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 September 30, 2000
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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: 0-24626
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COOPERATIVE BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1886527
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Market Street, Wilmington, North Carolina 28401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (910) 343-0181
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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. 2,714,610 shares at November 13, 2000.
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<PAGE>
TABLE OF CONTENTS
Page
Part I Financial Information
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition,
September 30, 2000 and December 31, 1999 2
Consolidated Statements of Operations, for the
three and nine months ended September 30, 2000 and 1999 3
Consolidated Statements of Cash Flows, for the
nine months ended September 30, 2000 and 1999 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>
PART 1-FINANCIAL INFORMATION-ITEM 1-FINANCIAL STATEMENTS
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents (including interest-bearing deposits: $ 11,576,453 $ 15,592,010
September 2000 - $6,411,977; December 1999 - $9,522,187)
Securities:
Available for sale 20,826,251 20,671,572
Held to maturity (fair value: September 2000 - $17,227,815;
December 1999 - $17,114,381) 18,017,320 18,024,581
Mortgage-backed and related securities available for sale -- 6,564,413
Mortgage-backed and related securities held to maturity
(fair value: September 2000 - $987,845) 985,921 --
Other investments 3,755,300 3,755,300
Loans receivable, net 348,872,094 334,743,526
Other real estate owned 234,051 244,626
Accrued interest receivable 2,906,639 2,471,459
Deferred tax asset 74,899 --
Premises and equipment, net 6,292,875 6,244,551
Prepaid expenses and other assets 1,178,246 1,833,807
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Total assets $ 414,720,049 $ 410,145,845
============= =============
LIABILITIES:
Deposits $ 319,646,959 $ 304,834,455
Borrowed funds 63,102,521 75,105,567
Escrow deposits 863,525 349,450
Accrued interest payable on deposits 86,306 50,945
Deferred income taxes, net -- 154,798
Accrued expenses and other liabilities 308,011 307,330
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Total liabilities 384,007,322 380,802,545
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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,
2,714,610 and 2,687,919 shares issued and outstanding 2,714,610 2,687,919
Additional paid-in capital 2,234,936 2,531,998
Accumulated other comprehensive income (106,516) (320,488)
Retained earnings 25,869,697 24,443,871
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Total stockholders' equity 30,712,727 29,343,300
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Total liabilities and stockholders' equity $ 414,720,049 $ 410,145,845
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, September 30, SEPTEMBER 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 7,332,808 $ 6,266,788 $ 21,372,189 $ 18,798,154
Mortgage-backed and related securities 8,925 144,134 70,729 452,218
Securities 717,847 642,027 2,200,869 1,846,265
----------- ----------- ----------- -----------
Total interest income 8,059,580 7,052,949 23,643,787 21,096,637
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits 3,922,804 3,203,684 10,946,132 9,627,737
Borrowed funds 1,081,857 841,231 3,270,566 2,532,432
----------- ----------- ----------- -----------
Total interest expense 5,004,661 4,044,915 14,216,698 12,160,169
----------- ----------- ----------- -----------
NET INTEREST INCOME 3,054,919 3,008,034 9,427,089 8,936,468
Provision for loan losses 90,000 45,000 880,000 165,000
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 2,964,919 2,963,034 8,547,089 8,771,468
----------- ----------- ----------- -----------
NONINTEREST INCOME:
Net Gains on sale of loans -- 4,514 -- 149,432
Net Gains(losses) on sale of investments -- -- (287,282) 937
Service charges on deposit accounts 195,625 178,245 548,746 493,853
Loan fees and service charges 105,956 82,565 302,469 238,900
Investment fees 17,560 31,427 65,137 61,328
Other service charges and fees 15,157 11,214 46,821 31,518
Gain on sale of branch -- -- 582,583 --
Other income, net 399 257 3,845 834
----------- ----------- ----------- -----------
Total noninterest income 334,697 308,222 1,262,319 976,802
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Compensation and fringe benefits 1,211,660 1,201,262 4,073,704 3,470,068
Occupancy and equipment 480,646 498,441 1,462,570 1,420,986
FDIC premium 16,069 42,807 47,836 132,021
Advertising 84,105 123,006 298,166 347,545
Other expense 369,152 342,242 1,296,589 1,241,025
----------- ----------- ----------- -----------
Total noninterest expenses 2,161,632 2,207,758 7,178,865 6,611,645
----------- ----------- ----------- -----------
Income before income taxes 1,137,984 1,063,498 2,630,543 3,136,625
Income tax expense 410,306 384,173 933,559 1,142,953
----------- ----------- ----------- -----------
NET INCOME $ 727,678 $ 679,325 $ 1,696,984 $ 1,993,672
=========== =========== =========== ===========
NET INCOME PER SHARE:
Basic $ 0.27 $ 0.25 $ 0.63 $ 0.70
=========== =========== =========== ===========
Diluted $ 0.26 $ 0.23 $ 0.60 $ 0.66
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,696,984 $ 1,993,672
Adjustments to reconcile net income to net cash
provided by operating activities:
Net accretion, amortization, and depreciation 493,504 572,394
Net (gain) loss on sale of loans and securities 287,282 (150,369)
Benefit for deferred income taxes (366,498) (258,931)
Loss on sale of premises and equipment 2,670 7,784
Loss on sales of foreclosed real estate 22,681 16,974
Gain on sale of branch office (582,583) --
Valuation losses on foreclosed real estate -- 10,000
Provision for loan losses 880,000 165,000
Changes in assets and liabilities:
Accrued interest receivable (439,910) (294,691)
Prepaid expenses and other assets 655,561 (304,233)
Accrued interest payable on deposits 53,911 29,129
Accrued expenses and other liabilities 681 222,024
------------ ------------
Net cash provided by operating activities 2,704,283 2,008,753
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INVESTING ACTIVITIES:
Proceeds from sales of mortgage backed securities available for sale 6,277,957 --
Purchase of securities available for sale -- (1,999,375)
Purchase of securities held to maturity (986,604) (5,000,000)
Proceeds from sale of securities available for sale -- 2,000,937
Proceeds from principal repayments of mortgage-backed
and related securities available for sale 190,562 1,888,222
Proceeds from sales of loans 34,685 29,895,606
Loan originations, net of principal repayments (16,720,488) (28,279,233)
Proceeds from disposals of foreclosed real estate 353,420 193,452
Purchases of premises and equipment (620,049) (451,064)
Proceeds from sale of premises and equipment 19,950 500
Net cash paid related to sale of branch office (5,156,761) --
Net purchases of other investments -- (177,400)
------------ ------------
Net cash provided by (used in) investing activities (16,607,328) (1,928,355)
------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits 21,911,243 6,420,732
Proceeds from FHLB advances 35,000,000 22,000,000
Principal payments on FHLB advances (47,003,046) (27,002,884)
Proceeds from issuance of common stock 210,286 100,371
Repurchase of common stock (480,657) (3,738,046)
Dividends paid (271,158) --
Net change in escrow deposits 520,820 527,140
------------ ------------
Net cash provided by (used in) financing activities 9,887,488 (1,692,687)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,015,557) (1,612,289)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 15,592,010 8,856,389
------------ ------------
END OF PERIOD $ 11,576,453 $ 7,244,100
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<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, 1999. The results of operations for the three and nine-month
periods ended September 30, 2000 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 727,678 $ 679,325 $1,696,984 $1,993,672
Other comprehensive income, net of tax:
Realized (gains) losses on available for sale securities -- -- 287,282 (937)
Unrealized gains (losses) on available for sale securities 162,684 (160,826) 63,492 (579,559)
Income tax (expense) benefit (63,447) 62,722 (136,802) 226,393
--------- --------- ---------- ----------
Other comprehensive income (loss) 99,237 (98,104) 213,972 (354,103)
Comprehensive income $ 826,915 $ 581,221 $1,910,956 $1,639,569
</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 an 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 the effective date to all fiscal quarters of all fiscal years
beginning after June 15, 2000.
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>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties.
Economic circumstances, the Company's operations, and the Company's actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein, but also include changes in the economy and
interest rates in the nation and the Company's market area generally.
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 15 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 have concentrated on the origination of
conventional mortgage loans for the purpose of constructing, financing or
refinancing residential properties. As of September 30, 2000, $295.2 million, or
83.9%, 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
$3,000,000. The Bank's primary emphasis is to originate adjustable rate loans,
although fixed rate loans are also offered. As of September 30, 2000, adjustable
rate loans totaled 62.3%, and fixed rate loans totaled 37.7% of the Bank's total
loan portfolio.
6
<PAGE>
INTEREST RATE SENSITIVITY ANALYSIS
Interest rate sensitivity refers to the change in interest spread resulting from
changes in interest rates. To the extent that interest income and interest
expense do not respond equally to changes in interest rates, or that all rates
do not change uniformly, earnings will be affected. Interest rate sensitivity,
at a point in time, can be analyzed using a static gap analysis that measures
the match in balances subject to repricing between interest-earning assets and
interest-bearing liabilities. Gap is considered positive when the amount of
interest rate sensitive assets exceed the amount of interest rate sensitive
liabilities.
Gap is considered negative when the amount of interest rate sensitive
liabilities exceed the amount of interest rate sensitive assets. At September
30, 2000, Cooperative had a one-year negative gap position of 4.3%. 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. The Bank has been granted a line of credit by the Federal Home
Loan Bank of Atlanta in an amount of up to 25% of the Bank's total assets. At
September 30, 2000 the Bank's borrowed funds equal 15.2% of its total assets.
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 September 30, 2000, the estimated market value of liquid assets (cash, cash
equivalents, and marketable securities) was approximately $54.4 million which
represents 14.2% of deposits and borrowed funds as compared to $63.7 million or
16.8% of deposits and borrowed funds at December 31, 1999. The decrease in
liquid assets was primarily due to the sale of mortgage-backed securities
guaranteed by Federal National Mortgage Association ("FNMA") and the Government
National Mortgage Association ("GNMA").
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. At September 30,
2000, the rate was 3.55%.
The Company's primary uses of liquidity are to fund loans and to make
investments. At September 30, 2000, outstanding off-balance sheet commitments to
extend credit totaled $22.7 million, and the undisbursed portion of construction
loans was $17.8 million. Management considers current liquidity levels adequate
to meet the Company's cash flow requirements.
7
<PAGE>
CAPITAL
Stockholders' equity at September 30, 2000, was $30.7 million, up 4.7% from
$29.3 million at December 31, 1999. Stockholders' equity at September 30, 2000
and December 31, 1999, includes unrealized losses net of tax, of $107,000 and
$320,000, respectively, on securities available for sale marked to estimated
fair market value.
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 September 30, 2000,
the Bank's ratio of Tier I capital was 7.4%. 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
September 30, 2000, the Bank had a ratio of qualifying total capital to
risk-weighted assets of 12.2%.
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.
On October 22, 1999 the Company's Board of Directors approved a Stock Repurchase
Program. The Stock Repurchase Program authorized the Company to repurchase up to
138,000 shares, or approximately 5% of the outstanding shares of common stock at
the time of approval. During the six months ended June 30, 2000, the Company
completed the stock repurchase program with the purchase of 46,385 shares at an
average cost of $10.36 per share.
On September 21, 2000, the Company's Board of Directors approved a quarterly
cash dividend of $.05 per share. The dividend was paid on October 16, 2000 to
stockholders of record as of October 1, 2000. Any future payment of dividends is
dependent on the financial condition, and capital needs of the company,
requirements of regulatory agencies, and economic conditions in the marketplace.
On October 19, 2000 the Company's Board of Directors announced a change in its
defined benefit pension plan, which will substantially reduce required
contributions going forward. As a result of this, the Company is offering a
special early retirement benefit to certain employees meeting the eligibility
requirement. Included in this group are the Company's Senior Vice-Presidents of
Administration, Finance, and Mortgage Lending. These vacancies will be filled
internally. This will result in a one-time charge of approximately $750,000,
which will be taken in the fourth quarter of 2000. The reduction in pension cost
and employee expense is expected to achieve annual savings of approximately
$775,000 beginning in 2001.
FINANCIAL CONDITION AT SEPTEMBER 30, 2000 COMPARED TO DECEMBER 31, 1999
The Company's total assets increased 1.1% to $414.7 million at September 30,
2000, as compared to $410.1 million at December 31, 1999. The major changes in
the assets are as follows: a decrease of $4.0 million (25.7%) in cash, a
decrease of $6.6 million (100.0%) in mortgage backed and related securities
available for sale, an increase of $14.1 million (4.2%) in loans receivable, and
a decrease of $656,000 (35.7%) in prepaid expenses and other assets. Retail
deposits, available liquid assets, and proceeds from the sale of the
mortgage-backed securities were used in part to fund the increase in loans
receivable. Although the Company has concentrated 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 September
30, 2000, approximately 16.1% of the Company's loan portfolio were loans secured
by collateral other than residential properties.
8
<PAGE>
With a $14.8 million (4.9%) increase in retail deposits, and other available
liquid assets, the Bank repaid $12.0 million in borrowed funds. 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
September 30, 2000, $23.0 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 $2.0 million, or 0.49% of assets, at September 30,
2000, compared to $1.4 million, or 0.35% of assets, at December 31, 1999. 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. Following a detailed review of the Bank's loan
portfolio during the quarter ended March 31, 2000, management authorized an
increase of approximately $625,000 in the loan loss reserve. The decision to
increase the loan loss reserve was considered appropriate in light of the
successful expansion in the commercial loan portfolio in recent months and was
not in response to any significant increase in non-performing assets. These
loans do, however, pose risks that are not characteristic of loans secured by
single family residences. While there can be no guarantee, in the opinion of
management, the loan loss reserve of $2.1 million at September 30, 2000 is
adequate to cover probable losses.
COMPARISON OF OPERATING 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 interest earning deposits 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 September 30, 2000 of $727,678
represents a 7.1% increase as compared to the same period last year. For the
nine-month period ended September 30, 2000, net income decreased 14.9% to
$1,696,984 as compared to $1,993,672 for the same period a year ago. The major
decreases in net income for the period ended September 30, 2000 can be
attributed to a $715,000 increase in provision for loan losses and a $287,000
loss on sales of mortgage-backed securities, offset, in part, by a $582,000 gain
on the sale of a branch office.
INTEREST INCOME
Interest income increased 14.3% for the three-month period ended September 30,
2000, as compared to the same period a year ago. The increase can be attributed
to a 7.4% increase in the average balance of interest-earning assets and a 49
basis point increase in average yield as compared to the same period a year ago.
The yield on average interest-earning assets increased to 8.06% as compared to
7.57% for the same period a year ago.
For the nine-month period ended September 30, 2000, interest income increased
12.1% as compared to the same period a year ago. The average balance of
interest-earning assets increased 7.2% and the average yield increased 34 basis
points as compared to the same period a year ago. The yield on average
interest-earning assets increased to 7.91% as compared to 7.57% for the same
period a year ago. The increase in the average balance of interest-earning
assets and yield had a positive effect on interest income.
9
<PAGE>
INTEREST EXPENSE
Interest expense increased 23.7% for the three-month period ended September 30,
2000, as compared to the same period a year ago. The average balance of
interest-bearing liabilities increased 6.7% and the average cost increased 75
basis points as compared to the same period a year ago. The cost of
interest-bearing liabilities increased to 5.42% as compared to 4.67% for the
same period last year.
For the nine-month period ended September 30, 2000, interest expense increased
16.9%, as compared to the same period a year ago. The average balance of
interest-bearing liabilities increased 6.8% and average cost increased 44 basis
points as compared to the same period a year ago. The increase in volume on
interest bearing liabilities can be attributed to the reliance on borrowed funds
to meet loan demand. The average balance of borrowed funds increased 26.5% from
the same period last year. The cost of interest-bearing liabilities increased to
5.13% as compared to 4.69% for the same period last year.
NET INTEREST INCOME
Net interest income for the three and nine month periods ended September 30,
2000, as compared to the same period a year ago, increased 1.6% and 5.5%,
respectively. During these same periods ended September 30, 2000, the yield on
average interest-earning assets increased 49 basis points and 34 basis points,
respectively. For the same periods, the cost of average interest-bearing
liabilities increased 75 basis points and 44 basis points, respectively. The
increase in the balance of average interest-earning assets and its respective
yield were the factors contributing to the increase in net interest income.
10
<PAGE>
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 quarter ended
September 30, 2000 September 30, 1999
------------------ ------------------
(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 $ 49,418 $ 718 5.81% $45,905 $ 642 5.59%
Mortgage-backed and related securities 482 9 7.47% 9,093 144 6.33%
Loan portfolio 350,078 7,333 8.38% 317,482 6,267 7.90%
-------- ------ -------- ------
Total interest-earning assets 399,978 $8,060 8.06% 372,480 $7,053 7.57%
------ ------
Non-interest earning assets 13,521 14,237
-------- --------
Total assets $413,499 $386,717
======== ========
Interest-bearing liabilities:
Deposits 304,774 3,923 5.15% 293,313 3,204 4.37%
Borrowed funds 64,831 1,082 6.68% 53,063 841 6.34%
-------- ------ -------- ------
Total interest-bearing liabilities 369,605 $5,005 5.42% 346,376 $4,045 4.67%
------ ------
Non-interest bearing liabilities 13,329 10,643
-------- --------
Total liabilities 382,934 357,019
Stockholders' equity 30,565 29,698
-------- --------
Total liabilities and stockholders'
equity $413,499 $386,717
======== ========
Net interest income $3,055 $3,008
====== ======
Interest rate spread 2.64% 2.90%
====== ======
Net yield on interest-earning assets 3.06% 3.23%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 108.2% 107.5%
====== ======
</TABLE>
11
<PAGE>
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 nine months ended
September 30, 2000 September 30, 1999
------------------ ------------------
(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 $50,306 $ 2,201 5.83% $44,351 $ 1,846 5.55%
Mortgage-backed and related securities 1,492 71 6.34% 9,608 452 6.27%
Loan portfolio 346,514 21,372 8.22% 317,447 18,798 7.90%
-------- ------- -------- -------
Total interest-earning assets 398,312 $23,644 7.91% 371,406 $21,096 7.57%
------- -------
Non-interest earning assets 13,373 14,558
-------- --------
Total assets $411,685 $385,964
======== ========
Interest-bearing liabilities:
Deposits 301,499 10,946 4.84% 292,079 9,628 4.40%
Borrowed funds 67,676 3,271 6.44% 53,495 2,532 6.31%
-------- ------- -------- -------
Total interest-bearing liabilities 369,175 $14,217 5.13% 345,574 $12,160 4.69%
------- -------
Non-interest bearing liabilities 12,359 10,169
-------- --------
Total liabilities 381,534 355,743
Stockholders' equity 30,151 30,221
-------- --------
Total liabilities and stockholders'
equity $411,685 $385,964
======== ========
Net interest income $ 9,427 $ 8,936
======= =======
Interest rate spread 2.78% 2.88%
====== ======
Net yield on interest-earning assets 3.16% 3.21%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 107.9% 107.5%
====== ======
</TABLE>
12
<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
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 has been allocated to the two categories
based on their relative values.
For the nine months ended
September 30, 1999 vs. September 30, 2000
Increase (Decrease)
Due to
-----------------------------------------
(DOLLARS IN THOUSANDS)
Volume Rate Total
------ ------ ------
Interest income:
Securities and other
interest-earning assets $ 257 $ 98 $ 355
Mortgage-backed and related securities (386) 5 (381)
Loan portfolio 1,771 803 2,574
------ ------ ------
Total interest-earning assets 1,642 906 2,548
------ ------ ------
Interest expense:
Deposits 318 1,000 1,318
Borrowed funds 684 55 739
------ ------ ------
Total interest-bearing liabilities 1,002 1,055 2,057
------ ------ ------
Net interest income $ 640 $ (149) $ 491
====== ====== ======
13
<PAGE>
PROVISION AND RESERVE FOR LOAN LOSSES
During the nine-month period ended September 30, 2000 the Bank had net
charge-offs against the allowance for loan losses of $93,000. The Bank added
$880,000 to the allowance for loan losses for the current nine-month period
increasing the balance to $2.1 million at September 30, 2000. The $880 thousand
provision in the nine-month period ended September 30, 2000 includes an increase
of approximately $625,000 made in response to a detailed review of the Bank's
loan portfolio. Management's decision to increase the loan loss reserve was
considered appropriate in light of the successful expansion in the commercial
loan portfolio in recent months and was not in response to any significant
increase in non-performing assets. 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 increased by 6.6% for the three-month period ended September
30, 2000, as compared to the same period a year ago. For the three-month period
ended September 30, 2000, as compared to September 30, 1999, service charges on
deposit accounts increased 9.8% and loan fees and service charges increased
28.3%. The increase in service charges on deposit accounts was due to an
increase in number of accounts, and the increase in loan fees was due to an
increase in loan settlement service fees for loans processed for others.
Noninterest income increased by 29.7% for the nine-month period ended September
30, 2000, as compared to the same period a year ago. The change in noninterest
income can be attributed to a $582,000 gain on the sale of a branch office
offset by a $287,000 loss on the sale of mortgage backed securities. During the
nine-month period ended September 30, 2000, the Bank recognized no gains or
losses on the sales of loans as compared to the sale of $29.9 million at a gain
of $149,000, for the same period a year ago. Loan fees for the nine-month period
ended September 30, 2000 as compared to last year increased 26.6% due to an
increase in loan settlement service fees for loans processed for others. For the
same period, fee income from deposit operations increased 11.1% due to an
increase in the volume of checking accounts.
NONINTEREST EXPENSES
For the nine-month period ended September 30, 2000, noninterest expense
increased 8.5% as compared to the same period last year. Compensation and
related costs increased 17.4% due to an increase in employee medical insurance
premiums, additional costs associated with the defined benefit retirement plan,
a $31,000 payment to a retiring director, increased staffing levels and normal
increases in salaries and benefits. Occupancy and equipment expense increased by
2.9%. This increase can be attributed to additional maintenance necessary to
keep the buildings and equipment in good repair, property tax increases,
increases in the cost of data processing services and normal increases in
utility expenses. The decrease of 63.8% in the federal deposit insurance premium
can be attributed to a reduction in this premium. The reduction of 14.2% in
advertising can be attributed to a more conservative advertising campaign. Other
expense increased 4.5% due to normal business activities.
INCOME TAXES
The effective tax rates for the nine-month periods ended September 30, 2000 and
1999, respectively, approximate the statutory rate after giving effect to
nontaxable interest, other permanent tax differences, and adjustments to certain
deferred tax liabilities.
14
<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
None
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.
During the quarter ended September 30, 2000, the registrant filed a
Current Report on Form 8-K on September 27, 2000 to report a change in
registrant's certifying accountants.
15
<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: November 13, 2000 /s/ Frederick Willetts, III
------------------- -------------------------------------
President and Chief Executive Officer
Dated: November 13, 2000 /s/ Edward E. Maready
------------------- -------------------------------------
Treasurer and Chief Financial Officer
16
