<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 June 30, 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.
2,761,168 shares at July 31, 1999.
- ---------------------------------
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TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition,
June 30, 1999 and December 31, 1998 2
Consolidated Statements of Operations, for the
three and six months ended June 30, 1999 and
1998 3
Consolidated Statements of Cash Flows, for the
six months ended June 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-14
Part II Other Information 15
Signatures 16
Exhibit 11 - Statement Regarding Computation of
Earnings Per Share 17
Exhibit 27 - Financial Data Schedule 18-19
<PAGE>
<PAGE>
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents (including interest-bearing
deposits: $ 12,782,646 $ 8,856,389
June 1999 - $7,971,861; December 1998 - $7,904,166)
Securities:
Available for sale 20,865,006 21,163,133
Held to maturity (estimated market value:
June 1999 - $12,426,251; December 1998 - $12,779,690) 13,029,423 13,034,264
Mortgage-backed and related securities available for sale 9,325,947 10,550,692
Other investments 2,973,900 2,828,000
Loans receivable, net 315,152,110 321,324,146
Other real estate owned 140,664 2,439,158
Accrued interest receivable 2,305,256 2,286,657
Premises and equipment, net 6,357,443 6,372,456
Prepaid expenses and other assets 910,490 918,311
------------ ------------
Total assets $383,842,885 $389,773,206
============ ============
LIABILITIES:
Deposits $303,248,120 $301,656,204
Borrowed funds 50,107,530 55,109,439
Escrow deposits 637,762 337,474
Accrued interest payable on deposits 97,353 79,263
Deferred income taxes, net 402,220 738,623
Accrued expenses and other liabilities 325,488 239,053
------------ ------------
Total liabilities 354,818,473 358,160,056
------------ ------------
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,
2,759,344 and 3,046,284 shares issued and outstanding 2,759,344 3,046,284
Additional paid-in capital 3,289,228 6,649,374
Accumulated other comprehensive income (101,948) 154,051
Retained earnings 23,077,788 21,763,441
------------ ------------
Total stockholders' equity 29,024,412 31,613,150
------------ ------------
Total liabilities and stockholders' equity $383,842,885 $389,773,206
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
2
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<PAGE>
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $6,199,357 $6,088,450 $12,531,366 $11,869,080
Mortgage-backed and related securities 152,008 187,791 308,084 391,712
Securities 611,126 831,940 1,204,238 1,726,030
---------- ---------- ----------- -----------
Total interest income 6,962,491 7,108,181 14,043,688 13,986,822
---------- ---------- ----------- -----------
INTEREST EXPENSE:
Deposits 3,175,875 3,485,744 6,424,052 6,871,617
Borrowed funds 808,213 809,477 1,691,202 1,610,185
---------- ---------- ----------- -----------
Total interest expense 3,984,088 4,295,221 8,115,254 8,481,802
---------- ---------- ----------- -----------
NET INTEREST INCOME 2,978,403 2,812,960 5,928,434 5,505,020
Provision for loan losses 45,000 60,000 120,000 190,000
---------- ---------- ----------- -----------
Net interest income after provision for
loan losses 2,933,403 2,752,960 5,808,434 5,315,020
---------- ---------- ----------- -----------
NONINTEREST INCOME:
Net Gains on sale of loans 21,808 1,790 144,918 261,964
Net Gains on sale of investments 937 0 937 0
Service charges on deposit accounts 161,774 123,263 315,609 238,563
Loan fees and service charges 84,161 77,352 156,335 156,913
Investment fees 18,420 33,083 29,901 49,723
Other service charges and fees 10,242 19,420 20,304 32,023
Real estate owned expenses and losses 551 (2,808) (42,477) (79,186)
Other income, net (574) (1,004) 560 (400)
---------- ---------- ----------- -----------
Total noninterest income 297,319 251,096 626,087 659,600
---------- ---------- ----------- -----------
NONINTEREST EXPENSE:
Compensation and fringe benefits 1,157,457 1,090,705 2,268,806 2,153,223
Occupancy and equipment 404,837 369,699 834,555 731,955
FDIC premium 43,772 44,416 89,213 89,388
Advertising 123,305 94,840 224,540 186,688
Other expense 446,727 340,613 944,280 790,903
---------- ---------- ----------- -----------
Total noninterest expenses 2,176,098 1,940,273 4,361,394 3,952,157
---------- ---------- ----------- -----------
Income before income taxes 1,054,624 1,063,783 2,073,127 2,022,463
Income tax expense 381,228 394,983 758,780 738,482
---------- ---------- ----------- -----------
NET INCOME $ 673,396 $ 668,800 $ 1,314,347 $ 1,283,981
========== ========== =========== ===========
NET INCOME PER SHARE:
Basic $ 0.24 $ 0.22 $ 0.45 $ 0.43
========== ========== =========== ===========
Diluted $ 0.23 $ 0.21 $ 0.43 $ 0.40
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
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<PAGE>
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,314,347 $ 1,283,981
Adjustments to reconcile net income to net cash
provided by operating activities:
Net accretion, amortization, and depreciation 392,652 298,723
Net gain on sale of loans and securities (145,855) (261,964)
Benefit for deferred income taxes (172,731) (240,700)
Release of ESOP shares - 120,642
Loss on sale of premises and equipment 542 1,587
Loss on sales of foreclosed real estate 37,083 2,498
Valuation losses on foreclosed real estate - 62,300
Provision for loan losses 120,000 190,000
Changes in assets and liabilities:
Accrued interest receivable (18,599) (229,299)
Prepaid expenses and other assets 243 12,055
Accrued interest payable on deposits 18,090 (13,782)
Accrued expenses and other liabilities 86,435 41,153
------------ ------------
Net cash provided by operating activities 1,632,207 1,267,194
------------ ------------
INVESTING ACTIVITIES:
Purchase of securities available for sale (1,999,375) (10,000,000)
Proceeds from maturity of securities available
for sale - 10,000,000
Proceeds from sale of securities available for sale 2,000,937 -
Proceeds from principal repayments of mortgage-backed
and related securities available for sale 1,062,115 1,133,410
Proceeds from sales of loans 29,501,515 13,941,895
Loan originations, net of principal repayments (21,080,772) (31,216,165)
Proceeds from disposals of foreclosed real estate 62,132 292,147
Purchases of premises and equipment (350,311) (1,389,718)
Proceeds from sale of premises and equipment 500 710
Net purchases of other investments (145,900) (208,556)
------------ ------------
Net cash provided by (used in) investing
activities 9,050,841 (17,446,277)
------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits 1,591,916 10,005,302
Proceeds from FHLB advances 12,000,000 -
Principal payments on FHLB advances (17,001,909) (1,128)
Proceeds from issuance of common stock 90,960 219,407
Repurchase of common stock (3,738,046) -
Net change in escrow deposits 300,288 457,078
------------ ------------
Net cash provided by (used in)
financing activities (6,756,791) 10,680,659
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,926,257 (5,498,424)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 8,856,389 17,207,777
------------ ------------
END OF PERIOD $ 12,782,646 $ 11,709,353
============ ============
</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 six-month period ended
June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Unrealized gains/(losses) on available for
sale securities $(333,631) $ 60,384 $ (409,044) $ 85,068
Income tax (expense)/benefit relating to
unrealized gains on available for sale
securities 130,116 (23,186) 159,527 (33,506)
--------- -------- ---------- ----------
Other comprehensive income (203,515) 37,198 (249,517) 51,562
Net Income 673,396 668,800 1,314,347 1,283,981
--------- -------- ---------- ----------
Total comprehensive income $ 469,881 $705,998 $1,064,830 $1,335,543
========= ======== ========== ==========
</TABLE>
5. Statement of Financial Accounting Standards No. 137:
---------------------------------------------------
In June 1999, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 137,
Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statement No. 133 as
amendment of FASB Statement No. 133. SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in
June 1998. It establishes accounting and reporting standards
for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging
activities. SFAS No. 133, as issued, is effective for all
fiscal quarters of all fiscal years beginning after June 15,
1999 with earlier applications encouraged. SFAS No. 137 amended
SFAS No. 133 by delaying th effective date to all fiscal
quarters of all fiscal years beginning after June 15, 2000. The
FASB continues to encourage early application of SFAS No. 133.
SFAS No. 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 SFAS No.
133 will not have a material 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 the consolidated 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. Funds generated 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 June 30, 1999, $260.2 million, or 82%, 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 June 30, 1999,
adjustable rate loans totaled approximately 63%, and fixed rate
loans totaled approximately 37% 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 interest-
6
<PAGE>
<PAGE>
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 June 30, 1999, Cooperative had a one-year
negative gap position of 7.7%. 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 June 30, 1999, the estimated market value of liquid
assets (cash, cash equivalents, and marketable securities) was
approximately $58.3 million, which represents 16.5% of deposits
and borrowed funds as compared to $56.2 million or 15.7% of
deposits and borrowed funds at December 31, 1998. The increase
in liquid assets was primarily due to the increase in cash from
the sale of loans.
The Company's security portfolio consists of U.S.
Government agency, mortgage-backed and other permissible
securities. The mortgage-backed securities are guaranteed by
the following agencies: Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA"), and
the Government National Mortgage Association ("GNMA").
Mortgage-backed securities entitle the Company to receive a pro
rata portion of the cash flows from an identified pool of
mortgages. Although mortgage-backed securities generally offer
lesser yields than the loans for which they are exchanged, they
present substantially lower credit risk by virtue of the
guarantees that back them. Mortgage-backed securities are more
liquid than individual mortgage loans, and may be used to
collateralize borrowings or other obligations of the Company.
The Company's investment in U. S. Government agency bonds
includes $5 million in Federal Home Loan Banks' Dual Indexed
Consolidated Bonds maturing August 4, 2003. These bonds had an
8% interest rate from August 4, 1993, through August 3, 1995, at
which time the rate was adjusted to 3.485% based on an indexing
formula. Subsequent interest rates will also be based on an
indexing formula and will adjust annually on February 4 and
August 4. The indexing formula states that the interest rate
per annum will be equal to a rate determined by the 10-Year CMT
less the 6 month LIBOR plus a margin of 2.9% for August 4, 1995,
increasing 30 basis points annually to 5.0% for August 4, 2002.
The rate at June 30, 1999 on this bond was 3.47%.
<PAGE>
The mortgage-backed and related securities owned by the
Company are subject to repayment by the mortgagors of the
underlying collateral at any time. A rising or declining
interest rate environment may 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.
7
<PAGE>
<PAGE>
The Company's primary uses of liquidity are to fund loans
and to make investments. At June 30, 1999, outstanding
off-balance sheet commitments to extend credit totaled $15.8
million, and the undisbursed portion of construction loans was
$19.3 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. The second repurchase
program was completed in May 1999. As of June 30, 1999, the
Company had repurchased 302,000 shares at an average cost of
$12.38 per share.
Stockholders' equity at June 30, 1999, was $29.0 million,
down 8.2% due to the stock repurchase plan, from $31.6 million
at December 31, 1998. The total at June 30, 1999 and December
31, 1998, includes unrealized losses of $102 thousand and
unrealized gains of $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.
Under the capital regulations of the FDIC, the Bank must
satisfy minimum leverage ratio requirements and risk-based
capital requirements. Banks supervised by the FDIC must
maintain a minimum leverage ratio of core (Tier I) capital to
average adjusted assets ranging from 3% to 5%. At June 30,
1999, the Bank's ratio of Tier I capital was 7.6%. The FDIC's
risk-based capital rules require banks supervised by the FDIC to
maintain risk-based capital to risk-weighted assets of at least
8.00%. Risk-based capital for the Bank is defined as Tier I
capital plus the balance of allowance for loan losses. At June
30, 1999, the Bank had a ratio of qualifying total capital to
risk-weighted assets of 13.1%.
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 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
8
<PAGE>
<PAGE>
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 JUNE 30, 1999 COMPARED TO DECEMBER 31,
1998
The Company's total assets decreased 1.5% to $383.8 million
at June 30, 1999, as compared to $389.8 million at December 31,
1998. The major changes in assets are as follows: an increase
of $3.9 million (44.3%) in cash, a $6.2 million decrease in
loans receivable, and a decrease in foreclosed real estate to
$141 thousand from $2.4 million at December 31, 1998. Due to a
high loan demand, the Bank sold $29.5 million in fixed rate
loans during the six month period ended June 30, 1999 and used
the proceeds to repay borrowed funds, 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 June 30, 1999,
approximately 14% of the Company's loan portfolio were loans
other than residential properties.
Funds from the $29.5 million loan sale were used in part
for the repayment of $5 million (9.8%) 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 June 30, 1999, $10.0
million in borrowed funds mature in 1 year and the remaining
amount of funds mature in 2 to 5 years.
The Company's non-performing assets (loans 90 days or more
delinquent and foreclosed real estate) were $1.3 million, or
0.33% of assets, at June 30, 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 $1.3
million at June 30, 1999 is adequate to cover potential losses
inherent in the loan portfolio.
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 the loan and investment portfolios and
the cost of funds, consisting principally of the interest paid
on deposits and borrowings. The Company's operations are
materially affected by general economic conditions, the monetary
and fiscal policies of the Federal government, and the policies
of regulatory authorities.
NET INCOME
Net income for the three-month period ended June 30, 1999
of $673,396 was essentially unchanged as compared to the same
period last year. For the six-month periods ended June 30,
1999, net income increased 2.4% to $1,314,347 as compared
$1,283,981 for the same periods a year ago. Contributing
factors for the increase in net income was a 1.8% increase in
interest-earning assets and an increase in the net interest
margin to 3.20% for the six month period ended June 30, 1999, as
compared to 3.02% for the same period last year.
9
<PAGE>
INTEREST INCOME
Interest income decreased 2.1% for the three-month period
ended June 30, 1999, as compared to the same period a year ago.
The decrease can be attributed to a small decrease in the
average balance of interest-earning assets and a decrease
in average yield as compared to the same period a year ago. The
yield on average interest-earning assets decreased to 7.57% as
compared to 7.71% for the same period a year ago.
For the six-month period ended June 30, 1999, interest
income was essentially unchanged as compared to the same period
a year ago. The average balance of interest-earning assets
increased 1.8% while average yield decreased 11 basis points as
compared to the same period a year ago. The yield on average
interest-earning assets decreased to 7.57% as compared to 7.68%
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 7.2% for the three-month period
ended June 30, 1999, as compared to the same period a year ago.
Although there was a 1% increase in average interest-bearing
liabilities, the decrease in cost was the major factor causing
interest expense to decrease. The cost of interest-bearing
liabilities decreased 42 basis points to 4.65% as compared to
5.07% for the same period last year.
For the six-month period ended June 30, 1999, interest
expense decreased 4.3%, as compared to the same period a year
ago. Although there was a 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 32 basis points to 4.70%
as compared to 5.02% for the same period last year.
NET INTEREST INCOME
Net interest income for the three and six month periods
ended June 30, 1999, as compared to the same period a year ago,
increased 5.9% and 7.7%, respectively. During these same
periods ended June 30, 1999, the yield on average
interest-earning assets decreased 14 basis points and 11 basis
points, respectively. For the same periods, the cost of average
interest-bearing liabilities decreased 42 basis points and 32
basis points, respectively. The decrease in the cost of average
interest-bearing liabilities was the major factor for the
increase in net interest income.
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
June 30, 1999 June 30, 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 $ 44,654 $ 611 5.47% $ 60,602 $ 832 5.49%
Mortgage-backed and related
securities 9,587 152 6.34% 12,106 188 6.21%
Loan portfolio 313,779 6,199 7.90% 295,833 6,088 8.23%
Total interest-earning -------- ------ -------- ------
assets 368,020 $6,962 7.57% 368,541 $7,108 7.71%
------ ------
Non-interest earning assets 14,116 12,300
-------- --------
Total assets $382,136 $380,841
======== ========
Interest-bearing liabilities:
Deposits 291,847 3,176 4.35% 288,981 3,486 4.83%
Borrowed funds 50,591 808 6.39% 50,137 809 6.45%
Total interest-bearing -------- ------ -------- ------
liabilities 342,438 $3,984 4.65% 339,118 $4,295 5.07%
------ ------
Non-interest bearing
liabilities 10,014 11,836
-------- --------
Total liabilities 352,452 350,954
Stockholders' equity 29,684 29,887
Total liabilities and -------- --------
stockholders' equity $382,136 $380,841
======== ========
Net interest income $2,978 $2,813
====== ======
Interest rate spread 2.92% 2.64%
==== ====
Net yield on interest-
earning assets 3.24% 3.05%
Percentage of average
interest-earning assets to
average interest-bearing
liabilities 107.5% 108.7%
===== =====
</TABLE>
11
<PAGE>
<PAGE>
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the
Company's average balance sheet and reflects the annualized
average yield on assets and average cost of liabilities for the
periods indicated. Such annualized yields and costs are derived
by dividing income or expense by the average balances of asset
or liabilities, respectively, for the periods presented.
<TABLE>
<CAPTION>
For the six months ended
June 30, 1999 June 30, 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 $ 43,574 $ 1,204 5.53% $ 61,862 $ 1,726 5.58%
Mortgage-backed and related
securities 9,865 308 6.24% 12,400 392 6.32%
Loan portfolio 317,429 12,531 7.90% 289,932 11,869 8.19%
Total interest-earning -------- ------- -------- -------
assets 370,868 $14,043 7.57% 364,194 $13,987 7.68%
------- -------
Non-interest earning assets 14,720 12,884
-------- --------
Total assets $385,588 $377,078
======== ========
Interest-bearing liabilities:
Deposits 291,462 6,424 4.41% 288,037 6,872 4.77%
Borrowed funds 53,711 1,691 6.30% 50,139 1,610 6.42%
Total interest-bearing -------- ------ -------- ------
liabilities 345,173 $8,115 4.70% 338,176 $8,482 5.02%
------ ------
Non-interest bearing
liabilities 9,932 9,484
-------- --------
Total liabilities 355,105 347,660
Stockholders' equity 30,483 29,418
Total liabilities and -------- --------
stockholders' equity $385,588 $377,078
======== ========
Net interest income $5,928 $5,505
====== ======
Interest rate spread 2.87% 2.66%
==== ====
Net yield on interest-
earning assets 3.20% 3.02%
Percentage of average
interest-earning assets to
average interest-bearing
liabilities 107.4% 107.7%
===== =====
</TABLE>
12
<PAGE>
<PAGE>
RATE/VOLUME ANALYSIS
The table below provides information regarding changes in
interest income and interest expense for the period indicated.
For each category of interest-earning asset and interest-bearing
liabilities, information is provided on changes attributable to
(i) changes in volume (changes in volume multiplied by old
rate); and (ii) changes in rates (change in rate multiplied by
old volume). The change attributable to changes in rate-volume
have been allocated to the other categories based on absolute
values.
<TABLE>
<CAPTION>
For the six months ended
June 30, 1998 vs. June 30, 1999
Increase (Decrease)
Due to
----------------------------------
(DOLLARS IN THOUSANDS) Volume Rate Total
--------- --------- ----------
<S> <C> <C> <C>
Interest income:
Securities and other
interest-earning assets $ (505) $ (17) $ (522)
Mortgage-backed and related securities (79) (5) (84)
Loan portfolio 1,097 (434) 663
------ ------ ------
Total interest-earning assets 513 (456) 57
------ ------ ------
Interest expense:
Deposits 81 (528) (447)
Borrowed funds 113 (31) 82
------ ------ ------
Total interest-bearing
liabilities 194 (559) (365)
------ ------ ------
Net interest income $ 319 $ 103 $ 422
====== ====== ======
</TABLE>
13
<PAGE>
<PAGE>
RESERVE FOR LOAN LOSSES
During the six-month period ended June 30, 1999 the Bank had
net charge-offs against the allowance for loan losses of
$26,000. The Bank added $120,000 to the allowance for loan
losses for the current six-month period bringing the balance up
to $1.3 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 inherent in the loan
portfolio. 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 up by 18.4% for the three-month period
ended June 30, 1999, as compared to the same period a year ago.
During the three-month period ended June 30, 1999, the Bank sold
$10.1 million in fixed rate mortgage loans at a gain of $22,000
as compared to the sale of $25 thousand at a gain of $2,000 for
the same period a year ago. The sales proceeds were used to
fund new loans. For the three-month period ended June 30, 1999,
as compared to the same period a year ago, service charges on
deposit accounts increased 31.2% and loan fees and service
charges increased 8.8%. The increase in service charges on
deposit accounts was due to an increase in transaction
accounts and the increase in loan fees was due to an increase in
the volume of loans serviced.
Noninterest income was down by 5.1% for the six-month period
ended June 30, 1999, as compared to the same period a year ago.
The major change was the reduction in the net gain on sale of
loan. During the six-month period ended June 30, 1999, the
Bank sold $29.5 million in fixed rate mortgage loans at a gain
of $145,000 as compared to the sale of $14 million at a gain of
$262,000 for the same period a year ago. The sales proceeds
were used to repay borrowed funds and for the funding of new
loans. For the six-month period ended June 30, 1999, as
compared to the same period a year ago, service charges on
deposit accounts increased 32.3% due to an increase in
transaction accounts. 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 six-month period ended June 30, 1999, noninterest
expense increased 10.4% as compared to the same period last
year. Compensation and related cost increased 5.4% due to
additional employees and normal increases in salaries and
benefits. Occupancy and equipment expense increased 14%. 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 20.3% due to a more
aggressive advertising campaign. Other operating expense
increased 19.4%. This increase can be attributed to costs
associated with the processing of a larger volume of transaction
accounts and normal increases in other operating costs.
INCOME TAXES
The effective tax rates for the six month periods ended June
30, 1999 and 1998 approximate the statutory rate after giving
effect to nontaxable interest, other permanent tax differences,
and adjustments to certain deferred tax liabilities.
14
<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.
No reports on Form 8-K were filed during the
quarter ended June 30, 1999.
15
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
COOPERATIVE BANKSHARES, INC.
Dated: August 10, 1999 /s/ Frederick Willetts, III
--------------- President and Chief Executive Officer
-------------------------------------
Dated: August 10, 1999 /s/ Edward E. Maready
--------------- Treasurer and Chief Financial Officer
-------------------------------------
16
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic income per common share:
Net Income $ 673,396 $ 668,800 $1,314,347 $1,283,981
Weighted average common shares outstanding 2,798,477 3,011,416 2,888,894 2,997,717
Basic income per common share
$ 0.24 $ 0.22 $ 0.45 $ 0.43
Dilutive income per common share:
Net Income $ 673,396 $ 668,800 $1,314,347 $1,283,981
Weighted average common shares outstanding 2,798,477 3,011,416 2,888,894 2,997,717
Dilutive effect of stock options 154,889 195,285 157,805 203,421
-------------------------------------------------
Total shares 2,953,366 3,206,701 3,046,699 3,201,138
Dilutive income per common share $ 0.23 $ 0.21 $ 0.43 $ 0.40
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,810,785
<INT-BEARING-DEPOSITS> 7,971,861
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,190,953
<INVESTMENTS-CARRYING> 13,029,423
<INVESTMENTS-MARKET> 12,426,251
<LOANS> 316,424,498
<ALLOWANCE> 1,272,388
<TOTAL-ASSETS> 383,842,885
<DEPOSITS> 303,248,120
<SHORT-TERM> 50,107,530
<LIABILITIES-OTHER> 1,462,823
<LONG-TERM> 0
<COMMON> 2,759,344
0
0
<OTHER-SE> 26,265,068
<TOTAL-LIABILITIES-AND-EQUITY> 383,842,885
<INTEREST-LOAN> 12,531,366
<INTEREST-INVEST> 1,512,322
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,043,688
<INTEREST-DEPOSIT> 6,424,052
<INTEREST-EXPENSE> 8,115,254
<INTEREST-INCOME-NET> 5,928,434
<LOAN-LOSSES> 120,000
<SECURITIES-GAINS> 145,855
<EXPENSE-OTHER> 4,361,394
<INCOME-PRETAX> 2,073,127
<INCOME-PRE-EXTRAORDINARY> 2,073,127
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,314,347
<EPS-BASIC> 0.45
<EPS-DILUTED> 0.43
<YIELD-ACTUAL> 3.24
<LOANS-NON> 0
<LOANS-PAST> 1,111,347
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,178,242
<CHARGE-OFFS> 37,211
<RECOVERIES> 11,357
<ALLOWANCE-CLOSE> 1,272,388
<ALLOWANCE-DOMESTIC> 1,272,388
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
