operating expense increased 25.2% as
compared to the same period a year ago. This increase can be
accounted for as follows: paper and printing 11.5%, postage and
freight 103.4%, professional services 9.4%, and telephone and
data communications 38.7%. The remaining increase was due to
normal increases in other expense items.
INCOME TAXES
The effective tax rates for the years ended December 31,
1998 and 1997 approximate the statutory rate after giving effect
to nontaxable interest, other permanent tax differences, and
adjustments to certain deferred tax liabilities.
14<PAGE>
<PAGE>
January 22, 1999
The Board of Directors and Stockholders
Cooperative Bankshares, Inc.
Wilmington, North Carolina
In our opinion, the accompanying consolidated statements of
financial condition and the related consolidated statements of
operations, comprehensive income, stockholders' equity and cash
flows present fairly, in all material respects, the financial
position of Cooperative Bankshares, Inc. and its subsidiary at
December 31, 1998 and 1997 and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted
accounting principles. 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 of these statements in
accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
15<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 8,856,389 $ 17,207,777
Securities:
Available for sale 21,163,133 21,004,067
Held to maturity (estimated market value,
1998 - $12,779,690; 1997 - $20,348,130) 13,034,264 21,043,946
Mortgage-backed and related securities available
for sale 10,550,692 12,856,337
Other investments 2,828,000 2,688,200
Loans receivable, net 321,324,146 286,691,769
Other real estate owned 2,439,158 251,141
Accrued interest receivable 2,286,657 2,172,335
Premises and equipment, net 6,372,456 4,872,202
Prepaid expenses and other assets 918,311 333,316
------------ ------------
$389,773,206 $369,121,090
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $301,656,204 $288,690,634
Borrowed funds 55,109,439 50,141,002
ESOP note payable -- 84,824
Escrow deposits 337,474 427,983
Accrued interest payable on deposits 79,263 126,155
Deferred income taxes, net 738,623 1,051,800
Accrued expenses and other liabilities 239,053 305,123
------------ ------------
Total liabilities 358,160,056 340,827,521
------------ ------------
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, 3,046,284 and 2,984,396
issued and outstanding 3,046,284 2,984,396
Additional paid-in capital 6,649,374 6,022,454
Unearned ESOP shares -- (84,824)
Accumulated other comprehensive income 154,051 (6,663)
Retained earnings 21,763,441 19,378,206
------------ ------------
Total stockholders' equity 31,613,150 28,293,569
------------ ------------
$389,773,206 $369,121,090
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
16<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans receivable $24,566,039 $22,220,197 $18,926,560
Mortgage-backed and related securities 737,697 1,771,023 2,048,268
Securities 3,106,807 2,102,462 1,818,629
----------- ----------- -----------
Total interest income 28,410,543 26,093,682 22,793,457
----------- ----------- -----------
Interest expense:
Deposits 13,891,244 13,148,297 12,669,984
Borrowed funds 3,320,583 2,584,143 960,408
----------- ----------- -----------
Total interest expense 17,211,827 15,732,440 13,630,392
----------- ----------- -----------
Net interest income 11,198,716 10,361,242 9,163,065
Provision for loan losses 330,000 153,000 155,809
----------- ----------- -----------
Net interest income after provision
for loan losses 10,868,716 10,208,242 9,007,256
----------- ----------- -----------
Noninterest income:
Net gains on sale of loans and mortgage-
backed and related securities 269,666 51,026 --
Real estate owned expenses and losses (79,729) (18,154) (39,833)
Loan fees 312,582 264,404 295,625
Deposit and related fees 388,851 311,047 257,011
Net gains on sale of securities -- -- 52,496
Other income, net (12,883) (256) 4,217
----------- ----------- -----------
Total noninterest income 878,487 608,067 569,516
----------- ----------- -----------
Other operating expenses:
Compensation and fringe benefits 4,327,317 3,957,154 3,638,832
Occupancy and equipment 1,626,064 1,428,944 1,257,639
Federal insurance premiums 177,588 218,811 543,526
Advertising 403,582 434,454 348,356
Amortization of goodwill -- -- 242,398
Other 1,438,712 1,149,278 1,077,727
SAIF assessment -- -- 1,782,810
Goodwill impairment -- -- 3,359,791
----------- ----------- -----------
Total other operating expenses 7,973,263 7,188,641 12,251,079
----------- ----------- -----------
Income (loss) before income taxes 3,773,940 3,627,668 (2,674,307)
Income tax expense 1,388,705 1,393,930 575,546
----------- ----------- -----------
Net income (loss) $ 2,385,235 $ 2,233,738 $(3,249,853)
=========== =========== ===========
Net income (loss) per share:
Basic $ .79 $ .75 $ (1.09)
=========== =========== ===========
Diluted $ .74 $ .70 $ (1.09)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
17<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Net income $2,385,235 $2,233,738 $(3,249,853)
Unrealized gain (loss) on available for
sale securities 264,006 627,620 (146,645)
Income tax (expense) benefit relating to
unrealized gain (loss) on available for
sale securities (103,292) (262,018) 72,318
---------- ---------- -----------
Other comprehensive income 160,714 365,602 (74,327)
---------- ---------- -----------
Comprehensive income $2,545,949 $2,599,340 $(3,324,180)
========== ========== ===========
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL UNEARNED OTHER TOTAL
COMMON PAID-IN ESOP COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK CAPITAL SHARES INCOME EARNINGS EQUITY
-------- ----------- -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
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
Exercise of stock options 61,888 501,540 - - - 563,428
Change in unrealized loss
on securities available
for sale, net of taxes - - - 160,714 - 160,714
Release of ESOP shares - 125,380 84,824 - - 210,204
Net income for year - - - - 2,385,235 2,385,235
---------- ---------- --------- --------- ----------- -----------
Balance, December 31, 1998 $3,046,284 $6,649,374 $ - $ 154,051 $21,763,441 $31,613,150
========== ========== ========= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
18<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------------ ----------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $2,385,235 $ 2,233,738 $ (3,249,853)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Net accretion, amortization, and
depreciation 705,478 591,844 801,129
Net gain on sale of loans and securities (269,666) (51,026) (52,496)
Provision (benefit) for deferred income
taxes (416,469) (286,101) 290,700
Goodwill impairment -- -- 3,359,791
Release of ESOP shares 125,380 11,664 --
Loss (gain) on sales of premises and
equipment 7,483 (3,345) 1,000
Loss on sales of foreclosed real estate 2,498 725 13,266
Valuation losses on foreclosed real
estate 62,300 10,653 76,566
Provision for loan losses 330,000 153,000 155,809
Changes in assets and liabilities:
Accrued interest receivable (114,322) (254,888) (174,858)
Prepaid expenses and other assets (584,995) 1,109,408 (992,802)
Accrued interest payable on deposits (46,892) (225,140) (511,082)
Accrued expenses and other liabilities 223,135 96,233 (319,256)
----------- ----------- -----------
Net cash provided by (used in)
operating activities 2,409,165 3,386,765 (602,086)
----------- ----------- -----------
Investing activities:
Purchase of securities available for sale (15,000,000) (17,000,000) (9,997,883)
Proceeds from maturity of securities available
for sale 15,000,000 2,000,000 4,000,000
Proceeds from sale of mortgage-backed and
related securities available for sale -- 15,038,128 --
Proceeds from maturities of securities
held to maturity 8,000,000 -- --
Proceeds from principal repayments of
mortgage-backed and related securities
available for sale 2,327,315 1,429,317 1,906,819
Proceeds from sales of loans 13,998,895 14,028,855 --
Loan originations, net of principal
repayments (51,092,429) (38,117,697) (29,661,834)
Proceeds from disposals of foreclosed real
estate 258,147 387,456 605,626
Purchases of premises and equipment (2,120,263) (562,349) (225,036)
Net expenditures on foreclosed real estate (110,139) -- --
Sales (purchases) of other investments (139,800) (253,200) 199,471
----------- ----------- -----------
Net cash(used in)investing
activities (28,878,274) (23,049,490) (33,172,837)
----------- ----------- -----------
Financing activities:
Net increase in deposits 12,965,570 10,551,725 8,068,248
Proceeds from borrowed funds 15,000,000 25,000,000 25,056,345
Principal payments on borrowed funds (10,031,563) (10,004,360) --
Proceeds from issuance of common stock 274,223 8,679 --
Net change in escrow deposits (90,509) (192,825) 268,140
----------- ----------- -----------
Net cash provided by
financing activities 18,117,721 25,363,219 33,392,733
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents (8,351,388) 5,700,494 (382,190)
Cash and cash equivalents:
Beginning of year 17,207,777 11,507,283 11,889,473
----------- ----------- -----------
End of year $ 8,856,389 $17,207,777 $11,507,283
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
19<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, (the "Bank) 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 deposits, bank 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 in the
financial statements and accompanying notes. 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 $7,904,166 and $12,311,582 at
December 31, 1998 and 1997, respectively.
Federal regulations require institutions to set aside
specified amounts of cash as reserves against transaction
and time deposits. As of December 31, 1998, the daily
average gross reserve requirement was $391,000.
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 net income and reported as other
comprehensive income and included in 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 effective 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.
20<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and unearned discounts 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. As permitted by the statement, smaller-
balance homogeneous loans which consist primarily of
residential mortgages and consumer loans are evaluated
collectively and reserves are established based on
historical loss experience.
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 charged to income. 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. It is possible that such
factors in management's evaluations of the adequacy of the
allowance for loan losses will change.
d. Income Recognition on Impaired and Nonaccrual Loans -
Loans, including impaired loans, are generally classified
as nonaccrual if they are past due for a 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.
21<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Transfers and Servicing of Financial Assets - 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 1998 or 1997, nor
were there any loan sales in 1996. Fees on loans sold in
1998 and 1997 are considered to adequately compensate the
Company, therefore no servicing assets were recorded on
those sales.
f. Other Real Estate Owned - Other real estate owned 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.
g. 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 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.
h. 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 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.
i. 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 down to net
realizable value through a charge to earnings of
$3,359,791.
22<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
j. Comprehensive Income - The Company adopted SFAS No. 130,
"Reporting Comprehensive Income" on January 1, 1998.
SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components
(revenues, expenses, gains, and losses) in general-purpose
financial statements.
k. Segment Information - During the year ended December 31,
1998, the Company adopted the provisions of Statement of
Financial Standards (SFAS) No. 131 "Disclosures about
Segments of and Enterprise and Related Information." The
Statement requires that public business enterprises report
certain information about operating segments in their
annual financial statements and in condensed financial
statements of interim periods issued to shareholders. It
also requires that the public business enterprises report
related disclosures and descriptive information about
products and services provided by significant segments,
geographic areas, and major customers, differences between
the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial
statements, and changes in the measurement of segment
amounts from period to period.
Operating segments are components of an enterprise about
which separate financial information is available that is
evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing
performance. The Company has determined that is has one
significant operating segment, the providing of general
commercial financial services to customers located in the
single geographic area of Eastern North Carolina. The
various products are those generally offered by community
banks, and the allocation of resources is based on the
overall performance of the institution, versus the
individual branches or products.
There are no differences between the measurements used in
reporting segment information and those used in the
enterprise's general-purpose financial statements, and the
measurement of segment amounts has not changed for 1998
from prior years.
l. Employers Disclosures about Pensions and Other
Postretirement Benefits - The Company has adopted the
provisions of SFAS No. 132, "Employers Disclosures about
Pensions and Other Postretirement benefits", effective for
fiscal years beginning after December 15, 1997. This
Statement revises employers' disclosures about pension and
other postretirement benefit plans. It does not change
the measurement or recognition of those plans. The
adoption of SFAS No. 132 did not have a material effect on
the Company's consolidated financial statements.
m. New Accounting Pronouncements - The Company will adopt the
provisions of SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" effective with the
fiscal quarter beginning January 1, 2000. This statement
establishes accounting and reporting standards for
derivative instruments and for hedging activities. It
requires that derivatives be recognized as either assets
or liabilities in the statement of financial position and
be measured at fair value. The accounting for changes in
the fair value of a derivative depends on the intended use
of the derivative and whether or not the derivative is
designated as a hedging instrument. SFAS No. 133 is not
expected to have a material effect on the Company's
consolidated financial statements.
SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held
for Sale by a Mortgage Banking Enterprise", was issued in
October 1998. This Statement amends existing
classification and accounting treatment of mortgage-backed
securities, retained after mortgage loans held for sale
are securitized, for entities engaged in mortgage banking
activities. These securities previously were classified
and accounted for as trading and now may be classified as
held-to-maturity or available-for-sale, also. This
Statement
23<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
is effective for the first fiscal quarter beginning after
December 15, 1998. SFAS No.134 is not expected to have
material effect on the Company's consolidated financial
statements.
2. SECURITIES
Securities at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1998:
U.S. Government and agency securities:
Held to maturity $13,034,264 $ -- $254,574 $12,779,690
Available for sale 21,002,205 174,988 14,060 21,163,133
----------- -------- --------------------
$34,036,469 $174,988 $268,634 $33,942,823
=========== ======== ====================
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
=========== ======== ====================
</TABLE>
The maturities of securities at December 31, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------------------
<S> <C> <C>
Held to maturity:
After 3 years through 5 years $ 8,034,264 $ 7,824,375
After 5 years through 10 years 5,000,000 4,955,315
----------- -----------
Total $13,034,264 $12,779,690
=========== ===========
Available for sale:
Within 1 year $ 2,000,000 $ 2,010,626
After 1 year through 5 years 19,002,205 19,152,507
----------- -----------
$21,002,205 $21,163,133
=========== ===========
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, the
Company had gross realized gains on sale of securities of
$52,496 in 1996, and no losses in any period.
24<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities available for sale
at December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1998:
GNMA certificates $ 4,936,517 $134,587 $ -- $ 5,071,104
FNMA certificates 4,224,080 5,572 57,204 4,172,448
FHLMC certificates 1,298,481 8,659 -- 1,307,140
----------- -------- -------- -----------
Total $10,459,078 $148,818 $ 57,204 $10,550,692
=========== ======== ======== ===========
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
=========== ======== ======== ===========
</TABLE>
The Company realized gross gains of $0 and $9,375 and gross
losses of $0 and $9,387 on sales of mortgage backed and
related securities for the years ended December 31, 1998
and 1997, respectively. There were no sales of mortgage
backed and related securities in 1996.
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, 1998 and 1997 consist of
Federal Home Loan Bank of Atlanta ("FHLB") stock. The cost
and estimated market value of the FHLB stock was $2,828,000
and $2,688,200 at December 31, 1998 and 1997,
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.
25<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS RECEIVABLE
Loans receivable at December 31, 1998 and 1997 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Mortgage loans collateralized by real estate:
1-4 family residential properties $235,644 $232,977
Multi-family residential properties 5,575 4,835
Nonresidential properties 3,697 4,891
1-4 family residential properties under
construction 25,244 24,908
Nonresidential properties under construction -- 469
Installment loans collateralized by real estate:
1-4 family residential properties 18,737 12,134
Multi-family residential properties 7,649 1,442
Nonresidential properties 12,940 4,526
Multi-family residential properties under
construction 1,128 2,996
1-4 family residential properties under
construction 8,810 2,327
Nonresidential properties under construction 11,735 7,868
Consumer loans 5,073 4,397
Business loans 4,021 2,586
Consumer and business construction loans 964 1,213
--------- ---------
Total loans 341,217 307,569
Less:
Undisbursed portion of construction loans 17,499 18,729
Unearned discounts and net deferred fees 1,216 1,274
Loan loss reserve 1,178 874
-------- --------
Net loans $321,324 $286,692
======== ========
</TABLE>
26<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the normal course of business, the Company originates
loans to related parties. Related parties include
directors, executive officers, principal shareholders of
equity securities, or any associate of such persons. The
activity with respect to related party loans is summarized
below:
Balance at beginning of year $ 754,697
New loans 2,188,000
Repayments 481,460
----------
Balance at end of year $2,461,237
==========
Activity in the allowance for loan losses for the years
ended December 31, 1998, 1997 and 1996 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $873,802 $807,539 $737,000
Provision for loan losses 330,000 153,000 155,809
Loans charged-off (28,330) (86,737) (85,270)
Recoveries 2,770 -- --
---------- -------- --------
Balance at end of year $1,178,242 $873,802 $807,539
========== ======== ========
</TABLE>
The following is a summary of nonperforming assets at
December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Loans 90 days past due and still accruing interest $1,765 $357
Nonaccrual loans -- --
Other real estate owned 2,439 251
------ ----
Total $4,204 $608
====== ====
</TABLE>
At December 31, 1998 and 1997, the recorded investment in
loans considered impaired in accordance with SFAS No. 114
totaled $0 and $454,176, respectively, with corresponding
valuation allowances of $0 and $0, respectively. For the
years ended December 31, 1998, 1997, and 1996, the average
recorded investment in impaired loans was approximately
$580,000, $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.
27<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The following table summarizes the Company's outstanding
off-balance sheet commitments to extend credit at December
31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Undisbursed portion of home equity lines of credit
collateralized primarily by junior liens on 1-4
family properties $ 7,332 $ 6,374
Other commitments and credit lines 4,577 3,318
Fixed-rate mortgage loan commitments 4,257 2,571
Adjustable-rate mortgage loan commitments 3,149 2,408
------- -------
Total $19,315 $14,671
======= =======
</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 $58,674,064, $65,061,001 and
$62,753,000 at December 31, 1998, 1997 and 1996,
respectively.
<PAGE>
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.
28<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1998 and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land $ 1,677,245 $ 1,626,553
Buildngs 5,488,561 4,796,885
Leasehold improvements 307,994 438,739
Furniture and equipment 4,572,363 3,711,528
----------- -----------
12,046,163 10,573,705
Less accumulated depreciation and amortization (5,673,707) (5,701,503)
----------- -----------
Premises and equipment, net $ 6,372,456 $ 4,872,202
=========== ===========
</TABLE>
7. DEPOSITS
Time deposits of $100,000 or more at December 31, 1998 and
1997, are summarized by maturity as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
3 months or less $ 10,486 $ 13,957
Over 3 through 6 months 12,238 8,708
Over 6 through 12 months 16,994 21,591
Over 12 months 9,367 6,180
--------- ---------
Total $ 49,085 $ 50,436
========= =========
</TABLE>
The average balance of, and weighed average rates ("WAR")
paid on, deposits for the years ended December 31, 1998,
1997 and 1996 (in thousands) are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------
Average Average Average
Balance WAR Balance WAR Balance WAR
------- ---- -------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
NOW accounts $ 14,117 0.85% $ 12,208 0.92% $ 11,513 1.00%
Money market 11,978 3.60% 7,472 2.83% 7,866 2.10%
Savings 28,714 1.74% 34,050 1.94% 35,881 2.00%
Certificates of deposit 236,042 5.44% 226,422 5.37% 215,896 5.41%
-------- ---- -------- ---- -------- -----
Total $290,851 4.78% $280,152 4.69% $271,156 4.67%
======== ==== ======== ==== ======== =====
</TABLE>
Non-interest bearing deposits totaled $7,877,568 and
$4,204,000 at December 31, 1998 and 1997, respectively.
29<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. BORROWED FUNDS
Borrowed funds and the corresponding weighted average rates
("WAR") at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998 WAR 1997 WAR
----------- --- ----------- ---
<S> <C> <C> <C> <C>
Advances from FHLB $55,000,000 6.33% $50,000,000 6.48%
Affordable Housing
Program advances from
FHLB 109,439 3.50% 141,002 3.50%
----------- ---- ----------- ----
Total $55,109,439 6.33% $50,141,002 6.47%
=========== ==== =========== ====
</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 a $92 million line of credit with the FHLB. The
maximum month end balances were $55 million, $50 million,
and $35 million during the years ended December 31, 1998,
1997 and 1996. Annual principal maturities of Federal Home
Bank advances for each of the five years subsequent to
December 31, 1998 are as follows:
1999 $ 15,000,000
2000 10,000,000
2001 15,000,000
2002 10,000,000
2003 5,000,000
-----------
Total $55,000,000
===========
The Affordable Housing Program advances are funds advanced
by the FHLB for the Company to 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>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Advances from FHLB $ 3,320,483 $2,575,273 $ 960,408
ESOP loan 100 8,870 -
----------- ---------- ----------
Total $ 3,320,583 $2,584,143 $ 960,408
=========== ========== ==========
</TABLE>
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
consolidated financial statements. Quantitative measures
established by regulation to ensure capital adequacy
require the Company to maintain
30
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
minimum amounts and ratios, as set forth in the table
below. Management believes, as of December 31, 1998,
that the Company meets all capital adequacy requirements to
which it is subject. The Company's only significant asset
is its investment in Cooperative Bank for Savings, Inc.
SSB. Consequently, the information concerning capital
ratios is essentially the same for the Company and the
Bank.
As of December 31, 1998, 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, 1998:
- -----------------------
Total Capital (to Risk
Weighted Assets) $32,637 14.3% $18,290 8.0% $22,863 10.0%
Tier I Capital (to Risk
Weighted Assets) 31,459 13.8% 9,145 4.0% 13,718 6.0%
Tier I Capital (to
Average Assets) 31,459 8.1% 15,528 4.0% 19,410 5.0%
Total Tangible Capital
(to Total Tangible
Assets) 31,613 8.1% 19,489 5.0% 19,489 5.0%
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%
</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
deposit of an account holder. The liquidation account was
approximately $3,571,000 at December 31, 1998.
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
31<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
9. 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 1998,
1997 and 1996.
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 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 served as collateral for
the loan and the loan was 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 matches
employee contributions up to a limit determined annually by
the Board of Directors. The match was established by the
Board as 6% for 1998 and 1997.
During the years ended December 31, 1998 and 1997, the
Company matched employee contributions by contributing
$85,000 and $204,000 to the KSOP to repay a portion of the
note. This released 8,774 and 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, 1998 and 1997. At December 31, 1998 and
1997 there were 0 and 8,774 unearned ESOP shares, with an
estimated market value of approximately $0 and $228,124,
held in suspense.
The compensation expense incurred by the Company for these
benefit plans, including the effect of the change in the
defined benefit plan noted earlier, was $366,939, $232,164,
and $209,216 for the years ended December 31, 1998, 1997,
and 1996, respectively.
32<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. 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, 1997 and 1996.
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, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) (numerator) $2,385,235 $ 2,233,738 $(3,249,853)
========== =========== ===========
Shares for basic EPS (denominator) 3,019,413 2,972,686 2,981,954
Dilutive effect of stock options 186,979 211,611 --
---------- ----------- -----------
Adjusted shares for diluted EPS 3,206,392 3,184,297 2,981,954
========== =========== ===========
</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 1996 calculation of diluted earnings
per share.
33<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES
Income tax expense consists of the following components for
the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- --------
<S> <C> <C> <C>
Current tax provision $1,805,174 $1,680,031 $284,846
Deferred tax provision (benefit) (416,469) (286,101) 290,700
---------- ---------- --------
Total $1,388,705 $1,393,930 $575,546
========== ========== ========
</TABLE>
The components of the net deferred tax liability at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Unrealized loss on securities
available for sale $ -- $ 4,800
Allowance for loan losses 36,744 --
---------- ----------
Total 36,744 4,800
---------- ----------
Deferred tax liabilities:
Deferred loan fees 360,378 482,731
Allowance for loan losses -- 225,559
FHLB stock 209,692 231,784
Excess of book over tax basis of equipment 106,805 116,526
Unrealized gain on securities available
for sale 98,492 --
---------- ----------
Total 775,397 1,056,600
---------- ----------
Net deferred tax liability $ 738,623 $1,051,800
========== ==========
</TABLE>
34<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Income taxes at federal tax rate $1,283,140 $ 1,233,407 $(909,265)
Increase (decrease) resulting from:
Amortization and impairment of
goodwill -- -- 1,216,807
State income taxes, net of
federal income tax benefit 84,619 152,196 59,071
Other 20,946 8,327 208,933
---------- ----------- ----------
Total $1,388,705 $ 1,393,930 $ 575,546
========== =========== ==========
</TABLE>
As of December 31, 1998, 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 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.
35<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No options were granted during the years ended December 31,
1998 and 1996. 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 1998 and 1997, 61,888 and 1,000 options were
exercised at a weighted average exercise price of $4.43 and
$1.78 per share, respectively. No options expired or were
forfeited during the years ended December 31, 1998, 1997
and 1996. 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, 1998 187,438 38,104 225,542 --
======= ====== ======= ======
Balance, December 31, 1997 230,726 56,704 287,430 --
======= ====== ======= ======
Balance, December 31, 1996 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 continue 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 Company'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,
1998 and 1996, 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>
36<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 4.38 years. The weighted average fair value of options
granted in 1997 was $3.87.
The following table summarizes additional information about
the Option Plan at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998
------------------------------------------
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
$1.78 183,234 2.75 years 183,234
$2.67 3,424 3.25 years 3,424
$3.20 5,924 3.50 years 5,924
$7.50 23,332 5.25 years 23,332
$10.50 5,424 8.25 years 5,424
$19.50 4,204 9.00 years 4,204
-------- ---------- -------
225,542 3.28 years 225,542
======== ========== =======
<CAPTION>
1997
------------------------------------------
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
$1.78 212,954 3.75 years 212,954
$2.67 7,424 4.75 years 7,424
$3.20 7,424 4.50 years 7,424
$7.50 48,000 6.25 years 48,000
$10.50 7,424 9.23 years 7,424
$19.50 4,204 10.00 years 4,204
-------- ----------- -------
287,430 5.67 years 287,430
======== =========== =======
</TABLE>
37<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, 1998 and 1997
and for the years ended December 31, 1998, 1997 and 1996
is presented below:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Assets:
Cash $ 1,624 $ 4,707
Equity investment in
subsidiary 31,602,684 28,264,866
Deferred organization costs 8,841 23,996
----------- -----------
$31,613,149 $28,293,569
=========== ===========
Liabilities and stockholders' equity:
Stockholders' equity $31,613,149 $28,293,569
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Dividends from subsidiary $ 11,938 $ 13,709 $ --
Equity in income (loss) of subsidiary 2,403,474 2,248,259 (3,222,121)
Miscellaneous expenses 30,177 28,230 27,732
---------- ----------- -----------
Net income (loss) $2,385,235 $ 2,233,738 $(3,249,853)
========== =========== ===========
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ 2,385,235 $ 2,233,738 $(3,249,853)
Equity in undistributed earnings of
subsidiary (2,403,474) (2,248,259) 3,222,121
Amortization of deferred organization costs 15,156 15,156 15,155
----------- ----------- -----------
Cash flows provided by (used in) operating
activities (3,083) 635 (12,577)
Cash and cash equivalents, beginning of year 4,707 4,072 16,649
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,624 $ 4,707 $ 4,072
=========== =========== ===========
</TABLE>
38<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. CASH FLOW SUPPLEMENTAL DISCLOSURES
The following information is supplemental information
regarding the cash flows for the years ended December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ------------
<S> <C> <C> <C>
Cash paid for:
Interest on deposits and borrowed funds $ 17,258,719 $ 15,957,580 $ 14,141,474
Income taxes 1,544,000 1,247,000 836,685
Summary of noncash investing and financing
activities:
Transfer from loans to foreclosed real
estate 2,438,023 843,477 239,729
Loans to facilitate the sale of foreclosed
real estate 34,000 235,648 38,348
</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.
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.
39<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 estimatedusing 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.
40<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts and estimated fair values of the
Company's financial instruments at December 31, 1998 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------- --------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 8,856 $ 8,856 $ 17,208 $ 17,208
Securities:
Available for sale 21,163 21,163 21,004 21,004
Held to maturity 13,034 12,780 21,044 20,348
Mortgage-backed and related securities
available for sale: 10,551 10,551 12,856 12,856
Loans receivable:
Gross loans 322,502 322,896 287,566 289,777
Allowance for loan losses (1,178) (1,178) (874) (874)
-------- -------- -------- --------
Loans receivable, net 321,324 321,718 286,692 288,903
Other investments 2,828 2,828 2,688 2,688
-------- -------- -------- --------
Total $377,756 $377,896 $361,492 $363,007
======== ======== ======== ========
Financial liabilities:
Deposits $301,656 $299,383 $288,690 $284,040
Borrowed funds 55,109 56,674 50,226 50,579
-------- -------- -------- --------
Total $356,765 $356,057 $338,916 $334,619
======== ======== ======== ========
</TABLE>
The Company's remaining assets and liabilities are not
considered financial instruments.
17. STOCK REPURCHASE PLAN
On September 17, 1998, the Company's Board of Directors
approved a Stock Repurchase Program. The Stock Repurchase
Program authorizes the Company to repurchase up to 150,000
shares, or approximately 5% of the currently outstanding
shares of common stock. As of December 31, 1998, no shares
had been repurchased. On February 8, 1999, the Company
purchased 74,000 shares under the Stock Repurchase Plan.
41<PAGE>
<PAGE>
DIRECTORS, OFFICERS AND OFFICE LOCATIONS
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S> <C>
Frederick Willetts, III, Chairman H. T. King, III
President, Chief Executive Officer President, Hanover Iron Works, Inc.
Cooperative Bankshares, Inc. and
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
James D. Hundley, M.D. O. Richard Wright, Jr.
President, Wilmington Orthopaedic Attorney, McGougan Wright Worley & Harper
Group P.A.
<CAPTION>
OFFICERS OF COOPERATIVE BANK FOR SAVINGS, INC., SSB
<S> <C>
Frederick Willetts, III.....................Chairman, 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
Raymond A. Martin.....................................Vice President-Information Services
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
Phillip T. Whittington............................... ..Vice President-Commercial Lending
</TABLE>
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)
42<PAGE>
<PAGE>
CORPORATE INFORMATION
CORPORATE INFORMATION
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 30, 1999 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, 1998 there
were 3,046,284 shares outstanding which were held by 599
stockholders of record. No cash dividends have been paid on the
common stock since its issuance. Stock performance for 1998 and
1997 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>
1998 1997
-----------------------------
QUARTERS ENDED HIGH LOW HIGH LOW
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
December $16.00 $10.00 $20.25 $15.50
September 18.00 12.50 17.50 10.63
June 20.00 17.00 11.00 10.25
March 24.38 18.00 10.75 10.00
</TABLE>
43
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.
<PAGE>
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 22, 1999, on our audits
of the consolidated financial statements of Cooperative
Bankshares, Inc. as of December 31, 1998 and 1997, and for each
of the three years in the period ended December 31, 1998, which
report is incorporated by reference in this Annual Report on
Form 10-K.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
March 18, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 952,223
<INT-BEARING-DEPOSITS> 7,904,166
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,713,825
<INVESTMENTS-CARRYING> 15,862,264
<INVESTMENTS-MARKET> 15,607,690
<LOANS> 322,502,388
<ALLOWANCE> 1,178,242
<TOTAL-ASSETS> 389,773,206
<DEPOSITS> 301,656,204
<SHORT-TERM> 55,109,439
<LIABILITIES-OTHER> 1,394,413
<LONG-TERM> 0
<COMMON> 0
0
28,566,866
<OTHER-SE> 3,046,284
<TOTAL-LIABILITIES-AND-EQUITY> 389,773,206
<INTEREST-LOAN> 24,566,039
<INTEREST-INVEST> 3,844,504
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 28,410,543
<INTEREST-DEPOSIT> 13,891,244
<INTEREST-EXPENSE> 17,211,827
<INTEREST-INCOME-NET> 11,198,716
<LOAN-LOSSES> 330,000
<SECURITIES-GAINS> 269,666
<EXPENSE-OTHER> 7,973,263
<INCOME-PRETAX> 3,773,940
<INCOME-PRE-EXTRAORDINARY> 3,773,940
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,385,235
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.74
<YIELD-ACTUAL> 3.04
<LOANS-NON> 0
<LOANS-PAST> 1,765
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 873,802
<CHARGE-OFFS> 28,330
<RECOVERIES> 2,770
<ALLOWANCE-CLOSE> 1,178,242
<ALLOWANCE-DOMESTIC> 1,178,242
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
