<PAGE>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______
Commission File Number: No. 0-24626
-------
COOPERATIVE BANKSHARES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1886527
- ------------------------------- -------------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
201 Market Street, Wilmington, North Carolina 28401
- --------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(910)343-0181
-------------
- ---------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 of 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of
shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
2,783,696 shares at May 10, 1999.
- --------------------------------<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition,
March 31, 1999 and December 31, 1998 2
Consolidated Statements of Operations, for the
three months ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows, for the
three months ended March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-13
Part II Other Information 14
Signatures 15
Exhibit 11 - Statement Regarding Computation of
Earnings Per Share 16
Exhibit 27 - Financial Data Schedule 17-18
<PAGE>
<PAGE>
PART 1-FINANCIAL INFORMATION-ITEM 1-FINANCIAL STATEMENTS
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents (including interest-bearing
deposits:
March 1999-$1,277,308; December 1998-$7,904,166) $ 6,138,772 $ 8,856,389
Securities:
Available for sale 21,065,318 21,163,133
Held to maturity (estimated market value: March 1999-
$12,612,504; December 1998-$12,779,690) 13,031,843 13,034,264
Mortgage-backed and related securities available for sale 9,924,309 10,550,692
Other investments 3,005,500 2,828,000
Loans receivable, net 320,071,693 321,324,146
Foreclosed real estate owned 25,352 2,439,158
Accrued interest receivable 2,443,774 2,286,657
Premises and equipment, net 6,406,515 6,372,456
Prepaid expenses and other assets 1,047,323 918,311
------------ ------------
Total assets $383,160,399 $389,773,206
============ ============
LIABILITIES:
Deposits $298,986,021 $301,656,204
Borrowed funds 52,108,491 55,109,439
Escrow deposits 499,252 337,474
Accrued interest payable on deposits 115,001 79,263
Deferred income taxes, net 612,722 738,623
Accrued expenses and other liabilities 691,402 239,053
------------ ------------
Total liabilities $353,012,889 $358,160,056
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value, 3,000,000 shares
authorized, none issued and outstanding -- --
Common stock, $1 par value, 7,000,000 shares authorized,
2,890,496 and 3,046,284 shares issued and outstanding 2,890,496 3,046,284
Additional paid-in capital 4,746,861 6,649,374
Accumulated other comprehensive income 105,761 154,051
Retained earnings 22,404,392 21,763,441
Total stockholders' equity 30,147,510 31,613,150
------------ ------------
Total liabilities and stockholders' equity $383,160,399 $389,773,206
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
2 <PAGE>
<PAGE>
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
------------ -----------
<S> <C> <C>
INTEREST INCOME:
Loans receivable $6,332,009 $5,780,631
Mortgage-backed and related securities 156,075 203,920
Securities 593,113 894,090
---------- ----------
Total interest income 7,081,197 6,878,641
---------- ----------
INTEREST EXPENSE:
Deposits 3,248,177 3,385,872
Borrowed funds 882,989 800,708
---------- ----------
Total interest expense 4,131,166 4,186,580
---------- ----------
NET INTEREST INCOME 2,950,031 2,692,061
Provision for loan losses 75,000 130,000
---------- ----------
Net interest income after provision for
loan losses 2,875,031 2,562,061
---------- ----------
NONINTEREST INCOME:
Net gains on sale of loans 123,110 260,174
Service charges on deposit accounts 153,834 115,300
Loan fees and service charges 72,174 79,561
Investment fees 11,481 16,640
Other service charges and fees 10,061 12,602
Real estate owned expenses and losses (43,027) (76,378)
Other income, net 1,135 605
---------- ----------
Total noninterest income 328,768 408,504
---------- ----------
NONINTEREST EXPENSE:
Compensation and fringe benefits 1,111,349 1,062,518
Occupancy and equipment 459,744 364,315
FDIC premium 45,442 44,972
Advertising 101,234 91,848
Other expense 467,527 448,232
---------- ----------
Total noninterest expenses 2,185,296 2,011,885
---------- ----------
Income before income taxes 1,018,503 958,680
Income tax expense 377,552 343,499
---------- ----------
NET INCOME $ 640,951 $ 615,181
========== ==========
NET INCOME PER SHARE:
Basic $ 0.22 $ 0.21
========== ==========
Diluted $ 0.20 $ 0.19
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3<PAGE>
<PAGE>
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 640,951 $ 615,181
Adjustments to reconcile net income to net
cash provided by operating activities:
Net accretion, amortization, and depreciation 137,959 145,360
Net gain on sale of loans and mortgage-backed and
related securities (123,110) (260,174)
Benefit for deferred income taxes (95,027) (139,370)
Release of ESOP shares - 61,583
Gain on sale of premises and equipment (300) -
Loss on sales of foreclosed real estate 37,945 5,476
Valuation losses on foreclosed real estate - 62,300
Provision for loan losses 75,000 130,000
Changes in assets and liabilities:
Accrued interest receivable (157,117) (104,966)
Prepaid expenses and other assets (132,801) (474,356)
Accrued interest payable on deposits 35,738 24,247
Accrued expenses and other liabilities 452,349 511,907
------------ ------------
Net cash provided by operating activities 871,587 577,188
------------ ------------
INVESTING ACTIVITIES:
Purchase of securities available for sale - (5,000,000)
Proceeds from maturity of securities available
for sale - 10,000,000
Proceeds from principal repayments of mortgage-
backed and related securities available for sale 621,721 406,220
Proceeds from sales of loans 19,484,691 13,915,579
Loan originations, net of principal repayments (15,849,128) (11,959,186)
Proceeds from disposals of foreclosed real estate 61,270 214,442
Purchases of premises and equipment (162,904) (894,684)
Proceeds from sale of premises and equipment 300 -
Net purchases of other investments (177,500) (208,430)
------------ ------------
Net cash provided by investing activities 3,978,450 6,473,941
------------ ------------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits (2,670,183) 10,999,853
Proceeds from FHLB advances 10,000,000 -
Principal payments on FHLB advances (13,000,948) (1,128)
Proceeds from issuance of common stock 48,981 -
Repurchase of common stock (2,107,282) -
Net change in escrow deposits 161,778 149,833
------------ ------------
Net cash (used in) provided by financing
activities (7,567,654) 11,148,558
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,717,617) 18,199,687
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 8,856,389 17,207,777
------------ ------------
END OF PERIOD $ 6,138,772 $ 35,407,464
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies: The significant accounting policies
followed by Cooperative Bankshares, Inc. (the "Company") for
interim financial reporting are consistent with the accounting
policies followed for annual financial reporting. These
unaudited consolidated financial statements have been prepared
in accordance with Rule 10-01 of Regulation S-X, and, in
management's opinion, all adjustments of a normal recurring
nature necessary for a fair presentation have been included.
The accompanying financial statements do not purport to contain
all the necessary financial disclosures that might otherwise be
necessary in the circumstances and should be read in conjunction
with the consolidated financial statements and notes thereto in
the Company's annual report for the year ended December 31,
1998. The results of operations for the three-month period
ended March 31, 1999 are not necessarily indicative of the
results to be expected for the full year.
2. Basis of Presentation: The accompanying unaudited
consolidated financial statements include the accounts of
Cooperative Bankshares, Inc., Cooperative Bank For Savings,
Inc., SSB and its wholly owned subsidiary, CS&L Services, Inc.
All significant intercompany items have been eliminated.
3. Earnings Per Share: Earnings per share are calculated by
dividing net income by both the weighted average number of
common shares outstanding and the dilutive common equivalent
shares outstanding. Common equivalent shares consist of stock
options issued and outstanding. In determining the number of
equivalent shares outstanding, the treasury stock method was
applied. This method assumes that the number of shares issuable
upon exercise of the stock options is reduced by the number of
common shares assumed purchased at market prices with the
proceeds from the assumed exercise of the common stock options
plus any tax benefits received as a result of the assumed
exercise.
4. Comprehensive Income: Comprehensive income includes net
income and all other changes to the Company's equity, with the
exception of transactions with shareholders ("other
comprehensive income"). The Company's only components of other
comprehensive income relate to unrealized gains and losses on
available for sale securities.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---------------------
<S> <C> <C>
Unrealized gains/(losses) on available for sale
securities $(79,163) $ 24,683
Income tax (expense)/benefit relating to unrealized
gains on available for sale securities 30,874 (10,319)
-------- --------
Other comprehensive income (48,289) 14,364
Net Income 640,951 615,181
-------- --------
Total comprehensive income $592,662 $629,545
======== ========
</TABLE>
5. Statement of Financial Accounting Standards No. 133: On
June 15, 1998 the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities
(FAS 133). FAS 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999 (January 1, 2000 for
the Company). FAS 133 requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes
in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction.
Management of the Company anticipates that, due to the fact that
it does not use derivative instruments, the adoption of FAS 133
will not have any effect on the Company's results of operations
or its financial position.
5<PAGE>
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Cooperative Bankshares, Inc. (the "Company") is a
registered 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 March 31, 1999, $280.7 million, or 87.7%, 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 March 31, 1999,
adjustable rate loans totaled approximately 62%, and fixed rate
loans totaled approximately 38% of the Bank's 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
6<PAGE>
<PAGE>
interest-earning assets and interest-bearing liabilities. Gap is
considered positive when the amount of interest rate sensitive
assets exceed the amount of interest rate sensitive liabilities.
Gap is considered negative when the amount of interest rate
sensitive liabilities exceed the amount of interest rate
sensitive assets. At March 31, 1999, Cooperative had a one-year
negative gap position of 8.7%. 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.
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 March 31, 1999, the estimated market value of liquid
assets (cash, cash equivalents, and marketable securities) was
approximately $52.7 million, which represents 15% of deposits
and borrowed funds as compared to $56.2 million or 15.7% of
deposits and borrowed funds at December 31, 1998. The decrease
in liquid assets was primarily due to the decrease in deposits
and borrowed funds.
The Company's security portfolio consists of U.S.
Government agency, mortgage-backed and other permissible
securities. The mortgage-backed securities are guaranteed by
the following agencies: Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA"), and
the Government National Mortgage Association ("GNMA").
Mortgage-backed securities entitle the Company to receive a pro
rata portion of the cash flows from an identified pool of
mortgages. Although mortgage-backed securities generally offer
lesser yields than the loans for which they are exchanged, they
present substantially lower credit risk by virtue of the
guarantees that back them. Mortgage-backed securities are more
liquid than individual mortgage loans, and may be used to
collateralize borrowings or other obligations of the Company.
The Company's investment in U. S. Government agency bonds
includes $5 million in Federal Home Loan Banks' Dual Indexed
Consolidated Bonds maturing August 4, 2003. These bonds had an
8% interest rate from August 4, 1993, through August 3, 1995, at
which time the rate was adjusted to 3.485% based on an indexing
formula. Subsequent interest rates will also be based on an
indexing formula and will adjust annually on February 4 and
August 4. The indexing formula states that the interest rate
per annum will be equal to a rate determined by the 10-Year CMT
less the 6 month LIBOR plus a margin of 2.9% for August 4, 1995,
increasing 30 basis points annually to 5.0% for August 4, 2002.
The rate at March 31, 1999 on this bond was 3.47%.
The mortgage-backed and related securities owned by the
Company are subject to repayment by the mortgagors of the
underlying collateral at any time. A rising or declining
interest rate environment may
7<PAGE>
<PAGE>
affect these repayments. 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 March 31, 1999, outstanding
off-balance sheet commitments to extend credit totaled $16.7
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
On September 17, 1998, the Company's 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 initial repurchase program was completed
in February 1999. On March 25, 1999, the Company's Board of
Directors announced a second Stock Repurchase Program. This
Stock Repurchase Program authorized the Company to repurchase an
additional 152,000 shares, or approximately 5% of the currently
outstanding shares of common stock. It is expected to be
completed within six months. As of March 31, 1999, the Company
had repurchased 164,000 shares at an average cost of $12.85 per
share. Subsequent to March 31, 1999, the Company has purchased
an additional 106,800 shares at an average cost of $11.85 per
share.
Stockholders' equity at March 31, 1999, was $30.1 million,
down 4.7% due to the stock repurchase plan, from $31.6 million
at December 31, 1998. The total at March 31, 1999 and December
31, 1998, includes unrealized gains of $106 thousand and $154
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 March 31,
1999, the Bank's ratio of Tier I capital was 7.8%. The FDIC's
risk-based capital rules require banks supervised by the FDIC to
maintain risk-based capital to risk-weighted assets of at least
8.00%. Risk-based capital for the Bank is defined as Tier I
capital plus the balance of allowance for loan losses. At March
31, 1999, the Bank had a ratio of qualifying total capital to
risk-weighted assets of 13.6%.
The Company, as a bank holding company, is also subject,
on a consolidated basis, to the capital adequacy guidelines of
the Board of Governors of the Federal Reserve (the "Federal
Reserve Board"). The capital requirements of the Federal
Reserve Board are similar to those of the FDIC governing the
Bank.
The Company currently exceeds all of its capital
requirements. Management expects the Company to continue to
exceed these capital requirements without altering current
operations or strategies.
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 a
scheduled upgrade of hardware and software and not a result
8<PAGE>
<PAGE>
of the Year 2000 issue, the costs of such system, approximately
$1.0 million, have been capitalized. All other costs associated
with the Year 2000 compliance are considered immaterial and have
been expensed. After extensive testing the Company presently
believes that the remaining hardware and software is in
compliance. 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.
FINANCIAL CONDITION AT MARCH 31, 1999 COMPARED TO DECEMBER 31,
1998
The Company's total assets decreased 1.7% to $383.2
million at March 31, 1999, as compared to $389.8 million at
December 31, 1998. The major changes in assets are as follows:
a decrease of $2.7 million (30.7%) in cash, a $1.3 million
decrease in loans receivable, and a decrease in foreclosed real
estate to $25 thousand from $2.4 million at December 31, 1998.
Due to a high loan demand, the Bank sold $19.5 million in fixed
rate loans during the three month period ended March 31, 1999
and used the proceeds to repay borrowed funds, to fund the
reduction in deposits, and 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 March 31,
1999, approximately 12% of the Company's loan portfolio were
loans other than residential properties.
Funds from the $19.5 million loan sale were used in part
for the funding of the $2.1 million (0.88%) decrease in retail
deposits, and the repayment of $3 million (5.4%) in borrowed
funds from the Federal Home Loan Bank ("FHLB). Borrowed funds,
collateralized through an agreement with the FHLB for advances,
are secured by the Bank's investment in FHLB stock and
qualifying first mortgage loans. At March 31, 1999, $12.0
million in borrowed funds mature in 1 year and the remaining
amount of funds mature in 2 to 5 years.
The Company's non-performing assets (loans 90 days or more
delinquent and foreclosed real estate) were $817 thousand, or
0.21% of assets, at March 31, 1999, compared to $4.2 million, or
1.08% of assets, at December 31, 1998. The Company assumes an
aggressive position in collecting delinquent loans to minimize
balances of non-performing assets and continues to evaluate the
loan and real estate portfolios to provide loss reserves as
considered necessary. While there can be no guarantee, in the
opinion of management, the allowance for loan losses of $1.2
million at March 31, 1999 is adequate to cover potential losses.
COMPARISON OF OPERATION RESULTS
OVERVIEW
The net income of the Company depends primarily upon net
interest income. Net interest income is the difference between
the interest earned on loans and securities portfolios and the
cost of funds, consisting principally of the interest paid on
deposits and borrowings. The Company's operations are
materially affected by general economic conditions, the monetary
and fiscal policies of the Federal government, and the policies
of regulatory authorities.
9<PAGE>
<PAGE>
NET INCOME
Net income for the three-month period ended March 31,
1999, increased 4.2% to $640,951 as compared to $615,181 for the
same period last year. The increase in net income can be
attributed to a 9.6% increase in net interest income, a 42.3%
decrease in the provision for loan losses, offset in part by a
19.5% decrease in noninterest income and an 8.6% increase in
noninterest expenses.
INTEREST INCOME
Interest income increased 2.9% for the three-month period
ended March 31, 1999, as compared to the same period a year ago.
The increase can be attributed to a 3.8% increase in the average
balance of interest-earning assets, offset in part by a decrease
in the yield, as compared to the same period last year. The
yield on average interest-earning assets decreased to 7.58% as
compared to 7.65% for the same period a year ago. The increase
in the average balance of interest-earning assets had a positive
effect on interest income while the decrease in the yield on
interest-earning assets had a negative effect on interest
income.
INTEREST EXPENSE
Interest expense decreased 1.3% for the three-month period
ended March 31, 1999, as compared to the same period a year ago.
Although there was a 3.2% increase in average interest-bearing
liabilities, the decrease in cost was the major factor in
causing interest expense to decrease. The cost of
interest-bearing liabilities decreased 22 basis points to 4.75%
as compared to 4.97% for the same period last year.
NET INTEREST INCOME
Net interest income for the three-month period ended March
31, 1999, as compared to the same period a year ago, increased
9.6%. During the three-month period, the yield on average
interest-earning assets decreased 7 basis points and the cost of
average interest-bearing liabilities decreased 22 basis points.
The net interest margin increased to 3.16% for the current three
months as compared to 2.99% for the same period last year. The
percentage of average interest-earning assets to average
interest-bearing liabilities increased to 107.4% for the current
three-month period as compared to 106.7% for the same period in
1998. The increase in interest-earning assets was the major
factor for the increase in net interest income.
Interest-earning assets grew 3.8% for the three-month period
ended March 31, 1999, as compared to the same period last year.
10<PAGE>
<PAGE>
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the
Company's average balance sheet and reflects the annualized
average yield on assets and average cost of liabilities for the
periods indicated. Such annualized yields and costs are derived
by dividing income or expense by the average balances of asset
or liabilities, respectively, for the periods presented.
<TABLE>
<CAPTION>
For the quarter ended
March 31, 1999 March 31, 1998
-----------------------------------------------------
(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 $ 42,493 $ 593 5.58% $ 63,122 $ 894 5.67%
Mortgage-backed and related
securities 10,143 156 6.15% 12,695 204 6.43%
Loan portfolio 321,080 6,332 7.89% 284,030 5,781 8.14%
Total interest-earning -------- ------ -------- ------
assets 373,716 $7,081 7.58% 359,847 $6,879 7.65%
------ ------
Non-interest earning assets 15,323 13,468
-------- --------
Total assets $389,039 $373,315
======== ========
Interest-bearing liabilities:
Deposits 291,076 3,248 4.46% 287,093 3,386 4.72%
Borrowed funds 56,831 883 6.21% 50,140 801 6.39%
Total interest-bearing -------- ------ -------- ------
liabilities 347,907 $4,131 4.75% 337,233 $4,187 4.97%
------ ------
Non-interest bearing
liabilities 9,850 7,133
-------- --------
Total liabilities 357,757 344,366
Stockholders' equity 31,282 28,949
Total liabilities and -------- --------
stockholders' equity $389,039 $373,315
======== ========
Net interest income $2,950 $2,692
====== ======
Interest rate spread 2.83% 2.68%
==== ====
Net yield on interest-
earning assets 3.16% 2.99%
Percentage of average
interest-earning assets to
average interest-bearing
liabilities 107.4% 106.7%
===== =====
</TABLE>
11<PAGE>
<PAGE>
RATE/VOLUME ANALYSIS
The table below provides information regarding changes in
interest income and interest expense for the period indicated.
For each category of interest-earning asset and interest-bearing
liabilities, information is provided on changes attributable to
(i) changes in volume (changes in volume multiplied by old
rate); and (ii) changes in rates (change in rate multiplied by
old volume). The change attributable to changes in rate-volume
have been allocated to the other categories based on absolute
values.
<TABLE>
<CAPTION>
For the three months ended
March 31, 1998 vs. March 31, 1999
Increase (Decrease)
Due to
----------------------------------
(DOLLARS IN THOUSANDS) Volume Rate Total
--------- --------- ----------
<S> <C> <C> <C>
Interest income:
Securities and other
interest-earning assets $ (288) $ (13) $ (301)
Mortgage-backed and related securities (39) (9) (48)
Loan portfolio 735 (184) 551
------ ------ ------
Total interest-earning assets 408 (206) 202
------ ------ ------
Interest expense:
Deposits 46 (184) (138)
Borrowed funds 105 (23) 82
------ ------ ------
Total interest-bearing
liabilities 151 (207) (56)
------ ------ ------
Net interest income $ 257 $ 1 $ 258
====== ====== ======
</TABLE>
12<PAGE>
<PAGE>
RESERVE FOR LOAN LOSSES
During the three-month period ended March 31, 1999 the
Bank had net charge-offs against the allowance for loan losses
of $20,000. The Bank added $75,000 to the allowance for loan
losses for the current period bringing the balance up to $1.2
million. 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
Noninterest income was down by 19.5% for the three-month
period ended March 31, 1999, as compared to the same period a
year ago. The major change was the reduction in the net gain on
sale of loans. During the three month period ended March 31,
1999, the Bank sold $19.5 million in fixed rate mortgage loans
at a gain of $123,000 as compared to the sale of $14 million at
a gain of $260,000 for the same period a year ago. The sales
proceeds were used to repay borrowed funds, to fund the
reduction in deposits, and reinvest in new loans. For the
three-month period ended March 31, 1999, as compared to the same
period a year ago, service charges on deposit accounts increased
19.6% due to an increase in checking accounts, and loan fees and
service charges decreased 9.3%. The balance in real estate
owned expense represents operating expense and further reduction
of the carrying amount of foreclosed real estate owned.
Management continues to be committed to disposing of these
properties in a timely manner.
NONINTEREST EXPENSES
For the three-month period ended March 31, 1999,
noninterest expense increased 8.6% as compared to the same
period last year. Compensation and related cost increased 4.6%
due to normal increases in salaries and benefits. Occupancy and
equipment expense increased 7.9%. 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 new teller/platform system and the
new Elizabethtown office were put in service during the third
quarter of 1998. Advertising increased 10.2% due to a more
aggressive advertising campaign. Other operating expense as
compared to the same period a year ago increased 4.3% due normal
increases.
INCOME TAXES
The effective tax rates for the three month periods ended
March 31, 1999 and 1998 approximate the statutory rate after
giving effect to nontaxable interest, other permanent tax
differences, and adjustments to certain deferred tax
liabilities.
13<PAGE>
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable
(b) Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(1) Annual Meeting of Stockholders, April 30, 1999
(a) Election of Directors
<TABLE>
<CAPTION>
Votes For Votes Against Votes Withheld Abstentions
--------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Paul G. Burton 2,310,469 0 50,524 0
H. Thompson King, III 2,311,893 0 49,100 0
R. Allen Rippy 2,312,093 0 48,900 0
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11. Computation of Earnings Per Share
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
On March 25, 1999 the Registrant announced that it
was commencing an open-market stock repurchase
program to purchase up to 152,000 shares of the
Registrant's common stock, which represents
approximately 5% of the shares outstanding.
14<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
COOPERATIVE BANKSHARES, INC.
Dated: May 10, 1999 /s/ Frederick Willetts, III
------------ -------------------------------------
President and Chief Executive Officer
Dated: May 10, 1999 /s/ Edward E. Maready
------------ -------------------------------------
Treasurer and Chief Financial Officer
15
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
-------- -------
<S> <C> <C>
Basic income per common share:
Net Income $ 640,951 $ 618,181
Weighted average common shares
outstanding 2,979,311 2,984,019
Basic income per common share $ 0.22 $ 0.21
Dilutive income per common share:
Net income $ 640,951 $ 615,181
Weighted average common shares
outstanding 2,979,311 2,984,019
Dilutive effect of stock options 160,721 211,556
---------- ----------
Total shares 3,140,032 3,195,575
Dilutive income per common share $ 0.20 $ 0.19
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 4,861,464
<INT-BEARING-DEPOSITS> 1,277,308
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,989,627
<INVESTMENTS-CARRYING> 13,031,843
<INVESTMENTS-MARKET> 12,612,504
<LOANS> 321,304,991
<ALLOWANCE> 1,233,298
<TOTAL-ASSETS> 383,160,399
<DEPOSITS> 298,986,021
<SHORT-TERM> 52,108,491
<LIABILITIES-OTHER> 1,918,377
<LONG-TERM> 0
<COMMON> 2,890,496
0
0
<OTHER-SE> 27,257,014
<TOTAL-LIABILITIES-AND-EQUITY> 383,160,399
<INTEREST-LOAN> 6,332,009
<INTEREST-INVEST> 749,188
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,081,197
<INTEREST-DEPOSIT> 3,248,177
<INTEREST-EXPENSE> 4,131,166
<INTEREST-INCOME-NET> 2,950,031
<LOAN-LOSSES> 75,000
<SECURITIES-GAINS> 123,110
<EXPENSE-OTHER> 2,185,296
<INCOME-PRETAX> 1,018,503
<INCOME-PRE-EXTRAORDINARY> 1,018,503
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 640,951
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.20
<YIELD-ACTUAL> 3.16
<LOANS-NON> 0
<LOANS-PAST> 791,928
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,178,242
<CHARGE-OFFS> 26,122
<RECOVERIES> 6,178
<ALLOWANCE-CLOSE> 1,233,298
<ALLOWANCE-DOMESTIC> 1,233,298
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
