UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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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
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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 (I.R.S. Employer
of 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
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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
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Page
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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
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COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
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JUNE 30, 1999 December 31, 1998
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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
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Total assets $ 383,842,885 $ 389,773,206
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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
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Total liabilities 354,818,473 358,160,056
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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,
2,759,344 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
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Total stockholders' equity 29,024,412 31,613,150
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Total liabilities and stockholders' equity $ 383,842,885 $ 389,773,206
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
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COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
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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)
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Total noninterest income 297,319 251,096 626,087 659,600
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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
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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
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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
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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SIX MONTHS ENDED
JUNE 30,
1999 1998
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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
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Net cash provided by operating activities
1,632,207 1,267,194
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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)
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Net cash provided by (used in) investing activities 9,050,841 (17,446,277)
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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
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Net cash provided by (used in) financing activities (6,756,791) 10,680,659
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,926,257 (5,498,424)
CASH AND CASH EQUIVALENTS: 3,926,257 (5,498,424)
BEGINNING OF PERIOD 8,856,389 17,207,777
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END OF PERIOD $ 12,782,646 $ 11,709,353
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</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
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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>
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
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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
----------- ----------- ----------- -----------
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
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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
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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-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.
6
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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%.
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.
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.
7
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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 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.
8
<PAGE>
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.
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
9
<PAGE>
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>
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>
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>
RATE/VOLUME ANALYSIS
The table below provides information regarding changes in interest income and
interest expense for the period indicated. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in volume multiplied by old rate)
and (ii) changes in rates (change in rate multiplied by old volume). The change
attributable to changes in rate-volume have been allocated to the other
categories based on absolute values.
<TABLE>
<CAPTION>
For the six
month 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>
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>
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>
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 3, 2000 /s/ Frederick Willetts, III
-------------------------------------
Frederick Willetts, III
President and Chief Executive Officer
Dated: August 3, 2000 /s/ Edward E. Maready
-------------------------------------
Edward E. Maready
Treasurer and Chief Financial Officer
16
