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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File Number: 0-24626
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COOPERATIVE BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1886527
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Market Street, Wilmington, North Carolina 28401
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(910) 343-0181
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. YES X NO .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 18, 2000, the aggregate market value of the
voting stock held by non-affiliates of the registrant, based on
the closing sales price of the registrant's common stock as
quoted on the National Association of Securities Dealers, Inc.
Automated Quotation National Market was $25,513,398 (2,401,261
shares at $10.625 per share). For purposes of this calculation,
directors, executive officers and beneficial owners of more than
5% of the registrant's outstanding voting stock are treated as
affiliates.
As of February 18, 2000 there were issued and outstanding
2,745,166 shares of the registrant's common stock.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal
Year Ended December 31, 1999. (Parts I and II)
2. Portions of Proxy Statement for the 2000 Annual Meeting of
Stockholders. (Part III)
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PART I
ITEM 1. BUSINESS
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GENERAL
THE COMPANY. Cooperative Bankshares, Inc. (the "Company")
is a registered savings bank holding company incorporated in
North Carolina in 1994. The Company was formed for the purpose
of serving as the holding company for Cooperative Bank for
Savings, Inc., SSB ("Cooperative Bank" or the "Bank"), a North
Carolina chartered savings bank. The Company's primary
activities consist of holding the stock of Cooperative Bank and
operating the business of the Bank. Accordingly, the
information set forth in this report, including financial
statements and related data, relates primarily to Cooperative
Bank.
COOPERATIVE BANK. Cooperative Bank was organized as a
North Carolina-chartered building and loan association in 1898.
The Bank has been a member of the Federal Home Loan Bank System
since 1933 and its deposits have been federally insured since
1940. In August 1991, the Bank converted to a North Carolina-
chartered stock savings and loan association and on October 1,
1992, the Bank converted from a North Carolina-chartered savings
and loan association to a North Carolina-chartered stock savings
bank. The Bank's deposit accounts are insured up to applicable
limits by the Federal Deposit Insurance Corporation ("FDIC").
At December 31, 1999, Cooperative Bank had total assets of
$410.1 million, deposits of $304.8 million and stockholders'
equity of $29.3 million.
The Bank is chartered under the laws of the state of North
Carolina to engage in general banking business. Cooperative
Bank offers a wide range of banking services including deposit
services, banking cards and alternative investments products.
These funds are used for the extension of credit through home
loans, commercial loans and other installment credit such as
home equity, auto and boat loans and check reserve.
Cooperative Bank conducts its operations through its main
office in Wilmington, North Carolina and 16 offices throughout
eastern North Carolina. The Bank's executive offices are
located at 201 Market Street, Wilmington, North Carolina 28401
and its telephone number is (910) 343-0181. The Bank considers
its primary market for deposits and lending activities to be the
communities of eastern North Carolina, extending from the
Virginia to the South Carolina borders.
RECENT RESULTS
During the March 31, 2000 quarter, the Company recorded a
gain of $582,000 on the sale of a branch. The Company also sold
a total of $6.3 million of low-yielding securities at a loss of
$287,000, redeploying those funds into higher yielding assets.
Also, following a detailed review of the Bank's loan
portfolio undertaken during the first quarter of 2000, the Bank
authorized a loan loss provision of approximately $665,000 for
the quarter. The decision to significantly increase the Bank's
loan loss reserves was considered appropriate in light of the
dramatic expansion in commercial real estate loan portfolio over
the past twelve months and was not in response to any significant
increases in non-performing assets. The Bank has emphasized the
origination of these loans in response to significant demand in
the Bank's market areas and management believes that they enhance
the Bank's profitability and interest rate sensitivity. These
loans do, however, pose risks that are not involved in loans
secured by single family residences. See "Lending Activities --
Loans Secured by Nonresidential Real Estate." After considering
these risks, the Bank authorized this adjustment to the loan loss
allowance.
The result of these transactions will be to reduce
anticipated net income for the March 31, 2000 quarter by
approximately 65%.
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RECENT REGULATORY AND LEGISLATIVE CHANGES
On November 12, 1999, the Gramm-Leach-Bliley Act was signed
into law. The Act calls for the modernization of the banking
system and could have far-reaching effects on the financial
services industry and the Company's and the Bank's operations.
For additional information on the provisions of this legislation,
see "Regulation -- Recently Enacted Legislation and Regulatory
Changes."
MARKET AREA
Cooperative Bank considers its primary market area to be
the communities of eastern North Carolina extending from the
Virginia to the South Carolina borders. The market is generally
segmented into the coastal communities and the inland areas.
The economies of the coastal communities (concentrated in Dare,
Carteret, Currituck, Onslow, Pender, New Hanover and Brunswick
Counties) are seasonal and largely dependent on the summer
tourism industry. The economy of Wilmington (the largest city
in the market area), a historic seaport with a population of
approximately 76,000, is also reliant upon summer tourism but is
diversified into the chemicals, shipping, aircraft engines, and
fiber optics industries. Wilmington also serves as a regional
retail center, a regional medical center and is home of the
University of North Carolina at Wilmington. The inland
communities served by the Bank (concentrated in Bladen,
Brunswick, Columbus, Duplin, Hyde, Martin, Beaufort and Pender
Counties) are largely service areas for the agricultural
activities in eastern North Carolina.
LENDING ACTIVITIES
GENERAL. Cooperative Bank's lending activities consist of
the origination of conventional mortgage loans for the purpose
of constructing, financing or refinancing residential
properties. As of December 31, 1999, $303.2 million, or 83.1%,
of the Bank's loan portfolio consisted of loans collateralized
by residential properties. The Bank also originates
nonresidential real estate loans, home equity lines of credit,
business and consumer loans. While continuing to place emphasis
on residential mortgage loans, the Bank continues to be active
in its nonresidential real estate lending, involving loans
secured by small commercial properties with balances generally
ranging from $100,000 to $1,000,000. See " -- Loans Secured by
Nonresidential Real Estate." The Bank's primary emphasis is to
originate adjustable rate loans with the fixed rate loan as an
option. As of December 31, 1999, adjustable rate loans totaled
63.3%, and fixed rate loans totaled 36.7%, of the Bank's total
loan portfolio.
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ANALYSIS OF LOAN PORTFOLIO. Set forth below is selected
data relating to the composition of the Bank's loan portfolio by
type of loan and type of collateral on the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------
1999 1998 1997
--------------- ------------------ -----------------
Amount % Amount % Amount %
------ ------ ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans secured by real estate:
1-4 family residential properties. . . $204,208 61.00% $235,644 73.34% $232,977 81.26%
Multi-family (5 or more) residential
properties . . . . . . . . . . . . . 5,523 1.65 5,575 1.74 4,835 1.69
Nonresidential property. . . . . . . . 2,215 .66 3,697 1.15 4,891 1.71
1-4 family residential properties
under construction . . . . . . . . . 23,689 7.08 25,244 7.86 24,908 8.69
Multi-family (5 or more) residential
property under construction. . . . . -- -- -- -- -- --
Nonresidential properties under
construction . . . . . . . . . . . . -- -- -- -- 469 .16
Installment loans secured by real estate:
1-4 family residential properties (1). 28,021 8.37 18,737 5.83 12,134 4.23
Multi-family (5 or more) residential
properties . . . . . . . . . . . . . 8,771 2.62 7,649 2.38 1,442 .50
Nonresidential property. . . . . . . . 28,045 8.38 12,940 4.03 4,526 1.58
1-4 family residential properties
under construction . . . . . . . . . 22,832 6.82 8,810 2.74 2,327 .81
Multi-family (5 or more) residential
property under construction. . . . . 10,166 3.04 1,128 .35 2,996 1.05
Nonresidential properties under
construction . . . . . . . . . . . . 15,104 4.51 11,735 3.65 7,868 2.74
Consumer loans, secured and unsecured. . 5,446 1.63 5,073 1.58 4,397 1.53
Business loans, secured and unsecured. . 9,763 2.91 4,021 1.25 2,586 .90
Business and consumer loans, secured and
unsecured under construction . . . . . 930 .28 964 .30 1,213 .42
-------- ------ -------- ------ -------- ------
Total loans . . . . . . . . . . . 364,713 108.95 341,217 106.20 307,569 107.27
-------- ------ -------- ------ -------- ------
Less:
Undisbursed portion of construction
loans . . . . . . . . . . . . . . 27,481 8.21 17,499 5.45 18,729 6.53
Discounts and other. . . . . . . . . . 1,182 .35 1,216 .38 1,274 .44
Loan loss reserve. . . . . . . . . . . 1,306 .39 1,178 .37 874 .30
-------- ------ -------- ------ -------- ------
Net loans. . . . . . . . . . . . . $334,744 100.00% $321,324 100.00% $286,692 100.00%
======== ====== ======== ====== ======== ======
<FN>
(1) Includes residential 1-4 family home equity loans.
</FN>
</TABLE>
3
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RESIDENTIAL REAL ESTATE LOANS. The Bank originates one-
to four- family residential mortgage loans collateralized by
property located in its market area. While a majority of the
Bank's residential real estate loans are collateralized by
owner-occupied primary residences, the Bank's portfolio also
includes some second home and investor properties. The Bank
also originates residential lot loans collateralized by vacant
lots located in approved subdivisions.
The Bank's loan originations are generally for a term of
15 to 30 years, amortized on a monthly basis, with principal and
interest due each month. Residential real estate loans often
remain outstanding for significantly shorter periods than their
contractual terms. Borrowers may refinance or prepay loans at
their option.
The Bank has offered adjustable rate mortgage loans
("ARMs") since 1979 and presently offers one year ARMs with
rate adjustments tied to prime or the weekly average yield on
U.S. Treasury Securities adjusted to a constant maturity of one
year. The Bank offers introductory interest rates on ARMs which
are not fully indexed. The interest rates on these loans
generally include a cap of 2% per adjustment and 6% over the
life of the loan. The Bank's underwriting policies require that
the borrower qualify for an ARM at the fully indexed rate.
While the proportion of fixed and adjustable rate loan
originations in the Bank's portfolio largely depends on the
level of interest rates, the Bank has strongly emphasized ARMs
in recent years and has been relatively successful in
maintaining the level of one year ARM originations even during
periods of declining interest rates. In addition to the one
year ARM, the Bank offers 3/1 and 5/1 ARM products. These loans
adjust annually after the end of the first three or five year
period. A non-conforming fixed rate loan is offered at a rate
that is 1% higher than the conforming fixed rate loan. A "Low
Doc" program is available for the non-conforming loans.
Cooperative Bank also originates 15 to 30 year fixed rate
mortgage loans on one- to four-family units. The Bank generally
charges a higher interest rate on such loans if the property is
not owner-occupied. The majority of fixed rate loans are
underwritten according to Federal Home Loan Mortgage Corporation
("FHLMC") or Federal National Mortgage Association ("FNMA")
guidelines, so that the loans qualify for sale in the secondary
market. The Bank has sold fixed rate loans in the secondary
market from time to time when such sales were consistent with
the Bank's liquidity and asset/liability goals.
The Bank actively lends on the security of properties
located in the Outer Banks region of North Carolina. This
region's economic base is seasonal and driven by beach tourism,
and a large number of the loans made by the Bank in this area
are secured by vacation rental properties. These loans are
inherently more risky than loans secured by the borrower's
permanent residence, since the borrower is typically dependent
upon rental income to meet debt service requirements, and
repayment is therefore subject to a greater extent to adverse
economic, weather and other conditions affecting vacation
rentals. Management seeks to minimize these risks by employing
what it believes are conservative underwriting criteria.
The Bank's lending policies generally limit the maximum
loan-to-value ratio on conventional residential mortgage loans
to 95% of the lesser of the appraised value or purchase price,
with the condition that private mortgage insurance is required
on loans with loan-to-value ratios in excess of 80%.
Cooperative Bank also originates loans secured by multi-
family properties. At December 31, 1999, the Bank had $24.5
million of such loans, representing 9.2% of its total loan
portfolio. These loans are primarily secured by apartment
buildings located in the Bank's market area.
CONSTRUCTION LOANS. The Bank originates loans to finance
the construction of one- to four- and multi-family dwellings,
housing developments and condominiums. Construction loans
amounted to approximately $56.7 million, or 15.5%, of the Bank's
total loan portfolio at December 31, 1999. In recent years, the
Bank has emphasized the origination of construction loans in
response to the significant demand for such loans by borrowers
engaged in building and development activities in the growing
communities of its market area. Substantially all of the Bank's
construction loans are structured to be converted to permanent
loans at the end of the construction phase. At the time the
loan is converted to a permanent loan and assumed by the
ultimate purchaser, the Bank underwrites the creditworthiness of
the
4
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ultimate purchaser prior to approving the assumption, when
the original borrower is released from liability.
Construction/permanent loans have either fixed or adjustable
rates and have terms of up to 30 years. Occasionally, the Bank
will make short term construction loans which have fixed rates
and terms of up to 12 months. These loans are generally made in
amounts up to 80% of appraised value. Loan proceeds generally
are disbursed in increments as construction progresses and as
inspections warrant.
Construction loans afford the Bank the opportunity to
increase the interest rate sensitivity of its loan portfolio.
The Bank's risk of loss on a construction loan is largely
dependent upon the accuracy of the initial estimate of the
property's value at completion of construction and the bid price
(including interest) of construction. If the estimate of
construction costs proves to be inaccurate, the Bank may be
required to advance funds beyond the amount originally committed
to permit completion of the project. If the estimate of the
value proves to be inaccurate, the Bank may be confronted, at or
prior to the maturity of the loan, with a project whose value is
insufficient to assure full repayment.
The Bank's underwriting criteria are designed to evaluate
and minimize the risks of each construction loan. Among other
things, the Bank considers the reputation of the borrower and
the contractor, the amount of the borrower's equity in the
project, independent valuations and reviews of cost estimates,
pre-construction sale and leasing information, and cash flow
projections of the borrower. In addition, the Bank reviews the
builder's current financial reports, tax returns, credit reports
and, if the builder has not previously borrowed from Cooperative
Bank, credit references. The Bank only makes construction loans
within its primary market area.
The Bank has in the past originated loans for the
acquisition and development of unimproved property to be used
for residential purposes. Land development lending is generally
considered to involve a higher level of credit risk than one- to
four-family residential lending due to the concentration of
principal in a limited number of loans and borrowers and the
effects of general economic conditions on development projects.
The following table sets forth certain information as of
December 31, 1999 regarding the dollar amount of construction
loans secured by real estate and real estate mortgage loans
maturing in the Bank's portfolio based on their contractual
terms to maturity. The majority of these loans have provisions
to convert to permanent loans upon completion of construction.
For further information, see Note 5 of Notes to Consolidated
Financial Statements included in the Company's Annual Report to
Stockholders for the Fiscal Year Ended December 31, 1999 (the
"Annual Report").
Due During the
Year Ended
December 31,
1999
--------------
(In thousands)
Real estate - construction
Residential. . . . . . . . . . . . $56,687
Nonresidential . . . . . . . . . . 15,104
Business and Industrial. . . . . . 930
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Total . . . . . . . . . . . . . $72,721
=======
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Loans
secured by nonresidential real estate constituted approximately
$45.4 million, or 12.4% of the Bank's total loans at December
31, 1999. The Bank is emphasizing the origination of these
loans because of their profitability, since they generally carry
a higher interest rate than single family residential mortgage
loans. The Bank originates both construction loans and
permanent loans on nonresidential properties. Nonresidential
real estate loans are generally made in amounts up to 80% of the
lesser of appraised value or purchase price of the property and
have generally been made in amounts under $2.0 million. The
Bank's permanent nonresidential real estate loans are secured by
improved property such as office buildings, retail centers,
warehouses, and other types of buildings located in the Bank's
primary market area. Nonresidential real estate loans are
either fixed
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or variable rate. The variable rate loans have interest rates
tied to prime or the weekly average yield on U.S. Treasury
Securities adjusted to a constant maturity of one year.
Loans secured by nonresidential properties are generally
larger and involve greater risks than residential mortgage
loans. Because payments on loans secured by nonresidential
properties are often dependent on successful operation or
management of the properties, repayment of such loans may be
subject to a greater extent to adverse conditions in the real
estate market or the economy. The Bank seeks to minimize these
risks in a variety of ways, including limiting the size of its
nonresidential real estate loans, generally restricting such
loans to its primary market area and attempting to employ
conservative underwriting criteria.
CONSUMER LENDING. At December 31, 1999, the Bank's
consumer loan portfolio totaled approximately $5.4 million,
representing 1.5% of the Bank's total loans receivable. The
Bank also offers home equity loans, which are made for terms of
up to 15 years at adjustable interest rates. As of December 31,
1999, the Bank's home equity loan portfolio totaled
approximately $9.8 million, representing 2.7% of its total loans
receivable.
Consumer loans entail greater risk than do residential
mortgage loans, particularly in the case of consumer loans which
are unsecured or collateralized by rapidly depreciable assets
such as automobiles. In such cases, any repossessed collateral
for a defaulted consumer loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. The
remaining deficiency often does not warrant further substantial
collection efforts against the borrower. In addition, consumer
loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans. Such
loans may also give rise to claims and defenses by a consumer
loan borrower against an assignee of such loans such as the
Bank, and a borrower may be able to assert against such assignee
claims and defenses which it has against the seller of the
underlying collateral.
NON-REAL ESTATE BUSINESS LENDING. In late 1996, the Bank
initiated a program for originating loans to small businesses in
the Bank's market area which are secured by various forms of
non-real estate collateral or are unsecured. At December 31,
1999, these loans totaled approximately $10.7 million.
Management of Cooperative Bank believes that these loans are
attractive to the Bank in light of the typically higher interest
rate yields associated with them and the opportunity they
present for expanding the Bank's relationships with existing
customers and developing broader relationships with new
customers. Accordingly, the Bank plans to actively pursue this
type of lending in the future in an effort to maintain a
profitable spread between the Bank's average loan yield and its
cost of funds.
Unlike residential mortgage loans, which generally are
made on the basis of the borrower's ability to make repayment
from his or her employment and other income and which are
collateralized by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher
risk and typically are made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially
dependent on the success of the business itself. Further, the
collateral securing the loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the
success of the business. The management of Cooperative Bank
seeks to minimize these risks as the Bank's commercial business
loan portfolio grows by attempting to employ conservative
underwriting criteria.
LOAN SOLICITATION AND PROCESSING. Loan originations are
derived from a number of sources, including "walk-in" customers
at the Bank's offices and solicitations by Cooperative Bank
employees. The Bank also has agreements with third party
solicitors who provide loan applications to the Bank.
Loan applications are accepted at all full-service
branches, and are reviewed by a loan officer or branch manager.
Upon receipt of a loan application, central processing orders a
credit report and verifications to verify specific information
relating to the applicant's employment, income and credit
standing. An appraisal of the real estate intended
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to secure the proposed loan is undertaken by an internal
appraiser or an outside appraiser approved by the Bank. In the
case of "Low Doc" loans a tax evaluation is acceptable.
Loan authorities and limits have been delegated by the
Board of Directors to a group of senior officers who function as
the loan committee, except for consumer loans, which may be
approved by branch loan officers. Loans exceeding $700,000 up
to $1,000,000 can be approved by three members of the loan
committee. Any loan exceeding $1,000,000 is approved by the
Bank's Board of Directors. Fire and casualty insurance is
required on all loans secured by improved real estate.
ORIGINATIONS, PURCHASES, AND SALES OF MORTGAGE LOANS. The
Bank's general policy is to originate conventional residential
mortgage loans under terms, conditions and documentation which
permit sale to the FHLMC, FNMA or private investors in the
secondary market. The Bank has from time to time sold fixed
rate, long term mortgage loans in the secondary market to meet
liquidity requirements or as part of the asset/liability
management program. In connection with such sales, the Bank
generally retains the servicing of the loans (i.e., collection
of principal and interest payments), for which it generally
receives a fee payable monthly of up to 1/4% per annum of the
unpaid balance of each loan. As of December 31, 1999, the Bank
was servicing approximately 1,578 loans for others aggregating
approximately $84.1 million.
The Bank does not generally purchase loans, and purchased
no loans during the last three fiscal years.
LOAN COMMITMENTS. The Bank issues loan origination
commitments to qualified borrowers primarily for the
construction and purchase of residential real estate. Such
commitments are made on specified terms and conditions and are
typically for terms of up to 30 days. A non-refundable
appraisal, flood certificate, credit report and underwriting fee
is collected at the time of application. Management estimates
that historically, less than 20% of such commitments expire
unfunded. At December 31, 1999, the Bank had outstanding loan
origination commitments of approximately $21.5 million. For
further information, see Note 5 of Notes to Consolidated
Financial Statements included in the Annual Report.
LOAN ORIGINATION AND OTHER FEES. In addition to receiving
interest at the stated rate on loans, the Bank receives loan
origination fees or "points" for originating loans. Origination
fees generally are calculated as a percentage of the principal
amount of the mortgage loan and are charged to the borrower for
creation of the loan account. Loan-origination fees and certain
direct loan origination costs are deferred, and the net fee or
cost is recognized as an adjustment to interest income over the
contractual life of the related loan.
Loan origination and commitment fees are volatile sources
of funds. Such fees vary with the volume and type of loans and
commitments made and purchased and with competitive market
conditions, which in turn respond to the demand for and
availability of money.
The Bank also recognizes other fees and service charges on
loans. Other fees and service charges consist of late fees,
fees collected with a change in borrower or other loan
modifications.
DELINQUENCIES. The Bank's collection procedures provide
that when a loan is 30 days past due, the borrower is contacted
by mail, and payment is requested. If the delinquency
continues, subsequent efforts are made to contact the borrower.
If the loan continues in a delinquent status for 60 days or
more, the Bank generally initiates legal proceedings. At
December 31, 1999, the Bank owned approximately $225,000, net of
valuation reserves, of property acquired as the result of
foreclosure or by deed in lieu of foreclosure and classified as
"real estate owned."
NON-PERFORMING ASSETS AND ASSET CLASSIFICATION. Loans are
reviewed on a regular basis and are placed on a non-accrual
status when, in the opinion of management, the collection of
additional interest is doubtful. As of December 31, 1999, the
Bank had two loans in non-accrual status with an aggregate
principal balance of $267,000.
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Real estate acquired by the Bank as a result of
foreclosure is classified as real estate owned until such time
as it is sold. When such property is acquired, it is recorded
at the lower of the unpaid principal balance plus unpaid accrued
interest of the related loan or its fair value. Any required
write-down of the loan to its fair market value is charged to
the allowance for loan losses. At December 31, 1999, the Bank
had eight loans in the process of foreclosure and/or bankruptcy
with a principal balance of approximately $742,000.
The following table sets forth information with respect to
the Bank's non-performing assets for the periods indicated.
During the periods shown, the Bank had no restructured loans
within the meaning of Statement of Financial Accounting
Standards ("SFAS") No. 15.
<TABLE>
<CAPTION>
At December 31,
--------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(Dollars in thousands)
Non-accruing loans:
Residential real estate. . . . . . . $ 192 $ -- $ --
Business . . . . . . . . . . . . . . 75 -- --
Accruing loans which are contractually
past due 90 days or more:
Real Estate:
Residential. . . . . . . . . . . . 892 1,606 332
Nonresidential . . . . . . . . . . -- 66 25
Consumer . . . . . . . . . . . . . . 22 39 --
Business . . . . . . . . . . . . . . 20 54 --
------ ------ -----
Total . . . . . . . . . . . . . $1,201 $1,765 $ 357
====== ====== =====
Percentage of total loans. . . . . . . .33% .52% .12%
====== ====== =====
Other non-performing assets (1). . . . $ 245 $2,439 $ 251
====== ====== =====
Total non-performing assets. . . . . . $1,446 $4,204 $ 608
====== ====== =====
Total non-performing assets
to total assets. . . . . . . . . . . .35% 1.08% .16%
====== ====== =====
<FN>
(1) Other non-performing assets represents property acquired by the Bank
through foreclosure or repossession. This property is carried at fair
value less estimated costs of sale.
</FN>
</TABLE>
Except as set forth above, the Bank had no loans which
were not classified as non-accrual, 90 days past due or
restructured but which may be so classified in the near future
because management has concerns as to the ability of borrowers
to comply with repayment terms. For further information, see
Note 1d of Notes to Consolidated Financial Statements in the
Annual Report.
Allowance for Loan Losses. In establishing the
appropriate levels for the provision and the allowance for
possible loan losses, management considers a variety of factors,
in addition to the fact that an inherent risk of loss always
exists in the lending process. Consideration is given to, among
other things, the current and future impact of economic
conditions, the diversification of the loan portfolio,
historical loss experience, the review of loans by the loan
review personnel, the individual borrower's financial and
managerial strengths, and the adequacy of underlying collateral.
Consideration is also given to examinations performed by
regulatory authorities and the Bank's independent certified
public accountants.
8
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<PAGE>
The following table analyzes activity in the Bank's
allowance for possible loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(Dollars in thousands)
Balance at beginning of period . . $1,178 $ 874 $ 807
Provision for possible
loan losses. . . . . . . . . . . 210 330 153
Loans charged-off - net. . . . . . 82 26 86
------ ------ -----
Balance at end of period . . . . . . $1,306 $1,178 $ 874
====== ====== =====
Ratio of net charge-offs to
average loans outstanding
during the period. . . . . . . . . .03% .01% .03%
====== ====== =====
Ratio of loan loss reserve to
total loans. . . . . . . . . . . . .36% .35% .28%
====== ====== =====
</TABLE>
Management believes that it has established the Bank's
existing allowance for loan losses in accordance with generally
accepted accounting principles. Additions to the allowance may
be necessary, however, due to changes in economic conditions,
real estate market values, growth in the portfolio, and other
factors. In addition, bank regulators may require Cooperative
Bank to make additional provisions for losses in the course of
their examinations based on their judgments as to the value of
the Bank's assets.
INVESTMENT ACTIVITIES
The Bank is required under applicable regulations to
maintain liquid assets equal to at least 10% of its total
assets. For purposes of this requirement, liquid assets consist
of cash and readily marketable investments. Cooperative Bank
has generally maintained a liquidity portfolio in excess of
regulatory requirements. Liquidity levels may be increased or
decreased depending upon the yields on investment alternatives
and upon management's judgment as to the attractiveness of the
yields then available in relation to other opportunities and its
expectation of the level of yield that will be available in the
future, as well as management's projections as to the short term
demand for funds to be used in the Bank's loan origination and
other activities.
The following table sets forth the carrying value of the
Bank's investment portfolio at the dates indicated. For
additional information regarding the Bank's investments, see
Notes 2 and 3 of Notes to Consolidated Financial Statements in
the Annual Report.
<TABLE>
<CAPTION>
At December 31,
--------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(In thousands)
Interest-bearing deposits. . . . . . . . .$ 9,522 $ 4,251 $12,312
Securities:
Available for sale - at estimated
market value . . . . . . . . . . . . . 20,672 21,163 21,004
Held to maturity . . . . . . . . . . . . 18,025 13,034 21,044
Mortgage-backed and related securities:
Available for sale - at estimated
market value . . . . . . . . . . . . . 6,564 10,551 12,856
------- ------- -------
Total. . . . . . . . . . . . . . . .$54,783 $48,999 $67,216
======= ======= =======
</TABLE>
From time to time, the Bank purchases mortgage-backed and
related securities guaranteed by the FHLMC, the Government
National Mortgage Association ("GNMA") or the FNMA. FHLMC and
FNMA mortgage-backed securities are participation certificates
issued and guaranteed by the FHLMC or the FNMA which represent
interests in pools of
9
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<PAGE>
conventional mortgages originated by savings institutions. GNMA
mortgage-backed securities are participation certificates issued
and guaranteed by the GNMA which represent interests in pools of
mortgages insured by the Federal Housing Administration or
partially guaranteed by the Veterans Administration. GNMA
obligations are backed by the full faith and credit of the
United States. At December 31, 1999, the Bank held
mortgage-backed securities, classified as available for sale,
with an amortized cost of approximately $6.8 million which
represented 1.6% of the Bank's total assets. At that date, the
estimated aggregate market value and carrying value of the
mortgage-backed securities was $6.6 million. Mortgage-backed
securities increase the quality of the Bank's assets by virtue
of the insurance and guarantees that back them, their greater
degree of liquidity over individual mortgage loans, and their
capacity to be used to collateralize borrowings or other
obligations of the Bank. However, a portion of the Bank's
mortgage-backed securities are long term, fixed rate instruments
and, in a rising interest rate environment, the market value of
such securities will decline. For further information regarding
the Bank's mortgage-backed securities portfolio, see
"Management's Discussion & Analysis" and Note 3 of Notes to
Consolidated Financial Statements in the Annual Report.
10
<PAGE>
<PAGE>
The following table sets forth the scheduled maturities,
carrying values, market values and average yields for the Bank's
investment portfolio at December 31, 1999.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
----------------- ----------------- -----------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits. . . $ 9,522 5.40% $ -- -- % $ -- -- %
U.S. government and
agency securities:
Available for sale . . . . . 4,942 5.13 15,730 6.04 -- --
Held to maturity . . . . . . -- -- 8,025 4.62 10,000 6.63
Mortgage-backed and related
securities:
Available for sale . . . . . -- -- -- -- -- --
Held to maturity . . . . . . -- -- -- -- -- --
------- ------- -------
Total. . . . . . . . . . $14,464 5.30% $23,755 5.56% $10,000 6.63%
======= ======= =======
<CAPTION>
More than Ten Years Total Investment Portfolio
------------------- -----------------------------
Carrying Average Carrying Market Average
Value Yield Value Value Yield
-------- ------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-bearing deposits. . . $ -- -- % $ 9,522 $ 9,522 5.40%
U.S. government and
agency securities:
Available for sale . . . . . -- -- 20,672 20,672 5.82
Held to maturity . . . . . . -- -- 18,025 17,114 5.74
Mortgage-backed and related
securities:
Available for sale . . . . . 6,564 6.44 6,564 6,564 6.44
Held to maturity . . . . . . -- -- -- -- --
------- ------- -------
Total. . . . . . . . . . $ 6,564 6.44% $54,783 $53,872 5.79%
======= ======= =======
</TABLE>
11
<PAGE>
<PAGE>
SUBSIDIARY ACTIVITIES
As a North Carolina-chartered savings bank, the Bank is
authorized to invest up to 10% of its assets in subsidiary or
service corporations engaged in activities that are permissible
to subsidiaries of federal savings associations. Currently,
subsidiaries of state-chartered savings banks generally may not
engage as principal in any activity that is not permissible for
a subsidiary of a national bank unless the FDIC determines that
the activities do not pose a significant risk to the appropriate
insurance fund and the bank complies with all applicable capital
requirements.
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Bank's
funds for lending and other investment purposes. In addition to
deposits, Cooperative Bank derives funds from interest payments,
loan principal repayments, borrowed funds and funds provided by
operations. Scheduled loan repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a
short term basis to compensate for reductions in the
availability of funds from other sources. The Bank intends to
fund its activities primarily through deposits.
DEPOSITS. Deposits are attracted from within the Bank's
primary market area through the offering of a broad selection of
deposit instruments including checking, savings, money market
deposit, and term certificate accounts (including negotiated
jumbo certificates in denominations of $100,000 or more) as well
as individual retirement plans. Deposit account terms vary
according to the minimum balance required, the time periods the
funds must remain on deposit and the interest rate, among other
factors. The Bank does not obtain funds through brokers;
however, the Bank has begun attracting deposits over the
Internet and considers this a viable alternative to borrowed
funds. For further information regarding the Bank's deposits,
see "Management's Discussion and Analysis" and Note 7 of Notes
to Consolidated Financial Statements in the Annual Report.
BORROWINGS. Deposits are the primary source of funds for
Cooperative Bank's lending and investment activities and for its
general business purposes. If the need arises, the Bank may
obtain advances from the FHLB of Atlanta to supplement its
supply of loanable funds and to meet deposit withdrawal
requirements. Advances from the FHLB are typically secured by
the Bank's stock in the FHLB and a lien on a portion of the
Bank's first mortgage loans. The Bank has utilized FHLB
advances in recent periods in order to meet a larger than
typical loan demand in the Bank's market area.
The FHLB of Atlanta functions as a central reserve bank
providing credit for the Bank and other member savings
associations and financial institutions. As a member,
Cooperative Bank is required to own capital stock in the FHLB
and is authorized to apply for advances on the security of such
stock and certain of its home mortgages and other assets
(principally, securities which are obligations of, or guaranteed
by, the United States), provided certain standards related to
creditworthiness have been met. Advances are made pursuant to
several different programs. Each credit program has its own
interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either
on a fixed percentage of a member institution's net worth or on
the FHLB's assessment of the institution's creditworthiness.
From time to time the Bank has borrowed funds under
reverse repurchase agreements and dollar rolls. Under a reverse
repurchase agreement, the Bank sells securities (generally
government securities, mortgage-backed certificates and FHLMC
participation certificates) and agrees to repurchase them (or
substantially identical securities) at a specified price at a
later date. Reverse repurchase agreements are generally for
terms of one week to one month, are subject to renewal, and are
deemed to be borrowings collateralized by the securities sold.
Generally, the cost of borrowed funds using reverse repurchase
agreements is less expensive than other borrowings with
comparable terms. Cooperative Bank had no reverse repurchase
agreements or dollar rolls outstanding during the fiscal year
ended December 31, 1999. All reverse repurchase agreements are
contracted with registered broker-dealers. The dollar rolls
used by the Bank closely
12
<PAGE>
<PAGE>
resemble reverse repurchase agreements, except that with dollar
rolls, the Bank agrees to repurchase securities similar to the
securities sold, rather than the same securities, as with
reverse repurchase agreements.
For further information regarding the Bank's borrowings,
see Note 8 of Notes to Consolidated Financial Statements in the
Annual Report.
The following tables set forth certain information
regarding short term borrowings by the Bank at the end of and
during the periods indicated:
<TABLE>
<CAPTION>
During the Year Ended December 31,
---------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Maximum amount of short-term borrowings
outstanding at any month end:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . $ -- $ -- $ --
FHLB advances. . . . . . . . . . . . . . . . 75,106 55,141 50,141
Maximum amount of short-term borrowings
outstanding at end of period:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . -- -- --
FHLB advances. . . . . . . . . . . . . . . . 75,106 55,109 50,141
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . -- -- --
FHLB advances. . . . . . . . . . . . . . . . 57,036 51,506 39,797
Approximate weighted average rate paid on:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . -- -- --
FHLB advances. . . . . . . . . . . . . . . . 6.28% 6.33% 6.49%
</TABLE>
COMPETITION
Cooperative Bank encounters strong competition both in the
attraction of deposits and in the making of real estate and
other loans. Its most direct competition for deposits has
historically come from financial institutions in its market
area. Competition for deposits is also realized from brokerage
firms and credit unions. The Bank competes for deposits by
offering depositors competitive rates and a high level of
personal service together with a wide range of banking products
and convenient office locations.
Competition for real estate and other loans comes
principally from financial institutions and mortgage companies.
The Bank competes for loans primarily through the interest rates
and loan fees it charges, and the efficiency and quality of
services it provides borrowers. Factors which affect
competition include the general and local economic conditions,
current interest rate levels and volatility in the mortgage
markets.
EMPLOYEES
At December 31, 1999, the Bank had 123 full-time employees
and eight part-time employees. The employees are not
represented by a collective bargaining unit. The Bank believes
its relationship with its employees to be good.
13
<PAGE>
<PAGE>
EXECUTIVE OFFICERS
At December 31, 1999, the executive officers of the Bank
who were not also directors were as follows:
<TABLE>
<CAPTION>
Age at
Name December 31, 1999 Position
- ---- ----------------- --------
<S> <C> <C>
Daniel W. Eller 57 Senior Vice President and Corporate
Secretary
Edward E. Maready 58 Senior Vice President and Treasurer,
Principal Financial and Accounting
Officer
Eric R. Gray 57 Senior Vice President of Mortgage
Lending
O.C. Burrell, Jr. 51 Executive Vice President and Chief
Operating Officer
</TABLE>
DANIEL W. ELLER was employed by the Bank in 1979 and
served as the Administrative Vice President until 1993, at which
time he was appointed Senior Vice President and Corporate
Secretary. He was a member of the Board of the Lower Cape Fear
Water & Sewer Authority and has served on the boards of the
Southeastern Economic Development Commission, Downtown Area
Revitalization Effort (DARE), New Hanover County Recreation
Advisory Committee, Cape Fear Area United Way, and past
president of Crimestoppers of New Hanover County. He also is
past president of the Wilmington Civitan Club and past chairman
of the board of Child Development Center.
EDWARD E. MAREADY was employed by the Bank in 1977. He
served as Controller and Treasurer from 1977 until 1993. In
1993, Mr. Maready was appointed Senior Vice President and
Treasurer. He is a member of the Financial Managers' Society,
Inc. and serves as a member of various civic committees.
ERIC R. GRAY was employed by the Bank in 1971. He served
as Vice President of Mortgage Lending from 1984 until 1993, at
which time he was elected Senior Vice President of Mortgage
Lending. He is past director of the Mortgage Banker's
Association of Wilmington, North Carolina, current member and
past president and director of the Wilmington East Rotary Club,
and current member of the Single Family FNMA/FHLMC of MBAC. Mr.
Gray serves as a member of the Project Impact Committee for New
Hanover County.
O. C. BURRELL, JR. was employed in May 1993 as Senior Vice
President of Retail Banking. Mr. Burrell was elected Executive
Vice President and Chief Operating Officer in 1997. Mr. Burrell
has been in the banking industry since 1970 and has served in
leadership capacities in various civic and professional
organizations. He is active in the Wilmington Rotary Club and
serves as treasurer and director of the Child Development Center
and is a member of the Retail Lending Committee of the North
Carolina Bankers Association.
REGULATION
GENERAL. As a North Carolina savings bank with deposits
insured by the SAIF, Cooperative Bank is subject to extensive
regulation by the Administrator of the North Carolina Savings
Banks Division (the "Administrator") and the FDIC. The Company
is also subject to extensive regulation under federal and state
law. The lending activities and other investments of
Cooperative Bank must comply with various federal regulatory
requirements. The Administrator and the FDIC periodically
examine Cooperative Bank for compliance with various regulatory
requirements. The Bank must file reports with the Administrator
and the FDIC describing its activities and financial condition.
The Bank is also subject to certain reserve requirements
promulgated by the Board of Governors of the Federal Reserve
System (the
14
<PAGE>
<PAGE>
"Federal Reserve Board"). This supervision and regulation is
intended primarily for the protection of depositors. Certain of
these regulatory requirements are referred to below or appear
elsewhere herein.
The following is a brief summary of certain statutes,
rules and regulations affecting the Company and the Bank. A
number of other statutes and regulations have an impact on their
operations. The following summary of applicable statutes and
regulations does not purport to be complete and is qualified in
its entirety by reference to such statutes and regulations.
RECENTLY ENACTED LEGISLATION. On November 12, 1999, the
Gramm-Leach-Bliley ("G-L-B") Act was signed into law. The G-L-B
Act authorizes affiliations between banking, securities and
insurance firms and authorizes bank holding companies and
national banks to engage in a variety of new financial
activities. Among the new activities that will be permitted to
bank holding companies are securities and insurance brokerage,
securities underwriting, insurance underwriting and merchant
banking. The Federal Reserve Board, in consultation with the
Department of Treasury, may approve additional financial
activities. National bank subsidiaries will be permitted to
engage in similar financial activities but only on an agency
basis unless they are one of the 50 largest banks in the
country. National bank subsidiaries will be prohibited from
insurance underwriting, real estate development and merchant
banking. The G-L-B Act, however, prohibits future acquisitions
of existing unitary savings and loan holding companies, like the
Company, by firms that are engaged in commercial activities and
prohibits the formation of new unitary holding companies.
The G-L-B Act also imposes new requirements on financial
institutions with respect to customer privacy. The G-L-B Act
generally prohibits disclosure of customer information to
non-affiliated third parties unless the customer has been given
the opportunity to object and has not objected to such
disclosure. Financial institutions are further required to
disclose their privacy policies to customers annually. Financial
institutions, however, will be required to comply with state law
if it is more protective of customer privacy than the G-L-B Act.
The G-L-B Act directs the federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury, the
Securities and Exchange Commission and the Federal Trade
Commission, after consultation with the National Association of
Insurance Commissioners, to promulgate implementing regulations
within six months of enactment. The privacy provisions will
become effective six months thereafter.
The G-L-B Act contains significant revisions to the
Federal Home Loan Bank System. The G-L-B Act imposes new
capital requirements on the Federal Home Loan Banks and
authorizes them to issue two classes of stock with differing
dividend rates and redemption requirements. The G-L-B Act
deletes the current requirement that the Federal Home Loan Banks
annually contribute $300 million to pay interest on certain
government obligations in favor of a 20% of net earnings
formula. The G-L-B Act expands the permissible uses of Federal
Home Loan Bank advances by community financial institutions
(under $500 million in assets) to include funding loans to small
businesses, small farms and small agri-businesses. The G-L-B
Act makes membership in the Federal Home Loan Bank System
voluntary for federal savings institutions.
The G-L-B Act contains a variety of other provisions
including a prohibition against ATM surcharges unless the
customer has first been provided notice of the imposition and
amount of the fee. The G-L-B Act reduces the frequency of
Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository
institutions that make payments to non-governmental entities in
connection with the Community Reinvestment Act. The G-L-B Act
also eliminates the SAIF special reserve and authorizes a
federal savings institution that converts to a national or state
bank charter to continue to use the term "federal" in its name
and to retain any interstate branches.
The Company is unable to predict the impact of the G-L-B
Act on its and the Institutions's operations and competitive
environment at this time. Although the G-L-B Act reduces the
range of companies with which the Company may affiliate, it may
facilitate affiliations with companies in the financial services
industry.
15
<PAGE>
<PAGE>
BANK HOLDING COMPANY REGULATION. The Company is
registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "Holding Company Act") and,
as such, is subject to supervision and regulation by the Federal
Reserve Board. As a bank holding company, the Company is
required to furnish to the Federal Reserve Board annual and
quarterly reports of its operations at the end of each period
and to furnish such additional information as the Federal
Reserve Board may require pursuant to the Holding Company Act.
The Company is also subject to regular examination by the
Federal Reserve Board. In addition, as a savings institution
holding company, the Company is subject to supervision by the
Administrator under North Carolina law.
Under the Holding Company Act, a bank holding company must
obtain the prior approval of the Federal Reserve Board before
(1) acquiring direct or indirect ownership or control of any
voting shares of any bank or bank holding company if, after such
acquisition, the bank holding company would directly or
indirectly own or control more than 5% of such shares; (2)
acquiring all or substantially all of the assets of another bank
or bank holding company; or (3) merging or consolidating with
another bank holding company. In addition to the above
restrictions under the Holding Company Act, the Company's
investments are limited under North Carolina law to those
investments permitted for North Carolina savings banks. See " -
- - State Law and Regulation."
The Holding Company Act prohibits the Federal Reserve
Board from approving an application by a bank holding company to
acquire voting shares of a bank located outside the state in
which the operations of the holding company's bank subsidiaries
are principally conducted, unless such an acquisition is
specifically authorized by state law. The State of North
Carolina has enacted reciprocal interstate banking statutes that
authorize banks and their holding companies in North Carolina to
be acquired by banks or their holding companies in states that
have also enacted reciprocal banking legislation, and permit
North Carolina banks and their holding companies to acquire
banks in such other states.
Under the Holding Company Act, any company must obtain
approval of the Federal Reserve Board prior to acquiring control
of the Company or the Bank. For purposes of the Holding Company
Act, "control" is defined as ownership of more than 25% of any
class of voting securities of the Company or the Bank, the
ability to control the election of a majority of the directors,
or the exercise of a controlling influence over management or
policies of the Company or the Bank.
The Change in Bank Control Act and the regulations of the
Federal Reserve Board thereunder require any person or persons
acting in concert (except for companies required to make
application under the Holding Company Act), to file a written
notice with the Federal Reserve Board before such person or
persons may acquire control of the Company or the Bank. The
Change in Bank Control Act defines "control" as the power,
directly or indirectly, to vote 25% or more of any voting
securities or to direct the management or policies of a bank
holding company or an insured bank.
The Holding Company Act also prohibits, with certain
exceptions, a bank holding company from acquiring direct or
indirect ownership or control of more than 5% of the voting
shares of a company that is not a bank or a bank holding
company, or from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal
exceptions to these prohibitions involve certain non-bank
activities which, by statute or by Federal Reserve Board
regulation or order, have been identified as activities closely
related to the business of banking or managing or controlling
banks. The activities of the Company are subject to these legal
and regulatory limitations under the Holding Company Act and the
Federal Reserve Board's regulations thereunder. Notwithstanding
the Federal Reserve Board's prior approval of specific
nonbanking activities, the Federal Reserve Board has the power
to order a holding company or its subsidiaries to terminate any
activity, or to terminate its ownership or control of any
subsidiary, when it has reasonable cause to believe that the
continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness or
stability of any bank subsidiary of that holding company.
16
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<PAGE>
The Federal Reserve Board has adopted guidelines regarding
the capital adequacy of bank holding companies, which require
bank holding companies to maintain specified minimum ratios of
capital to total assets and capital to risk-weighted assets.
See " -- Capital Requirements."
The Federal Reserve Board has the power to prohibit
dividends by bank holding companies if their actions constitute
unsafe or unsound practices. The Federal Reserve Board has
issued a policy statement on the payment of cash dividends by
bank holding companies, which expresses the Federal Reserve
Board's view that a bank holding company should pay cash
dividends only to the extent that the company's net income for
the past year is sufficient to cover both the cash dividends and
a rate of earning retention that is consistent with the
company's capital needs, asset quality, and overall financial
condition.
Bank holding companies generally are required to give the
Federal Reserve Board notice of any purchase or redemption of
outstanding equity securities if the gross consideration for the
purchase or redemption, when combined with the net consideration
paid for all such purchases or redemptions during the preceding
12 months, is equal to 10% or more of the Company's consolidated
net worth. The Federal Reserve Board may disapprove such a
purchase or redemption if it determines that the proposal would
violate any law, regulation, Federal Reserve Board order,
directive, or any condition imposed by, or written agreement
with, the Federal Reserve Board. The requirement to receive
prior Federal Reserve Board approval for such purchases or
redemption does not apply to bank holding companies that are
"well-capitalized," received one of the two highest examination
ratings at their last examination and are not the subject of any
unresolved supervisory issues.
CAPITAL REQUIREMENTS. The regulations of the Federal
Reserve Board and the FDIC require bank holding companies and
state-chartered banks that are not members of the Federal
Reserve System to maintain a minimum leverage capital
requirement consisting of a ratio of Tier 1 capital to total
assets of 3%. Although setting a minimum 3% leverage ratio, the
capital regulations state that only the strongest bank holding
companies and banks, with composite examination ratings of 1
under the rating system used by the federal bank regulators,
would be permitted to operate at or near such minimum level of
capital. For all but the most highly rated institutions meeting
the conditions set forth above, the minimum leverage capital
ratio is 3% plus an additional "cushion" amount of at least 100
to 200 basis points. Any bank or bank holding company
experiencing or anticipating significant growth would be
expected to maintain capital well above the minimum levels. In
addition, the Federal Reserve Board has indicated that whenever
appropriate, and in particular when a bank holding company is
undertaking expansion, seeking to engage in new activities or
otherwise facing unusual or abnormal rights, it will consider,
on a case-by-case basis, the level of an organization's ratio of
tangible Tier 1 capital (after deducting all intangibles) to
total assets in making an overall assessment of capital. Tier 1
capital is the sum of common stockholders' equity, noncumulative
perpetual preferred stock (including any related surplus) and
minority interests in consolidated subsidiaries, minus all
intangible assets (other than certain purchased mortgage
servicing rights and purchased credit card receivables), minus
identified losses and minus investments in certain subsidiaries.
As a SAIF-insured, state-chartered bank, the Bank must also
deduct from Tier 1 capital an amount equal to its investments
in, and extensions of credit to, subsidiaries engaged in
activities that are not permissible to national banks, other
than debt and equity investments in subsidiaries engaged in
activities undertaken as agent for customers or in mortgage
banking activities or in subsidiary depository institutions or
their holding companies.
The risk-based capital rules of the Federal Reserve Board
and the FDIC require bank holding companies and state non-member
banks to maintain minimum regulatory capital levels based upon a
weighting of their assets and off-balance sheet obligations
according to risk. The risk-based capital rules have two basic
components: a core capital (Tier 1) requirement and a
supplementary capital (Tier 2) requirement. Core capital
consists primarily of common stockholders' equity, certain
perpetual preferred stock (which must be noncumulative with
respect to banks), and minority interests in the equity accounts
of consolidated subsidiaries; less all intangible assets, except
for certain purchased mortgage servicing rights and purchased
credit card relationships. Supplementary capital elements
include, subject to certain limitations, the allowance for
losses on loans and leases; perpetual preferred stock that does
not qualify as Tier 1 capital and long-term preferred stock with
an original maturity of at least 20 years from issuance; hybrid
capital
17
<PAGE>
<PAGE>
instruments, including perpetual debt and mandatory convertible
securities; and subordinated debt and intermediate-term
preferred stock.
The risk-based capital regulations assign balance sheet
assets and credit equivalent amounts of off-balance sheet
obligations to one of four broad risk categories based
principally on the degree of credit risk associated with the
obligor. The assets and off-balance sheet items in the four
risk categories are weighted at 0%, 20%, 50% and 100%. These
computations result in the total risk-weighted assets.
The risk-based capital regulations require all banks and
bank holding companies to maintain a minimum ratio of total
capital to total risk-weighted assets of 8%, with at least 4% as
core capital. For the purpose of calculating these ratios: (i)
supplementary capital will be limited to no more than 100% of
core capital; and (ii) the aggregate amount of certain types of
supplementary capital will be limited. In addition, the risk-
based capital regulations limit the allowance for loan losses
includable as capital to 1.25% of total risk-weighted assets.
The federal bank regulatory agencies, including the
Federal Reserve Board and the FDIC, have revised their risk-
based capital requirements to ensure that such requirements
provide for explicit consideration by commercial banks of
interest rate risk. Under these requirements, a bank's interest
rate risk exposure is quantified using either the measurement
system set forth in the rule or the bank's internal model for
measuring such exposure, if such model is determined to be
adequate by the bank's examiner. If the dollar amount of a
bank's interest rate risk exposure, as measured under either
measurement system, exceeds 1% of the bank's total assets, the
bank is required to hold additional capital equal to the dollar
amount of the excess. Management of the Bank does not believe
that this interest rate risk component will have an adverse
effect on the Bank's capital.
Under North Carolina law, savings banks must maintain a
net worth of not less than 5% of assets. In computing its
compliance with this requirement, the savings bank must deduct
intangible assets from both net worth and assets.
The Bank was in compliance with both the FDIC capital
requirements and the North Carolina net worth requirement at
December 31, 1999.
LIQUIDITY. North Carolina savings banks must maintain
cash and readily marketable investments in an amount not less
than 10% of the assets of the savings banks. The Bank was in
compliance with this requirement at December 31, 1999.
PROMPT CORRECTIVE REGULATORY ACTION. The federal banking
regulators are required under applicable law to take prompt
corrective action if an insured depository institution fails to
satisfy certain minimum capital requirements including a
leverage limit, a risk-based capital requirement, and any other
measure of capital deemed appropriate by the federal banking
regulators for measuring the capital adequacy of an insured
depository institution. All institutions, regardless of their
capital levels, are restricted from making any capital
distribution or paying any management fees that would cause the
institution to fail to satisfy the minimum levels for any of its
capital requirements. An institution that fails to meet the
minimum level for any relevant capital measure (an
"undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within
45 days; (iii) subject to asset growth limits; and (iv) required
to obtain prior regulatory approval for acquisitions, branching
and new lines of business. A significantly undercapitalized
institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader
application of restrictions on transactions with affiliates,
limitations on interest rates paid on deposits, asset growth and
other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company
controlling the institution could also be required to divest the
institution or the institution could be required to divest
subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or
increases in compensation without prior approval and the
institution is prohibited from making payments of principal or
interest on
18
<PAGE>
<PAGE>
its subordinated debt. If an institution's ratio of
tangible capital to total assets falls below a level established
by the appropriate federal banking regulator, which may not be
less than 2% nor more than 65% of the minimum tangible capital
level otherwise required (the "critical capital level"), the
institution will be subject to conservatorship or receivership
within 90 days unless periodic determinations are made that
forbearance from such action would better protect the deposit
insurance fund.
The federal banking regulators measure a depository
institution's capital adequacy on the basis of the institution's
total risk-based capital ratio (the ratio of its qualifying
total capital to risk-weighted assets), Tier 1 risk-based
capital ratio (the ratio of its Tier 1 capital to risk-weighted
assets) and leverage ratio (the ratio of its Tier 1 capital to
adjusted total assets). Under the regulations, a savings bank
that is not subject to an order or written directive to meet or
maintain a specific capital level will be deemed "well
capitalized" if it also has: (i) a total risk-based capital
ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio
of 6.0% or greater; and (iii) a leverage ratio of 5.0% or
greater. An "adequately capitalized" institution is an
institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of
8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0%
or greater; and (iii) a leverage ratio of 4.0% or greater (or
3.0% or greater if the institution has a composite 1 CAMELS
rating). An "undercapitalized institution" is an institution
that has (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or
(iii) a leverage ratio of less than 4.0% (or 3.0% if the
institution has a composite 1 CAMELS rating). A "significantly
undercapitalized" institution is defined as an institution that
has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or
(iii) a leverage ratio of less than 3.0%. A "critically
undercapitalized" institution is defined as an institution that
has a ratio of "tangible equity" to total assets of less than
2.0%. For purposes of the prompt corrective action regulations,
tangible equity is equivalent to Tier 1 capital plus outstanding
cumulative perpetual preferred stock (and related surplus) minus
all intangible assets other than certain purchased mortgage
servicing rights. The FDIC may reclassify a well capitalized
institution as adequately capitalized and may require an
adequately capitalized or undercapitalized institution to comply
with the supervisory actions applicable to institutions in the
next lower capital category if the FDIC determines, after notice
and an opportunity for a hearing, that the savings institution
is in an unsafe or unsound condition or that the institution has
received and not corrected a less-than-satisfactory rating for
any CAMELSrating category. The Bank is currently classified as
"well capitalized" under these regulations.
COMMUNITY REINVESTMENT ACT. The Bank, like other
financial institutions, is subject to the Community Reinvestment
Act ("CRA"). The purpose of the CRA is to encourage financial
institutions to help meet the credit needs of their entire
communities, including the needs of low-and moderate-income
neighborhoods. During the Bank's last compliance examination,
the Bank received a "satisfactory" rating with respect to CRA
compliance. The Bank's rating with respect to CRA compliance
would be a factor to be considered by the Federal Reserve Board
and the FDIC in considering applications submitted by the Bank
to acquire branches or to acquire or combine with other
financial institutions and take other actions and, if such
rating was less than "satisfactory," could result in the denial
of such applications.
DIVIDEND LIMITATIONS. The Bank may not pay dividends on
its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation
account established for the benefit of certain depositors of the
Bank at the time of its conversion to stock form.
Earnings of the Bank appropriated to bad debt reserves and
deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders
without payment of taxes at the then current tax rate by the
Bank on the amount of earnings removed from the reserves for
such distributions. See "Taxation." The Bank intends to make
full use of this favorable tax treatment and does not
contemplate use of any earnings in a manner which would limit
the Bank's bad debt deduction or create federal tax liabilities.
Under applicable regulations, the Bank is prohibited from
making any capital distributions if after making the
distribution, the Bank would have: (i) a total risk-based
capital ratio of less than 8.0%; (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; or (iii) a leverage ratio of
less than 4.0%.
19
<PAGE>
<PAGE>
DEPOSIT INSURANCE. The Bank is required to pay
assessments based on a percentage of its insured deposits to the
FDIC for insurance of its deposits by the SAIF. Under the
FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on
the assessment risk classification assigned to the institution
by the FDIC, which is determined by the institution's capital
level and supervisory evaluations. Based on the data reported
to regulators for the date closest to the last day of the
seventh month preceding the semi-annual assessment period,
institutions are assigned to one of three capital groups -- well
capitalized, adequately capitalized or undercapitalized -- using
the same percentage criteria as in the prompt corrective action
regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of
three subgroups on the basis of supervisory evaluations by the
institution's primary supervisory authority and such other
information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the
deposit insurance fund. The Bank is currently classified as
well capitalized under this assessment system.
RESTRICTIONS ON CERTAIN ACTIVITIES. Under applicable law,
state-chartered banks with deposits insured by the FDIC are
generally prohibited from acquiring or retaining any equity
investment of a type or in an amount that is not permissible for
a national bank. The foregoing limitation, however, does not
prohibit FDIC-insured state banks from acquiring or retaining an
equity investment in a subsidiary in which the bank is a
majority owner. State-chartered banks are also prohibited from
engaging as principal in any type of activity that is not
permissible for a national bank and subsidiaries of state-
chartered, FDIC-insured state banks have been prohibited from
engaging as principal in any type of activity that is not
permissible for a subsidiary of a national bank unless in either
case the FDIC determines that the activity would pose no
significant risk to the appropriate deposit insurance fund and
the bank is, and continues to be, in compliance with applicable
capital standards.
The FDIC has adopted regulations to clarify the foregoing
restrictions on activities of FDIC-insured state-chartered banks
and their subsidiaries. Under the regulations, the term
activity refers to the authorized conduct of business by an
insured state bank and includes acquiring or retaining any
investment other than an equity investment. An activity
permissible for a national bank includes any activity expressly
authorized for national banks by statute or recognized as
permissible in regulations, official circulars or bulletins or
in any order or written interpretation issued by the Office of
the Comptroller of the Currency ("OCC"). In its regulations,
the FDIC indicates that it will not permit state banks to
directly engage in commercial ventures or directly or indirectly
engage in any insurance underwriting activity other than to the
extent such activities are permissible for a national bank or a
national bank subsidiary or except for certain other limited
forms of insurance underwriting permitted under the regulations.
Under the regulations, the FDIC permits state banks that meet
applicable minimum capital requirements to engage as principal
in certain activities that are not permissible to national banks
including guaranteeing obligations of others, activities which
the Federal Reserve Board has found by regulation or order to be
closely related to banking and certain securities activities
conducted through subsidiaries.
Subject to limitation by the Administrator, North
Carolina-chartered savings banks may make any loan or investment
or engage in any activity which is permitted to federally
chartered institutions. However, a North Carolina-chartered
savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans. In
addition to such lending authority, North Carolina-chartered
savings banks are authorized to invest funds, in excess of loan
demand, in certain statutorily permitted investments, including
but not limited to (i) obligations of the United States, or
those guaranteed by it; (ii) obligations of the State of North
Carolina; (iii) bank demand or time deposits; (iv) stock or
obligations of the federal deposit insurance fund or a FHLB; (v)
savings accounts of any savings institution as approved by the
board of directors; and (vi) stock or obligations of any agency
of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal
business is to make education loans.
SAFETY AND SOUNDNESS STANDARDS. The federal banking
regulatory agencies, including the FDIC, have adopted standards
for the safe and sound operation of financial institutions, as
mandated by the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). These regulations require
insured depository institutions to maintain internal controls
and information systems and internal audit systems that are
appropriate for the size, nature
20
<PAGE>
<PAGE>
and scope of the institution's business. The rules also require
certain basic standards to be observed in loan documentation,
credit underwriting, interest rate risk exposure, and asset
growth. Depository institutions are also required to maintain
safeguards to prevent the payment of compensation, fees and
benefits that are excessive or that could lead to material
financial loss, and to take into account factors such as
comparable compensation practices at comparable institutions.
The regulations also require a depository institution to
maintain a ratio of classified assets to total capital and
ineligible allowances that is no greater than 1.0, and require
that depository institutions have minimum earnings sufficient to
absorb losses without impairing capital. The FDIC may require
institutions to file safety and soundness plans to cure any
deficiency. The FDIC may issue orders directing an institution
to correct a deficiency or to take or refrain from taking
actions prohibited by Section 39 of FDICIA, and may assess civil
money penalties or take other enforcement action if such an
order is violated.
TRANSACTIONS WITH AFFILIATES. Transactions between
savings banks and any affiliate are governed by Sections 23A and
23B of the Federal Reserve Act. An affiliate of a savings bank
is any company or entity which controls, is controlled by or is
under common control with the savings bank. Generally, Sections
23A and 23B (i) limit the extent to which the savings bank or
its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's
capital stock and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20%
of such capital stock and surplus and (ii) require that all such
transactions be on terms substantially the same, or at least as
favorable, to the institution or subsidiary as those provided to
a non-affiliate. A bank holding company and its subsidiaries
are considered "affiliates" of the bank under Section 23A and
23B. The term "covered transaction" includes the making of
loans, purchase of assets, issuance of a guarantee and similar
other types of transactions. In addition to the restrictions
imposed by Sections 23A and 23B, the Bank may not (i) lend or
otherwise extend credit to an affiliate, except for any
affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the
Bank.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of
the FHLB System, which consists of 12 district FHLBs subject to
supervision and regulation by the Federal Housing Finance Board
("FHFB"). The FHLBs provide a central credit facility primarily
for member institutions. As a member of the FHLB of Atlanta,
the Bank is required to acquire and hold shares of capital stock
in the FHLB of Atlanta in an amount at least equal to 1% of the
aggregate unpaid principal of its home mortgage loans, home
purchase contracts, and similar obligations at the beginning of
each year, or 1/20 of its advances (borrowings) from the FHLB of
Atlanta, whichever is greater. Cooperative Bank was in
compliance with this requirement with investment in FHLB of
Atlanta stock at December 31, 1999 of $3.8 million. The FHLB of
Atlanta serves as a reserve or central bank for its member
institutions within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations
of the FHLB System. It makes advances to members in accordance
with policies and procedures established by the FHFB and the
Board of Directors of the FHLB of Atlanta. Long term advances
may only be made for the purpose of providing funds for
residential housing finance.
FEDERAL RESERVE BOARD REGULATION. Pursuant to regulations
of the Federal Reserve Board, all FDIC-insured depository
institutions must maintain average daily reserves against their
transaction accounts. Because required reserves must be
maintained in the form of vault cash or in a noninterest bearing
account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's
interest-earning assets. At December 31, 1999, the Bank met its
reserve requirements.
UNIFORM LENDING STANDARDS. Under FDIC regulations banks
must adopt and maintain written policies that establish
appropriate limits and standards for extensions of credit that
are secured by liens or interests in real estate or are made for
the purpose of financing permanent improvements to real estate.
These policies must establish loan portfolio diversification
standards, prudent underwriting standards, including loan-to-
value limits, that are clear and measurable, loan administration
procedures and documentation, approval and reporting
requirements. The real estate
21
<PAGE>
<PAGE>
lending policies must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies (the "Interagency
Guidelines") that have been adopted by the federal bank
regulators.
The Interagency Guidelines, among other things, call upon
depository institutions to establish internal loan-to-value
limits for real estate loans that do not exceed the following
supervisory limits: (i) for loans secured by raw land, the
supervisory loan-to-value limit is 65% of the value of the
collateral; (ii) for land development loans (i.e., loans for the
purpose of improving unimproved property prior to the erection
of structures), the supervisory limit is 75%; (iii) for loans
for the construction of commercial, multifamily or other
nonresidential property, the supervisory limit is 80%; (iv) for
loans for the construction of one-to four-family properties, the
supervisory limit is 85%; and (v) for loans secured by other
improved property (e.g., farmland, completed commercial property
and other income-producing property including non-owner-occupied
one-to four-family property), the limit is 85%. Although no
supervisory loan-to-value limit has been established for owner-
occupied, one-to four-family and home equity loans, the
Interagency Guidelines state that for any such loan with a loan-
to-value ratio that equals or exceeds 90% at origination, an
institution should require appropriate credit enhancement in the
form of either mortgage insurance or readily marketable
collateral.
The Interagency Guidelines state that it may be
appropriate in individual cases to originate or purchase loans
with loan-to-value ratios in excess of the supervisory loan-to-
value limits, based on the support provided by other credit
factors. The aggregate amount of loans in excess of the
supervisory loan-to-value limits, however, should not exceed
100% of total capital and the total of such loans secured by
commercial, agricultural, multifamily and other non-one-to four-
family residential properties should not exceed 30% of total
capital. The supervisory loan-to-value limits do not apply to
certain categories of loans including loans insured or
guaranteed by the U.S. government and its agencies or by
financially capable state, local or municipal governments or
agencies, loans backed by the full faith and credit of a state
government, loans that are to be sold promptly after origination
without recourse to a financially responsible party, loans that
are renewed, refinanced or restructured without the advancement
of new funds, loans that are renewed, refinanced or restructured
in connection with a workout, loans to facilitate sales of real
estate acquired by the institution in the ordinary course of
collecting a debt previously contracted and loans where the real
estate is not the primary collateral.
STATE LAW AND REGULATION. North Carolina law contains
comprehensive provisions for the regulation of a savings bank
business in the State of North Carolina, including the manner of
chartering a savings bank, capital requirements, the composition
and qualifications of boards of directors, the number and manner
of selection of officers, and record keeping requirements.
The Bank derives its investment power from these laws and
regulations and must structure its lending policies and
procedures to comply with the various applicable provisions.
Likewise, the investments by the Bank are regulated, including
investments in certain types of specific properties. The manner
of establishing savings accounts and evidencing the same is
prescribed, as are the obligations of the Bank with respect to
withdrawals from savings accounts. As a North Carolina savings
bank, Cooperative Bank is also permitted to make any investment
permitted to a federal savings association.
North Carolina savings banks may conduct operations
through branch offices located in the State of North Carolina.
The North Carolina Savings Banks Commission of the Department of
Commerce conducts hearings on all branch applications, and any
interested person may present evidence and argument.
Any plan adopted by the directors of a savings bank under
which the savings bank would reorganize or merge or consolidate
with another savings bank must be approved by the Administrator.
The plan must also be approved by the members or stockholders
who are entitled to vote, at an annual or special meeting.
The Administrator is required to conduct a periodic
examination of each institution under his jurisdiction. The
examination provides directors with an independent assessment of
the Bank's operations and compliance with applicable
22
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<PAGE>
law, regulations and prudent operating policies. The
Administrator may make such examination jointly with examiners
of the FDIC.
TAXATION
The Bank is subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Code") in the same
general manner as other corporations.
Legislation that was effective for tax years beginning
after December 31, 1995 required savings institutions to
recapture into taxable income over a six taxable year period the
portion of the tax loan reserve that exceeds the pre-1988 tax
loan loss reserve. The Bank will no longer be allowed to use
the reserve method for tax loan loss provisions, but would be
allowed to use the experience method of accounting for bad debts
used by commercial banks under Code section 585. There will be
no future effect on net income from the recapture because the
taxes on these bad debt reserves has already been accrued as a
deferred tax liability.
The Bank's federal income tax returns were most recently
audited in 1970.
For additional information regarding federal and state
taxes, see Note 12 of Notes to Consolidated Financial Statements
in the Annual Report.
STATE INCOME TAXATION
Under North Carolina law, the Bank is subject to an annual
corporate income tax of 7.00% of its federal taxable income as
computed under the Code, subject to certain prescribed
adjustments. The North Carolina corporate income tax will be
reduced to 6.9% for years beginning on or after January 1, 2000.
In addition to the state corporate income tax, the Bank is
subject to an annual state franchise tax, which is imposed at a
rate of .15% applied to the greatest of the Bank's (i) capital
stock, surplus and undivided profits, (ii) investment in
tangible property in North Carolina or (iii) appraised valuation
of property in North Carolina. The filing of consolidated
returns is not permitted under North Carolina law.
23
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ITEM 2. PROPERTIES
- -------------------
The following table sets forth the location of the Bank's
offices, as well as certain additional information relating to
these offices as of December 31, 1999.
<TABLE>
<CAPTION>
Year Net Book Square
Location Opened Value Footage Title Deposits
- -------- ------ --------- ------- ----- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C>
201 Market St., Wilmington, NC 1959 $ 2,122 27,976 Owned $ 35,290
24 N. Second St., Wilmington, NC (1) 1980 -- 4,176 Owned(1) --
827 New Bridge St., Jacksonville, NC 1954 211 4,213 Owned 18,154
205 E. Main St., Wallace, NC 1954 171 2,880 Owned 44,358
922 E. Arendell St., Morehead City, NC 1958 72 1,984 Owned 17,984
232 W. Broad Street, Elizabethtown, NC 1961 988 3,400 Owned 23,451
4 E. Fifth St., Tabor City, NC 1980 194 3,880 Owned 25,658
3605 Oleander Dr., Wilmington, NC 1970 77 1,296 Owned(2) 25,333
2405 S. College Rd., Wilmington, NC 1974 231 2,000 Owned 28,792
1501 Live Oak St., Beaufort, NC 1975 37 1,685 Owned(3) 10,627
400 Western Blvd., Jacksonville, NC 1982 450 2,050 Owned 13,994
132 W. 2nd St., Washington, NC 1983 117 7,298 Owned(4) 19,162
Railroad St., Robersonville, NC 1983 69 2,500 Owned(4) 7,698
2007 Croatan Ave., Kill Devil Hills, NC 1983 134 2,337 Owned(4) 7,333
1296 John Small Ave., Washington, NC 1987 225 1,920 Owned 8,675
Corner By-pass, Business 264,
Belhaven, NC 1989 379 1,482 Owned 9,450
821 Ocean Trail, Corolla, NC 1993 14 565 Leased(5) --
7028 Market Street, Wilmington, NC 1995 754 1,925 Owned 8,875
------- --------
$ 6,245 $304,834
======= ========
<FN>
______________
(1) Operations center for the Bank. Net book value included in 201 Market Street.
(2) Building is owned, but land is leased. Current lease terminates June 2000.
(3) Building is owned, but land is leased. Current lease terminates December 31, 2004.
(4) Acquired through merger.
(5) Loan production office. Month to month rental.
</FN>
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended December 31,
1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- ----------------------------------------------------------
The information contained under the section captioned
"Corporate Information" in the Annual Report is incorporated by
reference.
24
<PAGE>
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information required by this item is incorporated
herein by reference to the tables captioned "Selected Financial
and Other Data" in the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ----------------------------------------------------------
The information contained in the section captioned
"Management's Discussion & Analysis" in the Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements contained in the Annual Report
which are listed under Item 14 herein are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------
None, other than as previously reported.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
(a) Directors of the Registrant
The information contained under the section captioned
"Proposal I -- Election of Directors" in the Proxy Statement for
the 2000 Annual Meeting of Stockholders (the "Proxy Statement")
is incorporated herein by reference.
(b) Principal Officers of the Bank
The information contained under the caption "Executive
Officers" under Part I of this Form 10-K is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the section captioned
"Proposal I -- Election of Directors" in the Proxy Statement is
incorporated herein by reference.
25
<PAGE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
- -------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated
herein by reference to the sections captioned
"Voting Securities and Principal Holders Thereof" in
the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated
herein by reference to the sections captioned
"Proposal I -- Election of Directors" in the Proxy
Statement.
(c) Changes in Control
Management of the Bank knows of no arrangements,
including any pledge of any person of securities of
the Bank, the operation of which may at a subsequent
date result in a change in control of the Bank.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated
herein by reference to the sections captioned "Proposal I --
Election of Directors" and "Voting Securities and Principal
Holders Thereof" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
- --------------------------------------------------------------
(a) Contents. The following financial statements are
--------
filed as part of this Annual Report on Form 10-K.
(1) Consolidated Financial Statements*
1. Report of Independent Accountants
2. Consolidated Statements of Financial Condition
as of December 31, 1999 and 1998
3. Consolidated Statements of Income for the Years
Ended December 31, 1999, 1998 and 1997
4. Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1999, 1998 and
1997
5. Consolidated Statements of Cash Flows for the
Year Ended December 31, 1999, 1998, and 1997
6. Notes to Consolidated Financial Statements
________
* Incorporated by reference to the Annual Report,
attached hereto as Exhibit 13.
(2) Financial Statement Schedules (All financial
statement schedules have been omitted as the
required information is either inapplicable or
included in the Consolidated Financial
Statements or related notes.)
(b) On October 21, 1999, the Company filed a Current
Report on Form 8-K announcing that it was commencing an open-
market stock repurchase program.
26
<PAGE>
<PAGE>
(c) The following exhibits are either filed as part of
this report or are incorporated herein by reference:
No. Description Page
---- ----------- ----
3.1 Articles of Incorporation *
3.2 Bylaws *
10.1 Cooperative Bank for Savings, Inc. 1990 Stock *
Option Plan
10.2 Employment Agreement with Frederick Willetts,
III *
10.3 Termination Agreements with Daniel W. Eller, *
Edward E. Maready, Eric R. Gray, Todd L.
Sammons and O.C. Burrell, Jr.
10.4 Amendments to Severance Agreements with *
Daniel W. Eller, Edward E. Maready,
Eric R. Gray, and Todd L.Sammons
10.5 Indemnity Agreement with Directors *
and Executive Officers
10.6 Severance Agreement with O. C. Burrell **
11 Statement re: computation of per share
earnings - Reference is made to the Company's
Consolidated Statements of Operations
attached hereto as Exhibit 13, which are
incorporated herein by reference
13 Annual Report to Stockholders for the
year ended December 31, 1999
21 Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
________
* Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (Reg. No. 33-79206).
** Incorporated by reference to the Registrant's Form 10-K for
the fiscal year ended December 31, 1997.
27
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Cooperative Bankshares, Inc.
Date: March 16, 2000 By:/s/ Frederick Willetts, III
-------------------------------
Frederick Willetts, III
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Frederick Willetts, III Date: March 16, 2000
-------------------------------
Frederick Willetts, III
President, Chief Executive Officer
and Director
(Principal Executive Officer
and Director)
By: /s/ Edward E. Maready Date: March 16, 2000
-------------------------------
Edward E. Maready
Senior Vice President and Treasurer
(Principal Financial and
Accounting Officer)
By: /s/ James D. Hundley, M.D. Date: March 16, 2000
-------------------------------
James D. Hundley, M.D.
(Director)
By: /s/ O. Richard Wright, Jr. Date: March 16, 2000
-------------------------------
O. Richard Wright, Jr.
(Director)
By: /s/ Paul G. Burton Date: March 16, 2000
-------------------------------
Paul G. Burton
(Director)
By: /s/ H. Thompson King, III Date: March 16, 2000
-------------------------------
H. Thompson King, III
(Director)
By: /s/ F. Peter Fensel, Jr. Date: March 16, 2000
-------------------------------
F. Peter Fensel, Jr.
(Director)
By: /s/ R. Allen Rippy Date: March 16, 2000
-------------------------------
R. Allen Rippy
(Director)
<PAGE>
<PAGE>
INDEX TO EXHIBITS
Exhibit Description Page
- ------- ----------- ----
3.1 Articles of Incorporation *
3.2 Bylaws *
10.1 Cooperative Bank for Savings, Inc. 1990
Stock Option Plan *
10.2 Employment Agreement with Frederick
Willetts, III *
10.3 Termination Agreements with Daniel
W. Eller, Edward E. Maready, Eric R.
Gray, Todd L. Sammons and O.C.
Burrell, Jr. *
10.4 Amendments to Severance Agreements
with Daniel W. Eller, Edward E. Maready,
Eric R. Gray and Todd L. Sammons *
10.5 Indemnity Agreement with Directors
and Executive Officers *
10.6 Severance Agreement with O.C. Burrell **
11 Statement re: computation of per share
earnings - Reference is made to the
Company's Consolidated Statements of
Operations attached hereto as Exhibit 13,
which are incorporated herein by reference
13 Annual Report to Stockholders for the year
ended December 31, 1999
21 Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
___________
* Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (Reg. No. 33-79206).
** Incorporated by reference to the Registrant's Form 10-K for
the fiscal year ended December 31, 1997.
<PAGE>
COOPERATIVE
BANKSHARES, INC.
Full-Service Community Banking for the Next Century
Annual Report
December 31, 1999
<PAGE>
<PAGE>
COOPERATIVE BANKSHARES, INC.
________________________________________________________________
PROFILE Cooperative Bankshares, Inc., is the parent company
of Cooperative Bank For Savings, Inc., SSB. The
Bank is chartered under the laws of the state of
North Carolina to engage in general banking
business. Cooperative offers a wide range of retail
and commercial banking services including numerous
deposit services, banking cards and alternative
investment products. These funds are used for the
extension of credit through home loans, commercial
loans, consumer loans and other installment credit
such as home equity, auto, boat loans and check
reserve.
Chartered in 1898, Cooperative's headquarters is
located in Wilmington, North Carolina. Cooperative
operates 17 offices throughout the coastal and
inland communities of eastern North Carolina from
Corolla located on the Outer Banks of North Carolina
to Tabor City located on the South Carolina border.
The common stock of Cooperative Bankshares, Inc., is
traded on the NASDAQ National Market under the
symbol "COOP".
________________________________________________________________
MISSION It is the mission of Cooperative to provide the
maximum in safety and security for our depositors,
an equitable rate of return for our stockholders,
and excellent service for our customers. We do this
while operating in a fiscally sound and conservative
manner, with fair pricing of our products and
services, good working conditions, outstanding
training and opportunities for our staff, along with
a high level of corporate citizenship.
________________________________________________________________
Table Of
Contents Selected Financial and Other Data..................2
President's Message................................3
Management's Discussion & Analysis..............5-14
Report of Independent Accountants.................15
Consolidated Statements of Financial Condition....16
Consolidated Statements of Operations.............17
Consolidated Statements of Comprehensive Income...18
Consolidated Statements of Stockholders' Equity...18
Consolidated Statements of Cash Flows.............19
Notes to Consolidated Financial Statements.....20-38
Directors, Officers, and Office Locations.........39
Corporate Information.............................40
Capital Stock.....................................40
<PAGE>
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999 1998 1997 1996 1995
__________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Dollars in Thousands
Selected Financial Condition Data:
Assets. . . . . . . . . . . . . . . . . . . $410,146 $ 389,773 $369,121 $341,300 $311,843
Loans receivable, net . . . . . . . . . . . 334,744 321,324 286,692 263,313 234,008
Mortgage-backed and related securities. . . 6,564 10,551 12,856 28,825 30,907
Cash, securities and other investments. . . 58,043 45,882 61,944 40,942 35,540
Goodwill. . . . . . . . . . . . . . . . . . -- -- -- -- 3,602
Deposits. . . . . . . . . . . . . . . . . . 304,834 301,656 288,691 278,139 270,071
Borrowed funds. . . . . . . . . . . . . . . 75,106 55,109 50,226 35,435 10,089
Stockholders' equity. . . . . . . . . . . . $ 29,343 $ 31,613 $ 28,294 $ 25,470 $ 29,083
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995
__________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Dollars in Thousands
Selected Operations Data:
Interest income. . . . . . . . . . . . . . . $ 28,449 $ 28,411 $ 26,093 $ 22,793 $ 21,904
Interest expense . . . . . . . . . . . . . . 16,422 17,212 15,732 13,630 13,701
Net interest income. . . . . . . . . . . . . 12,027 11,199 10,361 9,163 8,203
Provision for loan losses. . . . . . . . . . 210 330 153 156 3
Non-interest income. . . . . . . . . . . . . 1,228 1,180 790 570 620
Non-interest expenses (1). . . . . . . . . . 8,885 8,275 7,370 12,251 7,121
Income (loss) before income taxes. . . . . . 4,160 3,774 3,628 (2,674) 1,699
Net income (loss). . . . . . . . . . . . . . 2,680 2,385 2,234 (3,250) 1,024
____________________________________________________________________________________________________________________
Selected Financial Ratios and Other Data:
Return on average assets. . . . . . . . . . 0.69% 0.62% 0.63% (1.01)% 0.32%
Return on average equity. . . . . . . . . . 8.88% 7.86% 8.26% (11.27)% 3.62%
Stockholders' equity to total assets . . . 7.15% 8.11% 7.67% 7.46% 9.33%
Non-performing assets to total assets . . . 0.35% 1.08% 0.08% 0.02% 0.25%
Allowance for loan losses to total loans. . 0.39% 0.35% 0.28% 0.29% 0.31%
Per Share Data (2)
Earnings (loss) per:
Common share . . . . . . . . . . . . . $ 0.95 $ 0.79 $ 0.75 $ (1.09) $ 0.34
Common share - assuming dilution. . . . $ 0.90 $ 0.74 $ 0.70 $ (1.09) $ 0.32
Tangible book value . . . . . . . . . . . . $ 10.92 $ 10.38 $ 9.48 $ 8.54 $ 8.54
Number of common shares outstanding . . . . 2,687,919 3,046,284 2,984,396 2,983,396 2,983,396
____________________________________________________________________________________________________________________
<FN>
(1) Includes one time special assessment for deposit insurance of $1.8 million and a charge-off of impaired
goodwill of $3.4 million for the year ended December 31, 1996.
(2) All per share amounts are adjusted for all stock dividends and splits.
</FN>
</TABLE>
2
<PAGE>
<PAGE>
PRESIDENT'S MESSAGE
The year 1999 was another good one for Cooperative
Bankshares, Inc. Despite three hurricanes during the third
quarter and the threat of Y2K computer problems, our company has
posted yet another good year. Net income for the year ended
December 31, 1999 rose 12.4% over the previous year to
$2,680,430 or $.90 per diluted share. Income for the year ended
December 31, 1998 was $2,385,235 or $.74 per diluted share.
Thus, per share earnings actually increased 22% from 1998 to
1999. Total assets at December 31, 1999, were $410.1 million.
Stockholders equity was $29.3 million, or $10.92 per share, and
represented 7.15% of assets. On March 25th, 1999 we announced
the completion of our first stock repurchase program of
approximately 150,000 shares, or 5% of our outstanding stock.
We also announced a new repurchase program for an additional 5%
of outstanding stock. This second stock repurchase program was
completed in the second quarter of 1999, thus reducing total
shares outstanding through the two stock repurchase programs by
302,000 shares. We are currently in our third repurchase
program and anticipate completion by mid year.
During the year 536 mortgage loans were originated totaling
$62,311,810. In addition, the Retail Banking Division
originated 839 commercial and consumer loans in the amount of
$87,641,698. Despite this high level of loan volume we continue
to adhere to strict underwriting criteria. At December 31,
1999, loans made by the Retail Banking Division comprised 35.4%
of our total loans as compared to 20.8% at December 31, 1998.
Continued growth in our banking operation impacts favorably our
net interest income as these loans generally carry a higher rate
of interest than one to four family mortgage loans.
The quality of our assets remains a top priority for the Bank.
As of December 31, 1999 non-performing loans and foreclosed real
estate owned stood at .35% of assets as compared to 1.08% of
assets at December 31, 1998. The allowance for loan losses has
been increased to 1,306,000, and while this is considered to be
adequate at the present time to cover any potential loan loss
exposure, the Bank is continuing to add to this allowance to
further protect our investment in loans.
During 1999, we installed new ATMs at our Long Leaf and Ogden
offices in Wilmington, as well as our Wallace and Jacksonville
offices, raising our total ATMs to six. Our Access 24 Phone
Banking System was installed during the third quarter and is
available for all customers seven days a week, 24 hours per day.
During September, Hurricane Floyd struck eastern North Carolina
changing lives and landscape for many years to come. None of
our offices sustained significant damage. Losses on loans due
to the hurricane were minimal. We have assisted in recovery
efforts with both people and resources and continue to lend our
support as the region recovers economically from this
devastation.
Cooperative entered the year 2000 with virtually no glitches in
our computer systems. The hard work of our Y2K Committee and
our Information Services staff, as well as hours of testing by
our employees, paid off as we passed through midnight and into
the new millennium with no problems.
3
<PAGE>
<PAGE>
PRESIDENT'S MESSAGE
The year 1999 was another busy one here at Cooperative. We
completed two stock repurchase programs and initiated a third in
order to increase the value of the remaining shares of stock in
an effort to enhance the return to you, the stockholders. We
installed four new ATMs and our Access 24 Phone Bank System in
order to increase customer service and continue our program of
increasing retail and commercial banking services to our
existing as well as new banking customers. We also survived the
hurricanes and the millennium bug. As we enter the new century,
I look forward to our future with a great deal of optimism.
Your continued support and confidence is appreciated.
Sincerely,
/s/ Frederick Willetts, III
Frederick Willetts, III
President
4
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
GENERAL
Cooperative Bankshares, Inc. (the "Company") is a
registered bank holding company incorporated in North Carolina
in 1994. The Company was formed for the purpose of serving as
the holding company of Cooperative Bank For Savings, Inc., SSB,
("Cooperative Bank" or the "Bank") a North Carolina chartered
stock savings bank. The Company's primary activities consist of
holding the stock of Cooperative Bank and operating the business
of the Bank. Accordingly, the information set forth in this
report, including financial statements and related data, relates
primarily to Cooperative Bank.
Cooperative Bank is chartered under the laws of the state
of North Carolina to engage in general banking business. The
Bank offers a wide range of retail banking services including
deposit services, banking cards and alternative investment
products. These funds are used for the extension of credit
through home loans, commercial loans, consumer loans and other
installment credit such as home equity, auto and boat loans and
check reserve.
The Company conducts its operations through its main
office in Wilmington, North Carolina and 16 offices throughout
eastern North Carolina. The Company considers its primary
market for savings and lending activities to be the communities
of eastern North Carolina extending from the Virginia to the
South Carolina borders.
The following management's discussion and analysis is
presented to assist in understanding the Company's financial
condition and results of operations. This discussion should be
read in conjunction with the consolidated financial statements
and accompanying notes presented in this report.
MANAGEMENT STRATEGY
It is the mission of the Company to provide the maximum in
safety and security for our depositors, an equitable rate of
return for our stockholders, excellent service for our
customers, and to do so while operating in a fiscally sound and
conservative manner, with fair pricing of our products and
services, good working conditions, outstanding training and
opportunities for our staff, along with a high level of
corporate citizenship.
Cooperative Bank's lending activities have concentrated on
the origination of conventional mortgage loans for the purpose
of constructing, financing or refinancing residential
properties. As of December 31, 1999, $303.2 million, or 83.1%,
of the Bank's loan portfolio consisted of loans secured by
residential properties. To a lesser extent, the Bank originates
nonresidential real estate loans, home equity line of credit
loans, secured and unsecured consumer and business loans. While
continuing to place primary emphasis on residential mortgage
loans, the Bank is taking a more aggressive position in pursuing
business lending, and nonresidential real estate lending
involving loans secured by small commercial properties with
balances generally ranging from $100,000 to $1,000,000. The
Bank's primary emphasis is to originate adjustable rate loans
with the fixed rate loan as an option. As of December 31, 1999,
adjustable rate loans totaled 63.3%, and fixed rate loans
totaled 36.7% of the Bank's total loan portfolio.
INTEREST RATE SENSITIVITY ANALYSIS
Interest rate sensitivity refers to the change in interest
spread resulting from changes in interest rates. To the extent
that interest income and interest expense do not respond equally
to changes in interest rates, or that all rates do not change
uniformly, earnings will be affected. Interest rate
sensitivity, at a point in time, can be analyzed using a static
gap analysis that measures the match in balances subject to
repricing between interest-earning assets and interest-bearing
liabilities. Gap is considered positive when the amount of
interest rate sensitive assets exceed the amount of interest
rate sensitive liabilities.
5
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
Gap is considered negative when the amount of interest rate
sensitive liabilities exceed the amount of interest rate
sensitive assets. At December 31, 1999, Cooperative had a
one-year negative gap position of 9.5%. During a period of
rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period
of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would
tend to adversely affect net interest income. It is important
to note that certain shortcomings are inherent in static gap
analysis. Although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in
different degrees to changes in market interest rates. For
example, a large part of the Company's adjustable-rate mortgage
loans are indexed to the National Monthly Median Cost of Funds
to SAIF-insured institutions. This index is considered a
lagging index that may lag behind changes in market rates. The
one-year or less interest-bearing liabilities also include
checking, savings, and money market deposit accounts.
Experience has shown that the Company sees relatively modest
repricing of these transaction accounts. Management takes this
into consideration in determining acceptable levels of interest
rate risk.
The following table indicates the time periods in which
interest-earning assets and interest-bearing liabilities will
mature or reprice in accordance with their contractual terms.
The table assumes prepayments and scheduled principal
amortization of fixed-rate loans and mortgage-backed securities,
and assumes that adjustable rate loans will reprice at
contractual repricing intervals.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS Over One Over Five
One Year Through Through Over Ten
December 31, 1999 or Less Five Years Ten Years Years Total
____________________________________________________________________________________
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities and other
interest-earning assets. . . . $ 23,219 $ 18,755 $ 10,000 $ -- $ 51,974
Mortgage-backed and related
securities . . . . . . . . . . 3,799 1,559 863 343 6,564
Loan portfolio . . . . . . . . . 189,796 108,267 22,782 13,899 334,744
-----------------------------------------------
Total. . . . . . . . . . . $216,814 $128,581 $ 33,645 $14,242 $393,282
===============================================
Interest-bearing liabilities:
Deposits (1) . . . . . . . . . $215,930 $ 78,378 $ 10,526 $ -- $304,834
Borrowed funds . . . . . . . . 40,002 35,012 18 74 75,106
-----------------------------------------------
Total. . . . . . . . . . . $255,932 $113,390 $ 10,544 $ 74 $379,940
===============================================
Interest rate sensitivity gap. . . $(39,118) $ 15,191 $ 23,101 $14,168 $ 13,342
===============================================
Cumulative interest rate
sensitivity gap. . . . . . . . . $(39,118) $(23,927) $ (826) $13,342
======================================
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities. . . . . . . 84.7% 93.5% 99.8% 103.5%
======================================
Ratio of cumulative gap to
total assets . . . . . . . . . . (9.5%) (5.8%) (0.2%) 3.3%
======================================
<FN>
___________
(1) Includes noninterest bearing checking accounts of $9,610,000
</FN>
</TABLE>
6
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
MARKET RISK
The Company's primary market risk is interest rate risk.
Interest rate risk is the result of differing maturities or
repricing intervals of interest earning assets and interest
bearing liabilities and the fact that rates on these financial
instruments do not change uniformly. These conditions may
impact the earnings generated by the Company's interest bearing
assets or the cost of its interest bearing liabilities, thus
directly impacting the Company's overall earnings. The
Company's management actively monitors and manages interest rate
risk. One way this is accomplished is through the development
of and adherence to the Company's asset/liability policy. This
policy sets forth management's strategy for matching the risk
characteristics of the Company's interest bearing assets and
liabilities so as to mitigate the effect of changes in the rate
environment.
One way to measure the Company's potential exposure to
interest rate risk is to estimate the effect of a change in
rates on the Company's Economic Value of Equity ("EVE"). The
following table sets forth information relating to the Company's
EVE and the estimated changes under various interest rate change
scenarios.
<TABLE>
<CAPTION>
Change in Economic Estimated Estimated
Interest Rates Value of Equity $ Change % Change
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
400 basis point rise $13,771,000 (19,670,000) -59%
300 basis point rise 20,502,000 (12,939,000) -39%
200 basis point rise 25,381,000 (8,060,000) -24%
100 basis point rise 29,276,000 (4,165,000) -12%
Base Scenario 33,441,000 --
100 basis point decline 36,737,000 3,296,000 10%
200 basis point decline 39,395,000 5,954,000 18%
300 basis point decline 40,338,000 6,897,000 21%
400 basis point decline 42,954,000 9,513,000 28%
</TABLE>
LIQUIDITY
The Company's goal is to maintain adequate liquidity to
meet potential funding needs of loan and deposit customers, pay
operating expenses, and meet regulatory liquidity requirements.
Maturing securities, principal repayments of loans and
securities, deposits, income from operations and borrowings are
the main sources of liquidity. Scheduled loan repayments are a
relatively predictable source of funds, unlike deposits and loan
prepayments that are significantly influenced by general
interest rates, economic conditions and competition.
At December 31, 1999, the estimated market value of liquid
assets (cash, cash equivalents, and marketable securities) was
approximately, $63.7 million which represents 16.8% 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.
Cash was increased at the end of the year in preparation of Y2K.
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
7
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
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 mortgage-backed and related securities owned by the
Company are subject to repayment by the mortgagors of the
underlying collateral at any time. These repayments may be
affected by a rising or declining interest rate environment.
During a rising or declining interest rate environment,
repayments and the interest rate caps may subject the Company's
mortgage-backed and related securities to yield and/or price
volatility.
The Company's primary uses of liquidity are to fund loans
and to make investments. At December 31, 1999, outstanding
off-balance sheet commitments to extend credit totaled $21.5
million, and the undisbursed portion of construction loans was
$27.5 million. Management considers current liquidity levels
adequate to meet the Company's cash flow requirements.
CAPITAL
Stockholders' equity at December 31, 1999, was $29.3
million, down 7.3% from $31.6 million at December 31, 1998. The
reduction in capital is due to the Company's stock repurchase
program. In 1999 the Company repurchased 381,789 shares of its
common stock at a cost of $4.6 million. Stockholders' equity at
December 31, 1999 and December 31, 1998, includes unrealized
losses of $320 thousand and unrealized gains of $154 thousand,
respectively, net of tax, 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 December 31,
1999, the Bank's ratio of Tier I capital was 7.2%. The FDIC's
risk-based capital rules require banks supervised by the FDIC to
maintain risk-based capital to risk-weighted assets of at least
8.00%. Risk-based capital for the Bank is defined as Tier I
capital plus the balance of allowance for loan losses. At
December 31, 1999, the Bank had a ratio of qualifying total
capital to risk-weighted assets of 12.0%.
The Company, as a bank holding company, is also subject,
on a consolidated basis, to the capital adequacy guidelines of
the Board of Governors of the Federal Reserve (the "Federal
Reserve Board"). The capital requirements of the Federal
Reserve Board are similar to those of the FDIC governing the
Bank.
The Company currently exceeds all of its capital
requirements. Management expects the Company to continue to
exceed these capital requirements without altering current
operations or strategies. For further information, see Note 9 of
Notes to Consolidated Financial Statements.
<PAGE>
On September 17, 1998, March 25, and October 22, 1999 the
Company's Board of Directors approved Stock Repurchase Programs.
Each Stock Repurchase Program authorized the Company to
repurchase up to 150,000, 152,000 and 138,000 shares,
respectively, or approximately 5% of the outstanding shares of
common stock at the time of approval. The first purchase was
made February 5, 1999. After the most recent purchase on
February 4, 2000, there remains approved for repurchase 53,211
common shares.
8
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
On January 27, 2000, the Company's Board of Directors
approved a quarterly cash dividend of $.05 per share. The first
dividend will be payable on April 15, 2000 to stockholders of
record as of April 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 September 23, 1999, Cooperative Bank's Board of
Directors approved a definitive agreement to sell its $8 million
deposit branch in Robersonville, North Carolina to Southern Bank
and Trust Company of Mount Olive, North Carolina. Due to the
deteriorating economic conditions in Robersonville, the Bank's
management decided it was no longer feasible to continue in this
market area along with the two other banks. Southern Bank is
within a city block of the Robersonville branch and the
customers of Cooperative can expect the same level of personal
service from Southern Bank that they are accustomed to
receiving. This transaction should be completed in February
2000.
During September 1999, Hurricane Floyd struck eastern
North Carolina-changing lives and landscape for many years to
come. None of our offices sustained significant damage and, at
this point, it appears that losses on loans will be minimal.
Management considers the Bank's Reserve for Loan Losses of $1.3
million to be adequate to handle the probable losses without a
material effect on the Company's results of operations or its
financial position.
9
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AT DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998
FINANCIAL CONDITION
The Company's total assets increased 5.2% to $410.1
million at December 31, 1999, as compared to $389.8 million at
December 31, 1998. The major changes in the assets are as
follows: an increase of $6.7 million (76.1%) in cash, an
increase of $5.0 million (38.3%) in held to maturity securities,
a decrease of $4.0 million (37.8%) in mortgage backed and
related securities available for sale, an increase of $13.4
million (4.2%) in loans receivable, and a decrease in foreclosed
real estate to $245 thousand from $2.4 million at December 31,
1998. Borrowed funds, retail deposits and available liquid
assets funded the increase in assets during the current period.
Due to a high loan demand, the Bank sold $40 million in fixed
rate loans during the year ended December 31, 1999 and used the
funds to reinvest in new loans. 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 December 31, 1999, approximately
16.9% of the Company's loan portfolio were loans other than
residential properties. With a $3 million (1.1%) increase in
retail deposits, an additional $20 million borrowed funds from
the Federal Home Loan Bank ("FHLB"), and the sale of $40 million
in loans, the Bank had adequate funds to meet its loan demand.
Borrowed funds, collateralized through an agreement with the
FHLB for advances, are secured by the Bank's investment in FHLB
stock and qualifying first mortgage loans. At December 31,
1999, $40.0 million in borrowed funds mature in 1 year and the
remaining amount of funds mature in 2 to 5 years. For further
information, see Note 8 of Notes to Consolidated Financial
Statements.
The Company's non-performing assets (loans 90 days or more
delinquent and foreclosed real estate) were $1.4 million, or
.35% of assets, at December 31, 1999, compared to $4.2 million,
or 1.08% of assets, at December 31, 1998. The sale and
refinancing of three residential lot development loans totaling
approximately $3.1 million was the major factor for the decrease
in non-performing assets. The Company assumes an aggressive
position in collecting delinquent loans and disposing of
foreclosed assets to minimize balances of non-performing assets
and continues to evaluate the loan and real estate portfolios to
provide loss reserves as considered necessary. While there can
be no guarantee, in the opinion of management, the allowance for
loan losses of $1.3 million at December 31, 1999 is adequate to
cover probable losses.
RESULTS OF OPERATIONS
The net income of the Company depends primarily upon net
interest income. Net interest income is the difference between
the interest earned on loans and securities portfolios and
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 year ended December 31, 1999, increased
12.4% over the previous year to $2.7 million as compared to the
previous year of $2.4 million. The increase in net income can
be attributed to a 7.4% increase in net interest income, a 4.1%
increase in noninterest income, and a 36.4% decrease in
provision for loan losses, offset in part by a 7.4% increase in
other operating expenses.
10
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
INTEREST INCOME
For the year ended December 31, 1999, interest income was
essentially unchanged as compared to the same period a year ago.
The average balance of interest-earning assets increased 1.9%
while average yield decreased 13 basis points as compared to the
same period a year ago. The yield on average interest-earning
assets decreased to 7.58% as compared to 7.71% 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 4.6% for the year ended
December 31, 1999, as compared to the year ended December 31,
1998. Although there was a 2.0% 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 33 basis points to 4.70%
as compared to 5.03% for the same period last year.
NET INTEREST INCOME
Net interest income for the year ended December 31, 1999,
as compared to the same period a year ago, increased 7.4%.
During the year ended December 31, 1999, the yield on average
interest-earning assets decreased 13 basis points, while the
cost of average interest-bearing liabilities decreased 33 basis
points as compared to the same period a year ago. The increase
in net interest income is principally due to the higher volume
of loans (the highest yielding asset) and a decrease in the
interest rate paid on deposits. Interest-earning assets
increased 1.9% while interest-bearing liabilities increased
2.0%. The net interest rate spread increased to 2.87% as
compared to 2.68% for the same period a year ago. The
percentage of average interest-earning assets to average
interest-bearing liabilities decreased to 107.5% for the year
ended December 31, 1999, as compared to 107.6% for the same
period in 1998.
11
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the
Company's average balance sheet and reflects the average yield
on assets and average cost of liabilities for the periods
indicated. Such annualized yields and costs are derived by
dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented.
<TABLE>
<CAPTION>
For The Year Ended
------------------------------------------------------------
DECEMBER 31, 1999 December 31, 1998
------------------------------ ----------------------------
(DOLLARS IN THOUSANDS) AVERAGE Average
AVERAGE YIELD/ Average Yield/
BALANCE INTEREST COST Balance Interest Cost
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities and other
interest-earning assets $ 46,741 $ 2,628 5.62% $ 55,344 $ 3,107 5.61%
Mortgage-backed and related
securities 9,219 547 5.93% 11,725 738 6.29%
Loan portfolio 319,480 25,274 7.91% 301,412 24,566 8.15%
-------- ------- -------- -------
Total interest-earning
assets 375,440 28,449 7.58% 368,481 28,411 7.71%
------- -------
Non-interest earning assets 14,540 13,370
-------- --------
Total assets $389,980 $381,851
======== ========
Interest-bearing liabilities:
Deposits $292,174 12,838 4.39% $290,851 13,891 4.78%
Borrowed funds 57,036 3,584 6.28% 51,506 3,321 6.45%
-------- ------- -------- -------
Total interest-bearing
liabilities 349,210 16,422 4.70% 342,357 17,212 5.03%
------- -------
Non-interest bearing
liabilities 10,598 9,149
-------- --------
Total liabilities 359,808 351,506
Stockholders' equity 30,172 30,345
-------- --------
Total liabilities and
stockholders' equity $389,980 $381,851
======== ========
Net interest income $12,027 $11,199
======= =======
Interest rate spread 2.87% 2.68%
==== ====
Net yield on interest-earning
assets 3.20% 3.04%
Percentage of average
interest-earning assets
to average interest-
bearing liabilities 107.5% 107.6%
===== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For The Year Ended
------------------------------
December 31, 1997
------------------------------
(DOLLARS IN THOUSDANDS) Average
Average Yield/
Balance Interest Cost
--------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Securities and other
interest-earning assets $ 36,586 $ 2,102 5.75%
Mortgage-backed and related
securities 25,954 1,771 6.82%
Loan portfolio 280,684 22,220 7.92%
-------- -------
Total interest-earning
assets 343,224 26,093 7.60%
-------
Non-interest earning assets 10,599
--------
Total assets $353,823
========
Interest-bearing liabilities:
Deposits $280,152 13,148 4.69%
Borrowed funds 39,797 2,584 6.49%
-------- -------
Total interest-bearing
liabilities 319,949 15,732 4.92%
-------
Non-interest bearing
liabilities 6,882
--------
Total liabilities 326,831
Stockholders' equity 26,992
--------
Total liabilities and
stockholders' equity $353,823
========
Net interest income $10,361
=======
Interest rate spread 2.69%
====
Net yield on interest-earning
assets 3.02%
Percentage of average
interest-earning assets
to average interest-
bearing liabilities 107.3%
=====
</TABLE>
12
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
RATE/VOLUME ANALYSIS
The table below provides information regarding changes in
interest income and interest expense for the period indicated.
For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in volume
multiplied by old rate) and (ii) changes in rates (change in
rate multiplied by old volume). The change attributable to
changes in rate-volume have been allocated to the other
categories based on absolute values.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 VS. DECEMBER 31, 1999 December 31, 1997 vs. December 31, 1998
INCREASE (DECREASE) Increase (Decrease)
DUE TO Due to
______________________________________ _______________________________________
(DOLLARS IN THOUSANDS)
VOLUME RATE TOTAL Volume Rate Total
_______ ______ _________ ________ ________ __________
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Securities and other
interest-earning
assets . . . . . . . .$ (484) $ 5 $ (479) $1,054 $ (49) $ 1,005
Mortgage-backed and
related securities . . . (151) (40) (191) (905) (128) (1,033)
Loan portfolio. . . . . . 1,444 (736) 708 1,675 671 2,346
------ ------- -------- ------ ----- --------
Total interest-
earning assets. . . 809 (771) 38 1,824 494 2,318
------ ------- -------- ------ ----- --------
Interest expense:
Deposits. . . . . . . . 63 (1,116) (1,053) 508 235 743
Borrowed funds. . . . . 350 (87) 263 755 (18) 737
------ ------- -------- ------ ----- --------
Total interest-bearing
liabilities . . . . 413 (1,203) (790) 1,263 217 1,480
------ ------- -------- ------ ----- --------
Net interest income. . . $ 396 $ 432 $ 828 $ 561 $ 277 $ 838
====== ======= ======== ====== ===== ========
</TABLE>
RESERVE FOR LOAN LOSSES
The reserve for loan losses increased to $1.3 million as
of December 31, 1999, as compared to $1.2 million for the same
period a year ago. The Company added $210 thousand to the
reserve and had net charge-offs of $82 thousand for the year
ended December 31, 1999. The increase in the reserve was
necessary due to the 4.2% increase in net loans receivable. At
December 31, 1999, the loan loss reserve was 0.39% of net loans
as compared to 0.37% for the same period a year ago. Management
considers this level to be appropriate based on lending volume,
the current level of delinquencies and other non-performing
assets, overall economic conditions and other factors. Future
increases to the allowance may be necessary, however, due to
changes in loan composition or loan volume, changes in economic
or market area conditions and other factors.
NONINTEREST INCOME
During the year ended December 31, 1999, the Bank sold $40
million in fixed rate mortgage loans at a gain of $161,000 as
compared to the sale of $14 million at a gain of $270,000 for
the same period a year ago. The funds from the loan sales were
used in the operation of the Bank to extend credit to home and
commercial loan customers. The balance in real estate owned
expense represents operating expense and further reduction of
the carrying amount of foreclosed real estate owned. For the
years 1999 and 1998 the Bank aggressively pursued disposal of
the foreclosed real estate owned, thereby incurring various
charges in the sales of these properties. Loan fees for the
year ended December 31, 1999 as compared to last year increased
5.4% due to an increase in the volume of loans serviced. For
the same period, fee income from deposit operations increased
13.3% due to an increase in the volume of checking accounts.
13
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
NONINTEREST EXPENSE
For the year ended December 31, 1999, noninterest expense
increased 7.4% as compared to the same period last year.
Compensation and related costs increased 6.5% due to normal
increases in salaries and benefits, and additional employees
needed to handle the 5.2% growth in assets. Occupancy and
equipment expense increased 6.4%. This increase can be
attributed to additional maintenance necessary to keep the
buildings in good repair, depreciation on the new
teller/platform system, and depreciation on the new
Elizabethtown office. The new teller/platform system and the
new Elizabethtown office were put in service during the third
quarter of 1998. Advertising increased 10.1% due to a more
aggressive advertising campaign. Other operating expense
increased 10.7%. 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 years ended December 31,
1999 and 1998 approximate the statutory rate after giving effect
to nontaxable interest, other permanent tax differences, and
adjustments to certain deferred tax liabilities.
14
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and stockholders
Cooperative Bankshares, Inc.
Wilmington, North Carolina
In our opinion, the accompanying consolidated statements of
financial condition and the related consolidated statements of
operations, of comprehensive income, of stockholders' equity and
of cash flows present fairly, in all material respects, the
financial position of Cooperative Bankshares, Inc. and its
subsidiary at December 31, 1999 and 1998 and the results of
their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
These financial statements are the responsibility of the
Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
/s/ Pricewaterhouse Coopers LLP
Raleigh, North Carolina
January 21, 2000
15
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 15,592,010 $ 8,856,389
Securities:
Available for sale 20,671,572 21,163,133
Held to maturity (estimated market value
of $17,114,381 in 1999 and $12,779,690
in 1998) 18,024,581 13,034,264
Mortgage-backed and related securities available
for sale 6,564,413 10,550,692
Other investments 3,755,300 2,828,000
Loans receivable, net 334,743,526 321,324,146
Other real estate owned 244,626 2,439,158
Accrued interest receivable 2,471,459 2,286,657
Premises and equipment, net 6,244,551 6,372,456
Prepaid expenses and other assets 1,833,807 918,311
------------ ------------
$410,145,845 $389,773,206
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $304,834,455 $301,656,204
Borrowed funds 75,105,567 55,109,439
Escrow deposits 349,450 337,474
Accrued interest payable on deposits 50,945 79,263
Deferred income taxes, net 154,798 738,623
Accrued expenses and other liabilities 307,330 239,053
------------ ------------
Total liabilities 380,802,545 358,160,056
------------ ------------
Commitments and contingencies (Notes 5, 9 and 17)
Stockholders' equity:
Preferred stock, $1 par value: 3,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $1 par value: 7,000,000 shares
authorized, 2,687,919 and 3,046,284
issued and outstanding 2,687,919 3,046,284
Additional paid-in capital 2,531,998 6,649,374
Accumulated other comprehensive income
(loss), net (320,488) 154,051
Retained earnings 24,443,871 21,763,441
------------ ------------
Total stockholders' equity 29,343,300 31,613,150
------------ ------------
$410,145,845 $389,773,206
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
16
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans receivable $25,274,397 $24,566,039 $22,220,197
Mortgage-backed and related securities 546,849 737,697 1,771,023
Securities 2,628,162 3,106,807 2,102,462
----------- ----------- -----------
Total interest income 28,449,408 28,410,543 26,093,682
----------- ----------- -----------
Interest expense:
Deposits 12,837,966 13,891,244 13,148,297
Borrowed funds 3,583,825 3,320,583 2,584,143
----------- ----------- -----------
Total interest expense 16,421,791 17,211,827 15,732,440
----------- ----------- -----------
Net interest income 12,027,617 11,198,716 10,361,242
Provision for loan losses 210,000 330,000 153,000
----------- ----------- -----------
Net interest income after provision
for loan losses 11,817,617 10,868,716 10,208,242
----------- ----------- -----------
Noninterest income:
Net gains on sale of loans and mortgage-
backed and related securities 161,365 269,666 51,026
Real estate owned expenses and losses (29,123) (79,729) (18,154)
Loan fees 322,146 305,582 262,654
Deposit and related fees 778,367 686,950 488,257
Net gains on sale of securities 938 -- --
Other income, net (6,085) (2,671) 6,299
----------- ----------- -----------
Total noninterest income 1,227,608 1,179,798 790,082
----------- ----------- -----------
Other operating expenses:
Compensation and fringe benefits 4,670,391 4,383,537 4,004,589
Occupancy and equipment 1,739,950 1,635,148 1,428,944
Federal insurance premiums 176,334 177,588 218,811
Advertising 444,521 403,582 434,454
Other 1,854,008 1,674,719 1,283,858
----------- ----------- -----------
Total other operating expenses 8,885,204 8,274,574 7,370,656
----------- ----------- -----------
Income before income taxes 4,160,021 3,773,940 3,627,668
Income tax expense 1,479,591 1,388,705 1,393,930
----------- ----------- -----------
Net income $ 2,680,430 $ 2,385,235 $ 2,233,738
=========== =========== ===========
Net income per share:
Basic $ .95 $ .79 $ .75
=========== =========== ===========
Diluted $ .90 $ .74 $ .70
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
17
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Net income $2,680,430 $2,385,235 $ 2,233,738
Realized gains on available for sale
securities (938) -- --
Unrealized gain (loss) on available for
sale securities (776,995) 264,006 627,620
Income tax (expense) benefit relating to
unrealized gain (loss) on available for
sale securities 303,394 (103,292) (262,018)
---------- ---------- -----------
Other comprehensive income (loss) (474,539) 160,714 365,602
---------- ---------- -----------
Comprehensive income $2,205,891 $2,545,949 $ 2,599,340
========== ========== ===========
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL UNEARNED COMPREHENSIVE TOTAL
COMMON PAID-IN ESOP INCOME, (LOSS) RETAINED STOCKHOLDERS'
STOCK CAPITAL SHARES NET EARNINGS EQUITY
-------- ----------- -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,1996 $1,491,698 $6,003,111 $(289,160) $(372,265) $18,636,166 $25,469,550
Two for one stock split,
in the form of a
stock dividend 1,491,698 - - - (1,491,698) -
Exercise of stock options 1,000 7,679 - - - 8,679
Other comprehensive income
net of taxes - - - 365,602 - 365,602
Release of ESOP shares - 11,664 204,336 - - 216,000
Net income for year - - - - 2,233,738 2,233,738
---------- ---------- --------- --------- ----------- -----------
Balance, December 31, 1997 2,984,396 6,022,454 (84,824) (6,663) 19,378,206 28,293,569
Exercise of stock options 61,888 501,540 - - - 563,428
Other comprehensive income
net of taxes - - - 160,714 - 160,714
Release of ESOP shares - 125,380 84,824 - - 210,204
Net income for year - - - - 2,385,235 2,385,235
---------- ---------- --------- --------- ----------- -----------
Balance, December 31, 1998 3,046,284 6,649,374 - 154,051 21,763,441 31,613,150
Exercise of stock options 23,424 95,373 - - - 118,797
Repurchase of stock
(381,789 shares) (381,789) (4,212,749) - - - (4,594,538)
Other comprehensive loss,
net of taxes - - - (474,539) - (474,539)
Net income for year - - - - 2,680,430 2,680,430
---------- ---------- --------- --------- ----------- -----------
Balance, December 31, 1999 $2,687,919 $2,531,998 $ - $(320,488) $24,443,871 $29,343,300
========== ========== ========= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
18
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income $2,680,430 $ 2,385,235 $ 2,233,738
Adjustments to reconcile net income
to net cash provided by operating activities:
Net accretion, amortization, and
depreciation 781,906 705,478 591,844
Net gain on sales of loans and securities (162,303) (269,666) (51,026)
Benefit from deferred income taxes (280,431) (416,469) (286,101)
Release of ESOP shares -- 125,380 11,664
Loss (gain) on sales of premises and
equipment 7,783 7,483 (3,345)
Loss on sales of foreclosed real estate 16,974 2,498 725
Valuation losses on foreclosed real
estate 10,000 62,300 10,653
Provision for loan losses 210,000 330,000 153,000
Changes in assets and liabilities:
Accrued interest receivable (184,802) (114,322) (254,888)
Prepaid expenses and other assets (924,337) (584,995) 1,109,408
Accrued interest payable on deposits (28,318) (46,892) (225,140)
Accrued expenses and other liabilities 68,277 223,135 96,233
----------- ----------- -----------
Net cash provided by operating
activities 2,195,179 2,409,165 3,386,765
----------- ----------- -----------
Investing activities:
Purchases of securities available for sale (1,999,375) (15,000,000) (17,000,000)
Purchases of securities held to maturity (5,000,000) -- --
Proceeds from maturity of securities available
for sale -- 15,000,000 2,000,000
Proceeds from sale of securities available
for sale 2,000,938 -- --
Proceeds from sale of mortgage-backed and
related securities available for sale -- -- 15,038,128
Proceeds from maturities of securities
held to maturity -- 8,000,000 --
Proceeds from principal repayments of
mortgage-backed and related securities
available for sale 3,600,089 2,327,315 1,429,317
Proceeds from sales of loans 39,923,328 13,998,895 14,028,855
Loan originations, net of principal
repayments (51,386,357) (51,092,429) (38,117,697)
Proceeds from disposals of foreclosed real
estate 193,452 258,147 387,456
Purchases of premises and equipment (544,567) (2,120,263) (562,349)
Proceeds from sales of premises and
equipment 500 -- --
Net expenditures on foreclosed real estate (30,880) (110,139) --
Purchases of other investments (927,300) (139,800) (253,200)
----------- ----------- -----------
Net cash used in investing
activities (14,170,172) (28,878,274) (23,049,490)
----------- ----------- -----------
Financing activities:
Net increase in deposits 3,178,251 12,965,570 10,551,725
Proceeds from borrowed funds 52,000,000 15,000,000 25,000,000
Principal payments on borrowed funds (32,003,872) (10,031,563) (10,004,360)
Proceeds from issuance of common stock 118,797 274,223 8,679
Purchase and retirement of common stock (4,594,538) -- --
Net change in escrow deposits 11,976 (90,509) (192,825)
----------- ----------- -----------
Net cash provided by
financing activities 18,710,614 18,117,721 25,363,219
<PAGE>
Increase (decrease) in cash and cash
equivalents 6,735,621 (8,351,388) 5,700,494
Cash and cash equivalents:
Beginning of year 8,856,389 17,207,777 11,507,283
----------- ----------- -----------
End of year $15,592,010 $ 8,856,389 $17,207,777
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
19
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial
---------------------
statements include the accounts and transactions of
Cooperative Bankshares, Inc. (the "Company"), a bank
holding company incorporated under the laws of the State
of North Carolina, and its wholly-owned subsidiary
Cooperative Bank for Savings, Inc., SSB, (the "Bank") and
its wholly-owned subsidiary CS&L Services, Inc. All
significant intercompany transactions have been
eliminated.
Nature of Operations - The Company operates 17 offices
--------------------
(including 16 full service branches) in Eastern North
Carolina and offers a wide range of banking services
including deposits, bank cards, and alternative investment
products. The funds are used for the extension of credit
through home loans, commercial loans, consumer loans, and
other installment credit such as home equity loans, auto
and boat loans, and check reserves. The Company's primary
sources of revenue are its loan and securities portfolios.
Use of Estimates in the Preparation of Financial
------------------------------------------------
Statements - The preparation of financial statements in
----------
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities in the
financial statements and accompanying notes. Actual
results could differ from those estimates.
Reclassifications - Certain items included in the 1998
-----------------
financial statements have been reclassified to conform to
the 1999 presentation. These reclassifications have no
effect on the net income or stockholders' equity
previously reported.
Significant Accounting Policies - The significant
-------------------------------
accounting policies of the Company are summarized below:
a. Cash and Cash Equivalents - Cash and cash equivalents
-------------------------
include demand and time deposits (with original
maturities of ninety days or less) at other
institutions. Interest-bearing deposits aggregated
$9,522,187 and $4,250,591 at December 31, 1999 and
1998, respectively.
Federal regulations require institutions to set aside
specified amounts of cash as reserves against
transaction and time deposits. As of December 31,
1999, the daily average gross reserve requirement was
$619,000.
b. Securities and Mortgage-Backed and Related Securities-
-----------------------------------------------------
Investments in certain securities are classified into
three categories and accounted for as follows: (1)
debt securities that the entity has the positive
intent and the ability to hold to maturity are
classified as held to maturity and reported at
amortized cost; (2) debt and equity securities that
are bought and held principally for the purpose of
selling them in the near term are classified as
trading securities and reported at fair value, with
unrealized gains and losses included in earnings; (3)
debt and equity securities not classified as either
held to maturity securities or trading securities are
classified as available for sale securities and
reported at fair value, with unrealized gains and
losses excluded from net income and reported
as other comprehensive income and included as a
separate component of stockholders' equity.
20
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has adopted the provisions of SFAS No.
134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" ("SFAS
No. 134"), effective January 1, 1999. This Statement
amends existing classification and accounting
treatment of mortgage-backed securities, retained
after mortgage loans held for sale are securitized,
for entities engaged in mortgage banking activities.
These securities previously were classified and
accounted for as trading and now may be classified as
held to maturity or available for sale, also. SFAS
No. 134 did not have a material effect on the
Company's consolidated financial statements.
Other investments are carried at cost, which
approximates market value. Premiums are amortized and
discounts are accreted using the effective interest
method over the remaining terms of the related
securities. Gains and losses on the sales of
securities are determined using the specific-
identification method and are included in non-interest
income at the time of sale.
c. Loans Receivable and Allowance for Loan Losses - Loans
----------------------------------------------
receivable are stated at the amount of unpaid
principal, reduced by an allowance for loan losses,
unearned discounts and net deferred loan origination
fees and costs. Interest income on loans is recorded
on the accrual basis based upon the principal amount
outstanding. Deferred loan fees and costs and
unearned discounts are amortized to interest income
over the contractual life of the loan using the
interest method.
The Company evaluates its loan portfolio in accordance
with Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan"" as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosure". Under
these standards, a loan is considered impaired, based
on current information and events, if it is probable
that the Company will be unable to collect the
scheduled payments of principal and interest when due
according to the contractual terms of the loan
agreement. Uncollateralized loans are measured for
impairment based on the present value of expected
future cash flows discounted at the original
contractual interest rate, while all collateral-
dependent loans are measured for impairment based on
the fair value of the collateral. As permitted by the
statement, smaller-balance homogeneous loans which
consist primarily of residential mortgages and
consumer loans are evaluated collectively and reserves
are established based on historical loss experience.
The Company uses several factors in determining if a
loan is impaired. The internal asset classification
procedures include a thorough review of significant
loans and lending relationships and the accumulation
of related data. This data includes loan payment
status, borrowers' financial data and borrowers'
operating factors such as cash flows and operating
income or loss.
The allowance for loan losses is established through a
provision charged to income. The allowance is an
amount that management believes will be adequate to
absorb probable losses on existing loans that may
become uncollectible, based on the evaluations of the
collectibility of loans and prior loan loss
experience. The evaluations take into consideration
such factors as changes in the nature and volume of
the loan portfolio quality, review of specific problem
loans, and current economic conditions and trends that
may affect the borrowers' ability to pay. It is
possible that such factors in management's evaluations
of the adequacy of the allowance for loan losses will
change.
21
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
d. Income Recognition on Impaired and Nonaccrual Loans -
---------------------------------------------------
Loans, including impaired loans, are generally
classified as nonaccrual if they are past due for a
payment of principal or interest for a period of more
than 90 days, unless such loans are well-secured and
in the process of collection. If a loan or a portion
of a loan is classified as doubtful or is partially
charged off, the loan is generally classified as
nonaccrual. Loans that are on a current payment
status or past due less than 90 days may also be
classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all
principal and interest amounts contractually due
(including arrearages) are reasonably assured of
repayment within an acceptable period of time, and
there is a sustained period of repayment performance
(generally a minimum of six months) by the borrower,
in accordance with the contractual terms of interest
and principal.
While a loan is classified as nonaccrual and the
future collectibility of the recorded loan balance is
doubtful, collections of interest and principal are
generally applied as a reduction to the principal
outstanding, except in the case of loans with
scheduled amortization where the payment is generally
applied to the oldest payment due.
When the future collectibility of the recorded loan
balance is expected, interest income may be recognized
on a cash basis. In the case where a nonaccrual loan
had been partially charged-off, recognition of
interest on a cash basis is limited to that which
would have been recognized on the recorded loan
balance at the contractual interest rate. Receipts in
excess of that amount are recorded as recoveries to
the allowance for loan losses until prior charge-offs
have been fully recovered.
e. Transfers and Servicing of Financial Assets - The
-------------------------------------------
Company recognizes, as separate assets, rights to
service mortgage loans for others. There were no
purchases of servicing rights during 1999 or 1998.
Fees on loans sold in 1999 and 1998 are considered to
adequately compensate the Company, therefore no
servicing assets were recorded on those sales.
f. Other Real Estate Owned - Other real estate owned is
-----------------------
recorded initially at the lower of the loan balance or
estimated fair value of the property less estimated
costs to sell at the date of foreclosure and
subsequently reduced by additional allowances which
are charged to earnings if the estimated fair value
declines below its initial value plus any capitalized
costs. Costs related to the improvement of the
property are capitalized, whereas those related to
holding the property are expensed.
g. Premises and Equipment - Premises and equipment are
----------------------
carried at cost less accumulated depreciation and
amortization. The provision for depreciation is
computed using the straight-line method over the
estimated useful lives of the various classes of
assets. Useful lives range from 15 to 40 years for
buildings and 5 to 10 years for furniture and
equipment. The cost of leasehold improvements is
amortized on the straight-line method over the lesser
of the lives of the improvements or the terms of the
leases. Repairs and maintenance are charged to
expense as incurred.
22
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
h. Income Taxes - Deferred tax asset and liability
------------
balances are determined by application to temporary
differences of the tax rate expected to be in effect
when taxes become payable or receivable. Temporary
differences are differences between the tax basis of
assets and liabilities and their reported amounts in
the consolidated financial statements that will result
in taxable or deductible amounts in future years.
i. Comprehensive Income - The Company reports as
--------------------
comprehensive income all changes in stockholders'
equity during the year from non-owner sources. Other
comprehensive income refers to all components
(revenues, expenses, gains, and losses) of
comprehensive income that are excluded from net
income.
j. Segment Information - During the year ended December
-------------------
31, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and
Related Information". The Statement requires that
public business enterprises report certain information
about operating segments in their annual financial
statements and in condensed financial statements of
interim periods issued to shareholders. It also
requires that the public business enterprises report
related disclosures and descriptive information about
products and services provided by significant
segments, geographic areas, and major customers,
differences between the measurements used in reporting
segment and those used in the enterprise's
general-purpose financial statements, and changes in
the measurement of segment amounts from period to
period.
Operating segments are components of an enterprise
about which separate financial information is
available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate
resources and in assessing performance. The Company
has determined that it has one significant operating
segment, the providing of general commercial financial
services to customers located in the single geographic
area of Eastern North Carolina. The various products
are those generally offered by community banks, and
the allocation of resources is based on the overall
performance of the institution, versus the individual
branches or products.
There are no differences between the measurements used
in reporting segment information and those used in the
enterprise's general-purpose financial statements, and
the measurement of segment amounts has not changed for
1999 from prior years.
k. New Accounting Pronouncements - The Company will adopt
-----------------------------
the provisions of SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS
No. 133") effective with the fiscal quarter beginning
July 1, 2000. This statement establishes accounting
and reporting standards for derivative instruments and
for hedging activities. It requires that derivatives
be recognized as either assets or liabilities in the
statement of financial position and be measured at
fair value. The accounting for changes in the fair
value of a derivative depends on the intended use of
the derivative and whether or not the derivative is
designated as a hedging instrument. SFAS No. 133 is
not expected to have a material effect on the
Company's consolidated financial statements.
23
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES
Securities as December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1999:
U.S. Government and agency
securities:
Held to maturity $18,024,581 $ -- $ 910,200 $17,114,381
Available for sale 21,001,441 -- 329,869 20,671,572
----------- -------- ---------- -----------
$39,026,022 $ -- $1,240,069 $37,785,953
=========== ======== ========== ===========
1998:
U.S. Government and agency
securities:
Held to maturity $13,034,264 $ -- $254,574 $12,779,690
Available for sale 21,002,205 174,988 14,060 21,163,133
----------- -------- -------- -----------
$34,036,469 $174,988 $268,634 $33,942,823
=========== ======== ======== ===========
</TABLE>
The maturities of securities at December 31, 1999 are
summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
<S> <C> <C>
Held to maturity:
After 3 years through 5 years $ 8,024,581 $ 7,585,315
After 5 years through 10 years 10,000,000 9,529,066
----------- -----------
Total $18,024,581 $17,114,381
=========== ===========
Available for sale:
Within 1 year $ 5,000,000 $ 4,942,190
After 1 year through 5 years 16,001,441 15,729,382
----------- -----------
$21,001,441 $20,671,572
=========== ===========
</TABLE>
For the three years ended December 31, 1999, the Company
had gross realized gains on sale of securities of $938 in
1999, and no gross realized losses in any period.
24
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities available for sale
at December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1999:
GNMA certificates $ 3,567,845 $ -- $ 81,463 $ 3,486,382
FNMA certificates 3,192,090 9,711 123,770 3,078,031
----------- -------- -------- -----------
Total $ 6,759,935 $ 9,711 $205,233 $ 6,564,413
=========== ======== ======== ===========
1998:
GNMA certificates $ 4,936,517 $134,587 $ -- $ 5,071,104
FNMA certificates 4,224,080 5,572 57,204 4,172,448
FHLMC certificates 1,298,481 8,659 -- 1,307,140
----------- -------- -------- -----------
Total $10,459,078 $148,818 $ 57,204 $10,550,692
=========== ======== ======== ===========
</TABLE>
During the three years ended December 31, 1999 the
Company realized gross gains of $9,375 and gross
losses of $9,387 in 1997 on sales of mortgage-backed
and related securities.
Expected maturities for mortgage-backed and related
securities will differ from contractual maturities
because borrowers have the right to call or prepay
obligations with or without call or prepayment
penalties.
4. OTHER INVESTMENTS
Other investments at December 31, 1999 and 1998
consist of Federal Home Loan Bank of Atlanta ("FHLB")
stock. The cost and estimated market value of the
FHLB stock was $3,755,300 and $2,828,000 at December
31, 1999 and 1998, respectively.
The Company, as member of the Federal Home Loan Bank
System, is required to maintain an investment in
capital stock of the FHLB in an amount equal to the
greater of 1% of its outstanding home loans or 5% of
its outstanding FHLB advances. No ready market
exists for FHLB stock, and it has no quoted market
value.
25
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS RECEIVABLE
Loans receivable at December 31, 1999 and 1998 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Mortgage loans collateralized by real estate:
1-4 family residential properties $204,208 $235,644
Multi-family residential properties 5,523 5,575
Nonresidential properties 2,215 3,697
1-4 family residential properties under
construction 23,689 25,244
Installment loans collateralized by real estate:
1-4 family residential properties 28,021 18,737
Multi-family residential properties 8,771 7,649
Nonresidential properties 28,045 12,940
Multi-family residential properties under
construction 10,166 1,128
1-4 family residential properties under
construction 22,832 8,810
Nonresidential properties under construction 15,104 11,735
Consumer loans 5,446 5,073
Business loans 9,763 4,021
Consumer and business construction loans 930 964
--------- --------
Total loans 364,713 341,217
Less:
Undisbursed portion of construction loans 27,481 17,499
Unearned discounts and net deferred fees 1,182 1,216
Loan loss reserve 1,306 1,178
-------- --------
Net loans $334,744 $321,324
======== ========
</TABLE>
In the normal course of business, the Company originates
loans to related parties. Related parties include
directors, executive officers, principal shareholders of
equity securities, or any associate of such persons. The
activity with respect to related party loans is summarized
below:
Balance at beginning of year $2,461,237
New loans 320,500
Repayments (711,829)
----------
Balance at end of year $2,069,908
==========
26
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity in the allowance for loan losses for the years
ended December 31, 1999, 1998 and 1997 is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $1,178,242 $ 873,802 $807,539
Provision for loan losses 210,000 330,000 153,000
Loans charged-off (94,034) (28,330) (86,737)
Recoveries 12,173 2,770 --
---------- ---------- --------
Balance at end of year $1,306,381 $1,178,242 $873,802
========== ========== ========
</TABLE>
The following is a summary of nonperforming assets at
December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Loans 90 days past due and still accruing interest $ 934 $1,765
Nonaccrual loans 267 --
Other real estate owned 245 2,439
------ ------
Total $1,446 $4,204
====== ======
</TABLE>
At December 31, 1999 and 1998, the recorded investment in
loans considered impaired in accordance with SFAS No. 114
totaled $194,728 and $0, respectively, with corresponding
valuation allowances of $22,609 and $0, respectively. For
the years ended December 31, 1999, 1998 and 1997, the
average recorded investment in impaired loans was
approximately $130,000, $580,000 and $654,000,
respectively. The amount of interest recognized on
impaired loans during the portion of the year that they
were impaired was immaterial.
In the normal course of business, the Company enters into
off-balance sheet commitments to extend credit. The
Company maintains the same credit policies in making
off-balance sheet commitments as it does for its on-balance
sheet instruments. Commitments to extend credit are
agreements to lend which generally have fixed expiration
dates or other termination clauses and may require a fee.
The following table summarizes the Company's outstanding
off-balance sheet commitments to extend credit at December
31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Undisbursed portion of home equity lines of credit
collateralized primarily by junior liens on 1-4
family properties $ 7,593 $ 7,332
Other commitments and credit lines 11,338 4,577
Fixed-rate mortgage loan commitments 1,183 4,257
Adjustable-rate mortgage loan commitments 1,369 3,149
------- -------
Total $21,483 $19,315
======= =======
</TABLE>
27
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As commitments may expire unused, the total commitment
amount does not necessarily represent future cash
requirements.
The Company, through its normal lending activity,
originates and maintains loans which are substantially
concentrated in Eastern North Carolina, where its
offices are located. The Company's policy calls for
collateral or other forms of repayment assurance to be
received from the borrower at the time of loan
origination. Such collateral or other form of repayment
assurance is subject to changes in economic value due to
various factors beyond the control of the
Company and such changes could be significant.
The Company originates both adjustable and fixed interest
rate loans. The adjustable-rate loans have interest rate
adjustment limitations and are indexed to various
nationally recognized indexes or financial instruments.
Future market factors may affect the correlation of the
interest rate adjustment with rates the Company pays on the
short term deposits that have been primarily utilized to
fund these loans.
Mortgage loans serviced for others (previously sold without
recourse) approximated $84,128,060, $58,674,064 and
$65,061,001 at December 31, 1999, 1998 and 1997,
respectively.
Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing
payments to investors and foreclosure processing. Loan
servicing income is recorded on the cash basis and includes
servicing fees from investors and certain charges collected
from borrowers, such as late payment fees.
6. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1999 and 1998 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land $ 1,677,245 $ 1,677,245
Buildngs 5,542,243 5,488,561
Leasehold improvements 307,994 307,994
Furniture and equipment 4,886,268 4,572,363
----------- -----------
12,413,750 12,046,163
Less accumulated depreciation and amortization (6,169,199) (5,673,707)
----------- -----------
Premises and equipment, net $ 6,244,551 $ 6,372,456
=========== ===========
</TABLE>
28
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEPOSITS
Time deposits of $100,000 or more at December 31, 1999 and
1998, are summarized by maturity as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
3 months or less $ 12,819 $ 10,486
Over 3 through 6 months 14,656 12,238
Over 6 through 12 months 13,741 16,994
Over 12 months 7,608 9,367
--------- ---------
Total $ 48,824 $ 49,085
========= =========
</TABLE>
The average balance of, and weighted average rates ("WAR")
paid on, deposits for the years ended December 31, 1999,
1998 and 1997 (in thousands) are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------
Average Average
Balance WAR Balance WAR
------- ---- -------- ---
<S> <C> <C> <C> <C>
NOW accounts $ 15,394 0.59% $ 14,117 0.85%
Money market 20,011 3.78% 11,978 3.60%
Savings 26,088 1.47% 28,714 1.74%
Certificates of deposit 230,681 5.03% 236,042 5.44%
-------- ---- -------- ----
Total $292,174 4.39% $290,851 4.78%
======== ==== ======== ====
</TABLE>
Non-interest bearing deposits totaled $9,610,007 and
$7,877,568 at December 31, 1999 and 1998, respectively.
8. BORROWED FUNDS
Borrowed funds and the corresponding weighted average rates
("WAR") at December 31, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
1999 WAR 1998 WAR
----------- --- ----------- ---
<S> <C> <C> <C> <C>
Advances from FHLB $75,000,000 6.11% $50,000,000 6.33%
Affordable Housing
Program advances from
FHLB 105,567 3.50% 109,439 3.50%
----------- ---- ----------- ----
Total $75,105,567 6.11% $55,109,439 6.33%
=========== ==== =========== ====
</TABLE>
29
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to a collateral agreement with the FHLB, advances
are collateralized by all the Company's FHLB stock and
qualifying first mortgage loans. This agreement provides
for a $92 million line of credit with the FHLB. The
maximum month end balances were $75 million, $55 million,
and $50 million during the years ended December 31, 1999,
1998 and 1997. Annual principal maturities of Federal Home
Bank advances for each of the five years subsequent to
December 31, 1999 are as follows:
2000 $ 40,000,000
2001 15,000,000
2002 10,000,000
2003 5,000,000
2004 5,000,000
-----------
Total $75,000,000
===========
The Affordable Housing Program advances are funds advanced
by the FHLB for the Company to lend to borrowers who might
not otherwise qualify for a home mortgage. These advances
have an interest rate of 3.5% and mature at various times
between November 2015 and January 2016.
Interest expense on borrowed funds is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Advances from FHLB $ 3,583,825 $3,320,483 $2,575,273
ESOP loan -- 100 8,870
----------- ---------- ----------
Total $ 3,583,825 $3,320,583 $2,584,143
=========== ========== ==========
</TABLE>
9. REGULATORY MATTERS AND CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital
requirements administered by federal and state banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Company's
consolidated financial statements. Quantitative measures
established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios,
as set forth in the table below. Management believes, as
of December 31, 1999, that the Company meets all capital
adequacy requirements to which it is subject. The
Company's only significant asset is its investment in
Cooperative Bank for Savings, Inc. SSB. Consequently, the
information concerning capital ratios is essentially the
same for the Company and the Bank.
As of December 31, 1999, the most recent notification from
the FDIC categorized the Company as well capitalized under
the regulatory framework for prompt corrective action. To
be categorized as well capitalized the Company must
maintain minimum amounts and ratios, as set forth in the
table below. There are no conditions or events since that
notification that management believes have changed the
Company's category.
30
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's actual capital amounts and ratios are also
presented in the table below (dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
- -----------------------
Total Capital (to Risk
Weighted Assets) $30,970 12.0% $20,608 8.0% $25,761 10.0%
Tier I Capital (to Risk
Weighted Assets) 29,664 11.5% 10,304 4.0% 15,456 6.0%
Tier I Capital (to
Average Assets) 29,664 7.4% 16,074 4.0% 20,092 5.0%
Total Tangible Capital
(to Total Tangible
Assets) 29,343 7.2% 20,507 5.0% 20,507 5.0%
As of December 31, 1998:
- -----------------------
Total Capital (to Risk
Weighted Assets) $32,637 14.3% $18,290 8.0% $22,863 10.0%
Tier I Capital (to Risk
Weighted Assets) 31,459 13.8% 9,145 4.0% 13,718 6.0%
Tier I Capital (to
Average Assets) 31,459 8.1% 15,528 4.0% 19,410 5.0%
Total Tangible Capital
(to Total Tangible
Assets) 31,613 8.1% 19,489 5.0% 19,489 5.0%
</TABLE>
A liquidation account was established at the time of
conversion to a stock institution in an amount equal to the
total net worth of the Bank as of March 31, 1991. Each
eligible deposit account holder is entitled to a
proportionate share of this account in the event of a
complete liquidation of the Bank, and only in such an
event. This share will be reduced if the account holder's
eligible deposits fall below the amount on the date of
record and will cease to exist if the account is closed.
The liquidation account will never be increased
despite any increase after the conversion in the related
eligible deposit of an account holder. The liquidation
account was approximately $3,241,346 at December 31, 1999.
The Company may not declare or pay a cash dividend, or
repurchase any of its capital stock, if the effect would
cause the regulatory net worth of the Company to fall below
the amount required for the liquidation account established
in connection with the conversion, or to an amount which is
less than the minimum required by the FDIC and the North
Carolina Savings Institutions Administrator ("N.C.
Administrator").
10. BENEFIT PLANS
The Company participates in a qualified, noncontributory,
defined-benefit, multi-employer retirement plan (the
"Plan") covering substantially all of its employees. The
benefits are based on each employee's years of service and
the employee's compensation during the last ten years of
employment.
31
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the multi-employer plan, the Company is required to
contribute its share of the Plan's total pension liability
as determined by the plan administrator. There were no
contributions required or made to the Plan during 1999,
1998 and 1997.
The Company maintains a combined ESOP and 401(k) plan (the
"KSOP"). Employees are able to contribute up to 15% of
their eligible annual compensation to the KSOP subject to
Internal Revenue Service limitations. The Company matches
employee contributions up to a limit determined
annually by the Board of Directors. The match was
established by the Board as 6% for 1999 and 1998.
During the year ended December 31, 1998, the Company
matched employee contributions by contributing $85,000 to
the KSOP to repay the remaining portion of an ESOP note.
This released the remaining 8,774 shares from
serving as collateral for the loan. These shares were
allocated to the participants according to the plan
specifications on December 31, 1998.
The compensation expense incurred by the Company for these
benefit plans, including the effect of the change in the
defined benefit plan noted earlier, was $176,038, $366,939
and $232,164 for the years ended December 31, 1999,
1998 and 1997, respectively.
11. EARNINGS PER SHARE
The following table provides a reconciliation of income
available to common stockholders and the average number of
shares outstanding (less unearned ESOP shares) for the
years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Net income(numerator) $2,680,430 $ 2,385,235 $ 2,233,738
========== =========== ===========
Shares for basic EPS (denominator) 2,819,846 3,019,413 2,972,686
Dilutive effect of stock options 154,197 186,979 211,611
---------- ----------- -----------
Adjusted shares for diluted EPS 2,974,043 3,206,392 3,184,297
========== =========== ===========
</TABLE>
For the year ended December 31, 1999, there were 83,204
options outstanding that were antidilutive since the
exercise price exceeds the average market price for the
year. These common stock equivalents have been omitted
from the 1999 calculation of diluted earnings per share.
12. INCOME TAXES
Income tax expense consists of the following components for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- --------
<S> <C> <C> <C>
Current tax provision $1,760,022 $1,805,174 $1,680,031
Deferred tax provision (benefit) (280,431) (416,469) (286,101)
---------- ---------- ----------
Total $1,479,591 $1,388,705 $1,393,930
========== ========== ==========
</TABLE>
32
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax liability at
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Unrealized loss on securities
available for sale $ 204,902 $ --
Allowance for loan losses 223,127 36,744
Accrued pension cost 46,483 --
---------- ----------
Total 474,512 36,744
---------- ----------
Deferred tax liabilities:
Deferred loan fees 262,575 360,378
FHLB stock 190,813 209,692
Excess of book over tax basis of equipment 170,564 106,805
Unrealized gain on securities available
for sale -- 98,492
Other 5,358 --
---------- ----------
Total 629,310 775,367
---------- ----------
Net deferred tax liability $ 154,798 $ 738,623
========== ==========
</TABLE>
Reconciliations of income taxes computed at the statutory
federal income tax rate (34%) to the provisions for income
tax for the years ended December 31, 1999, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Income taxes at federal tax rate $1,414,407 $ 1,283,140 $1,233,407
Increase (decrease) resulting from:
State income taxes, net of
federal income tax benefit 108,200 84,619 152,196
Other (43,016) 20,946 8,327
---------- ----------- ----------
Total $1,479,591 $ 1,388,705 $1,393,930
========== =========== ==========
</TABLE>
As of December 31, 1999, the Bank's bad debt reserve for
federal tax purposes was approximately $5,169,000 which
represents the base year amount. A deferred tax liability
has not been recognized for the base year amount. If the
Bank uses the base year reserve for any reason other than
to absorb loan losses, a tax liability could be incurred.
It is not anticipated that the reserve will be used for any
other purpose.
13. STOCK OPTION PLAN
The Company has a Stock Option Plan (the "Option Plan") for
selected employees of the Company and for nonemployee
directors. The purpose of the Option Plan is to attract
and retain the best available personnel for positions of
substantial responsibility and to provide additional
incentive to key employees and directors by facilitating
their purchase of a stock interest in the Company.
33
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Option Plan provides for a term of ten years, after
which no awards may be made, unless earlier terminated by
the Board of Directors pursuant to the Option Plan. The
option exercise price is the market price of the common
stock on the date the option is granted. Options are fully
vested upon being granted.
Stock options, after giving retroactive effect to stock
dividends and splits, are summarized as follows:
<TABLE>
<CAPTION>
ALL DIRECTORS
WHO ARE NOT
EXECUTIVE
ALL OFFICERS OFFICERS RESERVED
AS A GROUP AS A GROUP FOR FUTURE
(6 PERSONS) (8 PERSONS) TOTAL ISSUANCE
----------- ----------- ------ -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1999 238,554 42,564 281,118 211,000
======= ====== ======= =======
Balance, December 31, 1998 187,438 38,104 225,542 --
======= ====== ======= =======
Balance, December 31, 1997 230,726 56,704 287,430 --
======= ====== ======= =======
</TABLE>
A summary of the status of the Option Plan as of December
31, 1999, 1998 and 1997, and changes during the years then
ended is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTION OPTION OPTION
NUMBER PRICE NUMBER PRICE NUMBER PRICE
-------- ---------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding beginning of year 225,542 $ 2.96 287,430 $3.28 276,802 $ 3.28
Granted 79,000 11.05 -- -- 11,628 13.75
Exercised (23,424) 2.21 (61,888) 4.43 (1,000) 1.78
Forfeited -- -- -- -- -- --
------- ------ ------- ----- ------- ------
Options outstanding, end of year 281,118 $ 5.03 225,542 $2.96 287,430 $ 3.28
======= ====== ======= ===== ======= ======
</TABLE>
34
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 1, 1996 the Company adopted SFAS No. 123,
"Accounting for Stock Based Compensation". As permitted by
SFAS No. 123, the Company has chosen to continue to apply
APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, no
compensation cost has been recognized for options granted
under the Option Plan. Had compensation cost for the
Company's Option Plan been determined based on the fair
value at the grant dates for awards under the Option Plan
consistent with the method of SFAS No. 123, the Company's
net income and net income per share would have been reduced
to the pro forma amounts indicated below. The Company did
not grant any options during the year ended December 31,
1998, therefore, there are no pro forma amounts for that
period.
<TABLE>
<CAPTION>
1999
---------------------
AS
REPORTED PRO FORMA
--------- ---------
<S> <C> <C>
Net income $2,680,430 $2,513,362
Earnings per common share $ 0.95 $ 0.89
Earnings per common share - assuming
dilution $ 0.90 $ 0.85
<CAPTION>
1997
---------------------
AS
REPORTED PRO FORMA
--------- ---------
<S> <C> <C>
Net income $2,233,738 $2,213,554
Earnings per common share $ 0.75 $ 0.74
Earnings per common share - assuming
dilution $ 0.70 $ 0.70
</TABLE>
The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for
grants in 1999 and 1997: dividend yield of 0%, as there
has been no regular dividend payment history; expected
volatility of 17.8% in 1999 and 7.7% in 1997; risk-free
interest rates of 6.25% in 1999 and 5.50% in 1997; and
expected lives of 5 years. The weighted average fair
values of options granted in 1999 and 1997 were $3.42 and
$3.87, respectively.
The following table summarizes additional information about
the Option Plan at December 31, 1999:
<TABLE>
<CAPTION>
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE
- -------------- ----------- ---------- -----------
<S> <C> <C> <C>
$1.78 181,066 1.75 years 181,066
$2.67 1,424 2.25 years 1,424
$7.50 10,000 4.25 years 10,000
$10.50 5,424 7.25 years 5,424
$10.94 9,000 9.75 years 9,000
$11.06 70,000 9.50 years 70,000
$19.50 4,204 8.00 years 4,204
-------- ---------- -------
281,118 4.23 years 281,118
======== ========== =======
</TABLE>
35
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of Cooperative Bankshares,
Inc., the parent company, at December 31, 1999 and 1998 and
for the years ended December 31, 1999, 1998 and 1997 is
presented below:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
Assets:
Cash $ 951 $ 1,624
Equity investment in
subsidiary 29,342,349 31,602,685
Deferred organization costs -- 8,841
----------- -----------
$29,343,300 $31,613,150
=========== ===========
Liabilities and stockholders' equity:
Stockholders' equity $29,343,300 $31,613,150
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Dividends from subsidiary $ 13,906 $ 11,938 $ 13,709
Equity in income of subsidiary 2,689,944 2,403,474 2,248,259
Miscellaneous expenses 23,420 30,177 28,230
---------- ----------- -----------
Net income $2,680,430 $ 2,385,235 $ 2,233,738
========== =========== ===========
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income $ 2,680,430 $ 2,385,235 $ 2,233,738
Equity in undistributed earnings of
subsidiary (2,689,944) (2,403,474) (2,248,259)
Amortization of deferred organization costs 8,841 15,156 15,156
----------- ----------- -----------
Cash flows provided by (used in) operating
activities (673) (3,083) 635
Cash and cash equivalents, beginning of year 1,624 4,707 4,072
----------- ----------- -----------
Cash and cash equivalents, end of year $ 951 $ 1,624 $ 4,707
=========== =========== ===========
</TABLE>
36
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. CASH FLOW SUPPLEMENTAL DISCLOSURES
The following information is supplemental information
regarding the cash flows for the years ended December 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- ------------
<S> <C> <C> <C>
Cash paid for:
Interest on deposits and borrowed funds $ 16,450,109 $ 17,258,719 $ 15,957,580
Income taxes 1,724,000 1,544,000 1,247,000
Summary of noncash investing and financing
activities:
Transfer from loans to foreclosed real
estate 330,014 34,000 843,477
Loans to facilitate the sale of foreclosed
real estate 2,335,000 2,438,023 235,648
</TABLE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of
financial instruments is made in accordance with the
requirements of SFAS No. 107, "Disclosures About Fair Value
of Financial Instruments". The estimated fair value
amounts have been determined by the Company using the
methods and assumptions described below. However,
considerable judgment is required to interpret market data
to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative
of the amounts the Company could realize in a current
market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect
on the estimated fair value amounts.
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for
which it is practicable to estimate that value.
Cash and Cash Equivalents
-------------------------
The carrying amount is a reasonable estimate of fair
value.
Securities, Mortgage-Backed and Related Securities,
---------------------------------------------------
and Other Investments
---------------------
For investments in debt securities, fair values are
based on quoted market prices or dealer quotes. For
other securities, fair value equals quoted market
price, if available. If a quoted market price is not
available, fair value is estimated using quoted market
prices for similar securities.
Loans Receivable
----------------
The fair value of loans receivable is estimated by
discounting the future cash flows using the current
rates at which similar loans would be made to
borrowers with similar credit ratings and for the same
remaining maturities.
<PAGE>
Deposits
--------
The fair value of NOW, savings, and money market
deposit accounts is the amount payable on demand at
the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining
maturities.
37
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Borrowed Funds
--------------
Borrowed funds consist of FHLB borrowings with varying
maturities. The fair values of these liabilities are
estimated using the discounted values of the
contractual cash flows. The discount rate is
estimated using the rates currently in effect for
similar borrowings.
Off-Balance Sheet Financial Instruments
---------------------------------------
The fair value of off-balance sheet financial
instruments has not been considered in determining
on-balance sheet fair value. As discussed in
Note 5, these off-balance sheet financial instruments
are commitments to extend credit and are either short
term in nature or subject to immediate repricing.
The carrying amounts and estimated fair values of the
Company's financial instruments at December 31, 1999
and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------- --------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 15,592 $ 15,592 $ 8,856 $ 8,856
Securities:
Available for sale 20,672 20,672 21,163 21,163
Held to maturity 18,025 17,114 13,034 12,780
Mortgage-backed and related securities
available for sale 6,564 6,564 10,551 10,551
Loans receivable:
Gross loans 336,050 332,266 322,502 322,896
Allowance for loan losses (1,306) (1,306) (1,178) (1,178)
-------- -------- -------- --------
Loans receivable, net 334,744 330,960 321,324 321,718
Other investments 3,755 3,755 2,828 2,828
-------- -------- -------- --------
Total $399,352 $394,657 $377,756 $377,896
======== ======== ======== ========
Financial liabilities:
Deposits $304,834 $297,168 $301,656 $299,383
Borrowed funds 75,106 74,645 55,109 56,674
-------- -------- -------- --------
Total $379,940 $371,813 $356,765 $356,057
======== ======== ======== ========
</TABLE>
The Company's remaining assets and liabilities are not
considered financial instruments.
17. STOCK REPURCHASE PLAN
The Company's Board of Directors has approved a Stock
Repurchase Program authorizing the Company to repurchase up
to 440,000 shares of the currently outstanding shares of
common stock. During 1999, a total of 381,789 shares
were repurchased. An additional 58,211 shares have been
authorized for repurchase under the program.
38
<PAGE>
<PAGE>
DIRECTORS, OFFICERS AND OFFICE LOCATIONS
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S> <C>
Frederick Willetts, III, Chairman
President, Chief Executive Officer
Cooperative Bankshares, Inc. and
Cooperative Bank For Savings, Inc. SSB
Paul G. Burton H. T. King, III
President, Burton Steel Company President, Hanover Iron Works, Inc.
F. Peter Fensel, Jr. R. Allen Rippy
President, F. P. Fensel Supply Company Vice President, Rippy Cadillac Oldsmobile, Inc.
James D. Hundley, M.D. O. Richard Wright, Jr.
President, Wilmington Orthopaedic Attorney, McGougan Wright Worley & Harper
Group P.A.
<CAPTION>
OFFICERS OF COOPERATIVE BANK
<S> <C>
Frederick Willetts, III Chairman, President & Chief Executive Officer
O.C. Burrell, Jr Executive Vice President - Chief Operating Officer
Daniel W. Eller Senior Vice President - Corporate Secretary
Eric R. Gray Senior Vice President - Mortgage Lending
Edward E. Maready Senior Vice President - Treasurer
Sandra B. Carr Vice President - Retail Banking Operations
Linda B. Garland Vice President - Marketing
Raymond A. Martin Vice President - Information Services
Carl N. Mathis, Jr. Vice President - Appraising
Donna H. Mitchell Vice President - Mortgage Operations
Dare C. Rhodes Vice President - Human Resources
Todd L. Sammons Vice President - Auditing
Phillip T. Whittington Vice President - Commercial Lending
</TABLE>
OFFICE LOCATIONS
Beaufort Morehead City
Belhaven Tabor City
Corolla Wallace
Elizabethtown Washington (2)
Jacksonville (2) Wilmington (4)
Kill Devil Hills
39
<PAGE>
<PAGE>
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Cooperative Bankshares, Inc.
201 Market Street
P.O. Box 600
Wilmington, North Carolina 28402
(910) 343-0181
TRANSFER AGENT
First Citizens Bank
Corporate Trust Department
P.O. Box 29522
Raleigh, North Carolina 27626-0522
SPECIAL COUNSEL
Housley Kantarian & Bronstein, P.C.
Suite 700
1220 19th Street, NW
Washington, DC 20036
ANNUAL MEETING
The Annual Meeting of Stockholders of Cooperative Bankshares,
Inc. will be held at the Four Points Hotel by Sheraton, 5032
Market Street, Wilmington, North Carolina, on April 28, 2000 at
11:00 a.m. All stockholders are cordially invited to attend.
FORM 10K
Copies of Cooperative Bankshares, Inc. Form 10K may be obtained
by stockholders without charge by writing to Linda B. Garland at
the Cooperative Headquarters address.
ADDITIONAL INFORMATION
For additional information, please contact
Frederick Willetts, III, Daniel W. Eller or
Linda B. Garland at (910) 343-0181
www.coop-bank.com
CAPITAL STOCK
Cooperative's common stock is traded on the NASDAQ National
Market under the symbol "COOP". As of December 31, 1999 there
were 2,687,919 shares outstanding which were held by 587
stockholders of record. No cash dividends have been paid on the
common stock since its issuance. Stock performance for 1999 and
1998 is given in the following table. All prices have been
adjusted for the stock dividends as described in the notes to
the consolidated financial statements.
QUARTERLY COMMON STOCK DATA
<TABLE>
<CAPTION>
1999 1998
-----------------------------
QUARTERS ENDED HIGH LOW HIGH LOW
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
December $11.625 $ 9.500 $16.000 $10.000
September 12.750 10.500 18.000 12.500
June 13.000 9.875 20.000 17.000
March 14.000 9.000 24.380 18.000
</TABLE>
40
<PAGE>
<PAGE>
[MAP OF COOPERATIVE BANK'S FULL-SERVICE OFFICES
APPEARS HERE]
SUBSIDIARIES
State or Other
Jurisdiction of
Incorporation
---------------
Cooperative Bank for Savings, Inc., SSB North Carolina
CS&L Services, Inc. (1) North Carolina
__________
(1) Wholly owned subsidiary of Cooperative Bank for Savings,
Inc., SSB.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statement of Cooperative Bankshares, Inc.
on Form S-8 (File No. 333-22335) of our report dated
January 21, 2000, on our audits of the consolidated
financial statements of Cooperative Bankshares, Inc.
as of December 31, 1999 and 1998, and for each of the
three years in the period ended December 31, 1999,
which report is incorporated by reference in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Raleigh, North Carolina
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 15,592,010
<INT-BEARING-DEPOSITS> 9,522,187
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,991,285
<INVESTMENTS-CARRYING> 18,024,581
<INVESTMENTS-MARKET> 17,114,381
<LOANS> 336,049,907
<ALLOWANCE> 1,306,381
<TOTAL-ASSETS> 410,145,845
<DEPOSITS> 304,834,455
<SHORT-TERM> 75,000,000
<LIABILITIES-OTHER> 862,523
<LONG-TERM> 105,567
<COMMON> 0
0
26,655,381
<OTHER-SE> 2,687,919
<TOTAL-LIABILITIES-AND-EQUITY> 410,145,845
<INTEREST-LOAN> 25,274,397
<INTEREST-INVEST> 3,175,011
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 28,449,408
<INTEREST-DEPOSIT> 12,837,966
<INTEREST-EXPENSE> 16,421,791
<INTEREST-INCOME-NET> 12,027,617
<LOAN-LOSSES> 210,000
<SECURITIES-GAINS> 161,365
<EXPENSE-OTHER> 8,885,204
<INCOME-PRETAX> 4,160,021
<INCOME-PRE-EXTRAORDINARY> 4,160,021
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,680,430
<EPS-BASIC> 0.95
<EPS-DILUTED> 0.90
<YIELD-ACTUAL> 3.20
<LOANS-NON> 266,692
<LOANS-PAST> 933,679
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,178,242
<CHARGE-OFFS> 94,034
<RECOVERIES> 12,173
<ALLOWANCE-CLOSE> 1,306,381
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,306,381
</TABLE>
