UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ____________________
Commission File Number: 0-24626
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COOPERATIVE BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1886527
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
201 Market Street, Wilmington, North Carolina 28401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (910) 343-0181
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date. 2,714,610 shares at August 3, 2000.
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<PAGE>
TABLE OF CONTENTS
Page
Part I Financial Information
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition,
June 30, 2000 and December 31, 1999 2
Consolidated Statements of Operations, for the three
and six months ended June 30, 2000 and 1999 3
Consolidated Statements of Cash Flows, for the six
months ended June 30, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-13
Part II Other Information 14
Signatures 15
Exhibit 11 - Statement Regarding Computation of Earnings Per Share 16
Exhibit 27 - Financial Data Schedule 17-18
<PAGE>
PART 1-FINANCIAL INFORMATION-ITEM 1-FINANCIAL STATEMENTS
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 2000 December 31, 1999
---------------- -----------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents (including interest-bearing deposits: $ 16,284,393 $ 15,592,010
June 2000 - $12,981,534; December 1999 - $9,522,187)
Securities:
Available for sale 20,663,758 20,671,572
Held to maturity (estimated market value: June 2000 - $16,970,945;
December 1999 - $17,114,381) 18,019,741 18,024,581
Mortgage-backed and related securities available for sale -- 6,564,413
Other investments 3,755,300 3,755,300
Loans receivable, net 351,677,788 334,743,526
Other real estate owned 283,049 244,626
Accrued interest receivable 2,684,280 2,471,459
Deferred tax asset 159,336 --
Premises and equipment, net 6,335,911 6,244,551
Prepaid expenses and other assets 871,588 1,833,807
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Total assets $ 420,735,144 $ 410,145,845
============= =============
LIABILITIES:
Deposits $ 321,166,766 $ 304,834,455
Borrowed funds 68,103,550 75,105,567
Escrow deposits 1,007,985 349,450
Accrued interest payable on deposits 74,514 50,945
Deferred tax liability -- 154,798
Accrued expenses and other liabilities 361,693 307,330
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Total liabilities 390,714,508 380,802,545
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STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value, 3,000,000 shares authorized,
none issued and outstanding -- --
Common stock, $1 par value, 7,000,000 shares authorized,
2,714,110 and 2,687,919 shares issued and outstanding 2,714,110 2,687,919
Additional paid-in capital 2,234,556 2,531,998
Accumulated other comprehensive income (loss) (205,753) (320,488)
Retained earnings 25,277,723 24,443,871
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Total stockholders' equity 30,020,636 29,343,300
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Total liabilities and stockholders' equity $ 420,735,144 $ 410,145,845
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 7,199,594 $ 6,199,357 $ 14,039,381 $ 12,531,366
Mortgage-backed and related securities -- 152,008 61,804 308,084
Securities 725,169 611,126 1,483,022 1,204,238
------------ ------------ ------------ ------------
Total interest income 7,924,763 6,962,491 15,584,207 14,043,688
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits 3,674,005 3,175,875 7,023,327 6,424,052
Borrowed funds 1,070,179 808,213 2,188,710 1,691,202
------------ ------------ ------------ ------------
Total interest expense 4,744,184 3,984,088 9,212,037 8,115,254
------------ ------------ ------------ ------------
NET INTEREST INCOME 3,180,579 2,978,403 6,372,170 5,928,434
Provision for loan losses 90,000 45,000 790,000 120,000
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 3,090,579 2,933,403 5,582,170 5,808,434
------------ ------------ ------------ ------------
NONINTEREST INCOME:
Net Gains on sale of loans -- 21,808 -- 144,918
Net Gains (losses) on sale of investments -- 937 (287,282) 937
Service charges on deposit accounts 180,881 161,774 353,121 315,609
Loan fees and service charges 114,237 84,161 196,513 156,335
Investment fees 21,582 18,420 47,577 29,901
Other service charges and fees 15,275 10,242 31,664 20,304
Real estate owned expenses and losses (5,601) 551 (39,564) (42,477)
Other income, net 124 (574) 583,396 560
------------ ------------ ------------ ------------
Total noninterest income 326,498 297,319 885,425 626,087
------------ ------------ ------------ ------------
NONINTEREST EXPENSE:
Compensation and fringe benefits 1,333,059 1,157,457 2,862,044 2,268,806
Occupancy and equipment 460,224 404,837 981,924 834,555
FDIC premium 15,632 43,772 31,767 89,213
Advertising 111,358 123,305 214,061 224,540
Other expense 432,807 446,727 885,240 944,280
------------ ------------ ------------ ------------
Total noninterest expenses 2,353,080 2,176,098 4,975,036 4,361,394
------------ ------------ ------------ ------------
Income before income taxes 1,063,997 1,054,624 1,492,559 2,073,127
Income tax expense 368,711 381,228 523,253 758,780
------------ ------------ ------------ ------------
NET INCOME $ 695,286 $ 673,396 $ 969,306 $ 1,314,347
============ ============ ============ ============
NET INCOME PER SHARE:
Basic $ 0.26 $ 0.24 $ 0.36 $ 0.45
============ ============ ============ ============
Diluted $ 0.25 $ 0.23 $ 0.34 $ 0.43
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
COOPERATIVE BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 969,306 $ 1,314,347
Adjustments to reconcile net income to net cash
provided by operating activities:
Net accretion, amortization, and depreciation 331,974 392,652
Net (gain)/loss on sale of loans and securities 287,282 (145,855)
Benefit for deferred income taxes (387,489) (172,731)
Loss on sale of premises and equipment 2,634 542
Loss on sales of foreclosed real estate 30,542 37,083
Gain on sale of branch office (582,583) --
Provision for loan losses 790,000 120,000
Changes in assets and liabilities:
Accrued interest receivable (217,551) (18,599)
Prepaid expenses and other assets 962,219 243
Accrued interest payable on deposits 42,119 18,090
Accrued expenses and other liabilities 54,363 86,435
------------ ------------
Net cash provided by operating activities 2,282,816 1,632,207
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sales of mortgage backed securities available for sale 6,277,957 --
Purchase of securities available for sale -- (1,999,375)
Proceeds from sale of securities available for sale -- 2,000,937
Proceeds from principal repayments of mortgage-backed
and related securities available for sale 189,762 1,062,115
Proceeds from sales of loans 34,685 29,501,515
Loan originations, net of principal repayments (19,368,031) (21,080,772)
Proceeds from disposals of foreclosed real estate 217,510 62,132
Purchases of premises and equipment (476,613) (350,311)
Proceeds from sale of premises and equipment 3,450 500
Net cash paid related to sale of branch office (5,156,761) --
Net purchases of other investments -- (145,900)
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Net cash provided by (used in) investing activities (18,278,041) 9,050,841
------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits 23,431,050 1,591,916
Proceeds from FHLB advances 28,000,000 12,000,000
Principal payments on FHLB advances (35,002,017) (17,001,909)
Proceeds from issuance of common stock 209,406 90,960
Repurchase of common stock (480,657) (3,738,046)
Dividends paid (135,454) --
Net change in escrow deposits 665,280 300,288
------------ ------------
Net cash provided by (used in) financing activities 16,687,608 (6,756,791)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 692,383 3,926,257
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 15,592,010 8,856,389
------------ ------------
END OF PERIOD $ 16,284,393 $ 12,782,646
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies: The significant accounting policies followed by
--------------------
Cooperative Bankshares, Inc. (the "Company") for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting. These unaudited consolidated financial statements have
been prepared in accordance with Rule 10-01 of Regulation S-X, and, in
management's opinion, all adjustments of a normal recurring nature
necessary for a fair presentation have been included. The accompanying
financial statements do not purport to contain all the necessary financial
disclosures that might otherwise be necessary in the circumstances and
should be read in conjunction with the consolidated financial statements
and notes thereto in the Company's annual report for the year ended
December 31, 1999. The results of operations for the six-month period ended
June 30, 2000 are not necessarily indicative of the results to be expected
for the full year.
2. Basis of Presentation: The accompanying unaudited consolidated financial
---------------------
statements include the accounts of Cooperative Bankshares, Inc.,
Cooperative Bank For Savings, Inc., SSB and its wholly owned subsidiary,
CS&L Services, Inc. All significant intercompany items have been
eliminated.
3. Earnings Per Share: Earnings per share are calculated by dividing net
-------------------
income by both the weighted average number of common shares outstanding and
the dilutive common equivalent shares outstanding. Common equivalent shares
consist of stock options issued and outstanding. In determining the number
of equivalent shares outstanding, the treasury stock method was applied.
This method assumes that the number of shares issuable upon exercise of the
stock options is reduced by the number of common shares assumed purchased
at market prices with the proceeds from the assumed exercise of the common
stock options plus any tax benefits received as a result of the assumed
exercise.
4. Comprehensive Income: Comprehensive income includes net income and all
---------------------
other changes to the Company's equity, with the exception of transactions
with shareholders ("other comprehensive income"). The Company's only
components of other comprehensive income relate to unrealized gains and
losses on available for sale securities.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income $ 695,286 $ 673,396 $ 969,306 $ 1,314,347
----------- ----------- ----------- -----------
Other comprehensive income, net of tax:
Realized losses on available for sale securities -- 937 287,282 937
Unrealized gains/(losses) on available for sale securities 66,759 (341,444) (99,192) (420,607)
Income tax (expense)/benefit (26,036) 132,798 (73,355) 163,671
----------- ----------- ----------- -----------
Other comprehensive income 40,723 (207,709) 114,735 (255,999)
Comprehensive income $ 736,009 $ 465,687 $ 1,084,041 $ 1,058,348
=========== =========== =========== ===========
</TABLE>
5. Statement of Financial Accounting Standards No. 137: In June 1999, the
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Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 137, Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133
as an amendment of FASB Statement No. 133. SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1998. It
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133, as issued, is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 with
earlier applications encouraged. SFAS No. 137 amended SFAS No. 133 by
delaying the effective date to all fiscal quarters of all fiscal years
beginning after June 15, 2000.
SFAS No. 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
Management of the Company anticipates that, due to the fact that it does
not use derivative instruments, the adoption of SFAS No. 133 will not have
a material effect on the Company's results of operations or its financial
position.
5
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Cooperative Bankshares, Inc. (the "Company") is a registered bank holding
company incorporated in North Carolina in 1994. The Company was formed for the
purpose of serving as the holding company of Cooperative Bank For Savings, Inc.,
SSB, ("Cooperative Bank" or the "Bank") a North Carolina chartered stock savings
bank. The Company's primary activities consist of holding the stock of
Cooperative Bank and operating the business of the Bank. Accordingly, the
information set forth in this report, including financial statements and related
data, relates primarily to Cooperative Bank.
Cooperative Bank is chartered under the laws of the state of North Carolina to
engage in general banking business. The Bank offers a wide range of retail
banking services including deposit services, banking cards and alternative
investment products. These funds are used for the extension of credit through
home loans, commercial loans, consumer loans and other installment credit such
as home equity, auto and boat loans and check reserve.
The Company conducts its operations through its main office in Wilmington, North
Carolina and 15 offices throughout eastern North Carolina. The Company considers
its primary market for savings and lending activities to be the communities of
eastern North Carolina extending from the Virginia to the South Carolina
borders.
The following management's discussion and analysis is presented to assist in
understanding the Company's financial condition and results of operations. This
discussion should be read in conjunction with the consolidated financial
statements and accompanying notes presented in this report.
MANAGEMENT STRATEGY
It is the mission of the Company to provide the maximum in safety and security
for our depositors, an equitable rate of return for our stockholders, excellent
service for our customers, and to do so while operating in a fiscally sound and
conservative manner, with fair pricing of our products and services, good
working conditions, outstanding training and opportunities for our staff, along
with a high level of corporate citizenship.
Cooperative Bank's lending activities have concentrated on the origination of
conventional mortgage loans for the purpose of constructing, financing or
refinancing residential properties. As of June 30, 2000, $297.5 million, or
84.6%, of the Bank's loan portfolio consisted of loans secured by residential
properties. To a lesser extent, the Bank originates nonresidential real estate
loans, home equity line of credit loans, secured and unsecured consumer and
business loans. While continuing to place primary emphasis on residential
mortgage loans, the Bank is taking a more aggressive position in pursuing
business lending, and nonresidential real estate lending involving loans secured
by small commercial properties with balances generally ranging from $100,000 to
$3,000,000. The Bank's primary emphasis is to originate adjustable rate loans
with the fixed rate loan as an option. As of June 30, 2000, adjustable rate
loans totaled 63.1%, and fixed rate loans totaled 36.9% 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.
6
<PAGE>
Gap is considered negative when the amount of interest rate sensitive
liabilities exceed the amount of interest rate sensitive assets. At June 30,
2000, Cooperative had a one-year negative gap position of 2.6%. During a period
of rising interest rates, a negative gap would tend to adversely affect net
interest income, while a positive gap would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative gap would
tend to result in an increase in net interest income while a positive gap would
tend to adversely affect net interest income. It is important to note that
certain shortcomings are inherent in static gap analysis. Although certain
assets and liabilities may have similar maturities or periods of repricing, they
may react in different degrees to changes in market interest rates. For example,
a large part of the Company's adjustable-rate mortgage loans are indexed to the
National Monthly Median Cost of Funds to SAIF-insured institutions. This index
is considered a lagging index that may lag behind changes in market rates. The
one-year or less interest-bearing liabilities also include checking, savings,
and money market deposit accounts. Experience has shown that the Company sees
relatively modest repricing of these transaction accounts. Management takes this
into consideration in determining acceptable levels of interest rate risk.
LIQUIDITY
The Company's goal is to maintain adequate liquidity to meet potential funding
needs of loan and deposit customers, pay operating expenses, and meet regulatory
liquidity requirements. Maturing securities, principal repayments of loans and
securities, deposits, income from operations and borrowings are the main sources
of liquidity. The Bank has been granted a line of credit by the Federal Home
Loan Bank of Atlanta in an amount of up to 25% of the Bank's total assets. At
June 30, 2000 the Bank's borrowed funds equal 16.2% of its total assets.
Scheduled loan repayments are a relatively predictable source of funds, unlike
deposits and loan prepayments that are significantly influenced by general
interest rates, economic conditions and competition.
At June 30, 2000, the estimated market value of liquid assets (cash, cash
equivalents, and marketable securities) was approximately, $57.7 million which
represents 14.8% of deposits and borrowed funds as compared to $63.7 million or
16.8% of deposits and borrowed funds at December 31, 1999. The decrease in
liquid assets was primarily due to the sale of mortgage-backed securities
guaranteed by Federal National Mortgage Association ("FNMA") and the Government
National Mortgage Association ("GNMA").
The Company's investment in U. S. Government agency bonds includes $5 million in
Federal Home Loan Banks' Dual Indexed Consolidated Bonds maturing August 4,
2003. These bonds had an 8% interest rate from August 4, 1993, through August 3,
1995, at which time the rate was adjusted to 3.485% based on an indexing
formula. Subsequent interest rates will also be based on an indexing formula and
will adjust annually on February 4 and August 4. The indexing formula states
that the interest rate per annum will be equal to a rate determined by the
10-Year CMT less the 6 month LIBOR plus a margin of 2.9% for August 4, 1995,
increasing 30 basis points annually to 5.0% for August 4, 2002. At June 30,
2000, the rate was 4.46%.
The Company's primary uses of liquidity are to fund loans and to make
investments. At June 30, 2000, outstanding off-balance sheet commitments to
extend credit totaled $21.1 million, and the undisbursed portion of construction
loans was $22.3 million. Management considers current liquidity levels adequate
to meet the Company's cash flow requirements.
CAPITAL
Stockholders' equity at June 30, 2000, was $30.0 million, up 2.31% from $29.3
million at December 31, 1999. Stockholders' equity at June 30, 2000 and December
31, 1999, includes unrealized losses of $206 and $320 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 June 30, 2000, the
Bank's ratio
7
<PAGE>
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 June 30, 2000, the Bank had a
ratio of qualifying total capital to risk-weighted assets of 11.4%.
The Company, as a bank holding company, is also subject, on a consolidated
basis, to the capital adequacy guidelines of the Board of Governors of the
Federal Reserve (the "Federal Reserve Board"). The capital requirements of the
Federal Reserve Board are similar to those of the FDIC governing the Bank.
The Company currently exceeds all of its capital requirements. Management
expects the Company to continue to exceed these capital requirements without
altering current operations or strategies.
On October 22, 1999 the Company's Board of Directors approved a Stock Repurchase
Program. The Stock Repurchase Program authorized the Company to repurchase up to
138,000 shares, or approximately 5% of the outstanding shares of common stock at
the time of approval. During the six months ended June 30, 2000, the Company
completed the stock repurchase program with the purchase of 46,385 shares at an
average cost of $10.36 per share.
On June 22, 2000, the Company's Board of Directors approved a quarterly cash
dividend of $.05 per share. The dividend was paid on July 15, 2000 to
stockholders of record as of July 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.
FINANCIAL CONDITION AT JUNE 30, 2000 COMPARED TO DECEMBER 31, 1999
The Company's total assets increased 2.6% to $420.7 million at June 30, 2000, as
compared to $410.1 million at December 31, 1999. The major changes in the assets
are as follows: a decrease of $6.6 million (100.0%) in mortgage backed and
related securities available for sale, an increase of $16.9 million (5.1%) in
loans receivable, an increase in foreclosed real estate to $283 thousand from
$245 thousand at December 31, 1999 and a decrease of $962 thousand (52.5%) in
prepaid expenses and other assets. Retail deposits, available liquid assets, and
proceeds from the sale of the mortgage-backed securities were used in part to
fund the increase in loans receivable. Although the Company has concentrated its
lending activities on the origination of conventional mortgage loans for the
purpose of the construction, financing or refinancing of residential properties,
it is becoming more active in the origination of small loans secured by
commercial properties. At June 30, 2000, approximately 15.4% of the Company's
loan portfolio were loans secured by collateral other than residential
properties.
With a $16.3 million (5.4%) increase in retail deposits, and other available
liquid assets, the Bank repaid $7.0 million in borrowed funds. Borrowed funds,
collateralized through an agreement with the FHLB for advances, are secured by
the Bank's investment in FHLB stock and qualifying first mortgage loans. At June
30, 2000, $28.0 million in borrowed funds mature in 1 year and the remaining
amount of funds mature in 2 to 5 years.
The Company's non-performing assets (loans 90 days or more delinquent and
foreclosed real estate) were $985 thousand, or 0.23% of assets, at June 30,
2000, compared to $1.4 million, or 0.35% of assets, at December 31, 1999. The
Company assumes an aggressive position in collecting delinquent loans and
disposing of foreclosed assets to minimize balances of non-performing assets and
continues to evaluate the loan and real estate portfolios to provide loss
reserves as considered necessary. Following a detailed review of the Bank's loan
portfolio during the quarter ended March 31, 2000, management authorized an
increase of approximately $625 thousand in the loan loss reserve. The decision
to increase the loan loss reserve was considered appropriate in light of the
successful expansion in the commercial loan portfolio in recent months and was
not in response to any significant increase in non-performing assets. These
loans do, however, pose risks that are not characteristic of loans secured by
single family residences. While there can be no guarantee, in the opinion of
management, the loan loss reserve of $2.0 million at June 30, 2000 is adequate
to cover probable losses.
8
<PAGE>
COMPARISON OF OPERATION RESULTS
OVERVIEW
The net income of the Company depends primarily upon net interest income. Net
interest income is the difference between the interest earned on loans and
securities portfolios and interest earning deposits and the cost of funds,
consisting principally of the interest paid on deposits and borrowings. The
Company's operations are materially affected by general economic conditions, the
monetary and fiscal policies of the Federal government, and the policies of
regulatory authorities.
NET INCOME
Net income for the three-month period ended June 30, 2000 of $695,286 represents
a 3.2% increase as compared to the same period last year. For the six-month
period ended June 30, 2000, net income decreased 26.3% to $969,306 as compared
to $1,314,347 for the same period a year ago. The major decreases in net income
for the period ended June 30, 2000 can be attributed to a $670 thousand increase
in provision for loan losses, a $287 thousand loss on sales of mortgage-backed
securities, offset, in part, by a $582 thousand gain on the sale of a branch
office.
INTEREST INCOME
Interest income increased 13.8% for the three-month period ended June 30, 2000,
as compared to the same period a year ago. The increase can be attributed to an
8.7% increase in the average balance of interest-earning assets and a 35 basis
point increase in average yield as compared to the same period a year ago. The
yield on average interest-earning assets increased to 7.92% as compared to 7.57%
for the same period a year ago.
For the six-month period ended June 30, 2000, interest income increased 11.0% as
compared to the same period a year ago. The average balance of interest-earning
assets increased 7.2% and average yield increased 27 basis points as compared to
the same period a year ago. The yield on average interest-earning assets
increased to 7.84% as compared to 7.57% for the same period a year ago. The
increase in the average balance of interest-earning assets and yield had a
positive effect on interest income.
INTEREST EXPENSE
Interest expense increased 19.1% for the three-month period ended June 30, 2000,
as compared to the same period a year ago. The average balance of
interest-bearing liabilities increased 8.3% and average cost increased 47 basis
points as compared to the same period a year ago. The cost of interest-bearing
liabilities increased to 5.12% as compared to 4.65% for the same period last
year.
For the six-month period ended June 30, 2000, interest expense increased 13.5%,
as compared to the same period a year ago. The average balance of
interest-bearing liabilities increased 6.9% and average cost increased 29 basis
points as compared to the same period a year ago. The increase in volume on
interest bearing liabilities can be attributed to the reliance on borrowed funds
to meet loan demand. The average balance of borrowed funds increased 28.6% from
the same period last year. The cost of interest-bearing liabilities increased to
4.99% as compared to 4.70% for the same period last year.
NET INTEREST INCOME
Net interest income for the three and six month periods ended June 30, 2000, as
compared to the same period a year ago, increased 6.8% and 7.5%, respectively.
During these same periods ended June 30, 2000, the yield on average
interest-earning assets increased 35 basis points and 27 basis points,
respectively. For the same periods, the cost of average interest-bearing
liabilities increased 47 basis points and 29 basis points, respectively. The
increase in the balance of average interest-earning assets and its respective
yield were the factors contributing to the increase in net interest income.
9
<PAGE>
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the Company's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such annualized yields and costs are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented.
<TABLE>
<CAPTION>
For the quarter ended
June 30, 2000 June 30, 1999
--------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------ --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities and other
interest-earning assets $ 49,557 $ 725 5.85% $ 44,654 $ 611 5.47%
Mortgage-backed and related securities 0 0 0.00% 9,587 152 6.34%
Loan portfolio 350,478 7,200 8.22% 313,779 6,199 7.90%
-------- ------ -------- ------
Total interest-earning assets 400,035 $7,925 7.92% 368,020 $6,962 7.57%
------ ------
Non-interest earning assets 13,241 14,116
-------- --------
Total assets $413,276 $382,136
======== ========
Interest-bearing liabilities:
Deposits 304,464 3,674 4.83% 291,847 3,176 4.35%
Borrowed funds 66,280 1,070 6.46% 50,591 808 6.39%
-------- ------ -------- ------
Total interest-bearing liabilities 370,744 $4,744 5.12% 342,438 $3,984 4.65%
------ ------
Non-interest bearing liabilities 12,557 10,014
-------- --------
Total liabilities 383,301 352,452
Stockholders' equity 29,975 29,684
-------- --------
Total liabilities and stockholders'
equity $413,276 $382,136
======== ========
Net interest income $3,181 $2,978
====== ======
Interest rate spread 2.80% 2.92%
===== =====
Net yield on interest-earning assets 3.18% 3.24%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 107.9% 107.5%
===== =====
</TABLE>
10
<PAGE>
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the Company's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such annualized yields and costs are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented.
<TABLE>
<CAPTION>
For the six months ended
June 30, 2000 June 30, 1999
---------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------ --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities and other
interest-earning assets $ 50,749 $ 1,483 5.84% $ 43,574 $ 1,204 5.53%
Mortgage-backed and related securities 1,996 62 6.21% 9,865 308 6.24%
Loan portfolio 344,732 14,039 8.14% 317,429 12,531 7.90%
-------- ------- -------- -------
Total interest-earning assets 397,477 $15,584 7.84% 370,868 $14,043 7.57%
------- -------
Non-interest earning assets 13,299 14,720
-------- --------
Total assets $410,776 $385,588
======== ========
Interest-bearing liabilities:
Deposits 299,862 7,023 4.68% 291,462 6,424 4.41%
Borrowed funds 69,099 2,189 6.34% 53,711 1,691 6.30%
-------- ------ -------- -------
Total interest-bearing liabilities 368,961 $9,212 4.99% 345,173 $ 8,115 4.70%
------ -------
Non-interest bearing liabilities 11,870 9,932
-------- --------
Total liabilities 380,831 355,105
Stockholders' equity 29,945 30,483
-------- --------
Total liabilities and stockholders'
equity $410,776 $385,588
======== ========
Net interest income $6,372 $ 5,928
====== =======
Interest rate spread 2.85% 2.87%
===== =====
Net yield on interest-earning assets 3.21% 3.20%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 107.7% 107.4%
===== =====
</TABLE>
11
<PAGE>
RATE/VOLUME ANALYSIS
The table below provides information regarding changes in interest income and
interest expense for the period indicated. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in volume multiplied by old rate)
and (ii) changes in rates (change in rate multiplied by old volume). The change
attributable to changes in rate-volume has been allocated to the other
categories based on absolute values.
<TABLE>
<CAPTION>
For the six month ended
June 30, 1999 vs. June 30, 2000
Increase (Decrease)
Due to
------------------------------
(DOLLARS IN THOUSANDS)
Volume Rate Total
------ ---- ------
<S> <C> <C> <C>
Interest income:
Securities and other
interest-earning assets $ 206 $ 72 $ 278
Mortgage-backed and related securities (245) (2) (247)
Loan portfolio 1,103 407 1,510
------- ------- -------
Total interest-earning assets 1,064 477 1,541
------- ------- -------
Interest expense:
Deposits 189 410 599
Borrowed funds 487 11 498
------- ------- -------
Total interest-bearing liabilities 676 421 1,097
------- ------- -------
Net interest income $ 388 $ 56 $ 444
======= ======= =======
</TABLE>
12
<PAGE>
RESERVE FOR LOAN LOSSES
During the six-month period ended June 30, 2000 the Bank had net charge-offs
against the allowance for loan losses of $70 thousand. The Bank added $790
thousand to the allowance for loan losses for the current six-month period
increasing the balance to $2.0 million at June 30, 2000. The $790 thousand
provision in the six-month period ended June 30, 2000 includes an increase of
approximately $625 thousand made in response to a detailed review of the Bank's
loan portfolio. Management's decision to increase the loan loss reserve was
considered appropriate in light of the successful expansion in the commercial
loan portfolio in recent months and was not in response to any significant
increase in non-performing assets. Management considers this level to be
appropriate based on lending volume, the current level of delinquencies and
other non-performing assets, overall economic conditions and other factors.
Future increases to the allowance may be necessary, however, due to changes in
loan composition or loan volume, changes in economic or market area conditions
and other factors.
NONINTEREST INCOME
Noninterest income increased by 9.8% for the three-month period ended June 30,
2000, as compared to the same period a year ago. For the three-month period
ended June 30, 2000, as compared to June 30, 1999, service charges on deposit
accounts increased 11.8% and loan fees and service charges increased 35.7%. The
increase in service charges on deposit accounts was due to an increase in number
of accounts and the increase in loan fees was due to an increase in loan
settlement service fees for loans processed for others.
Noninterest income increased by 41.4% for the six-month period ended June 30,
2000, as compared to the same period a year ago. The change in noninterest
income can be attributed to a $582 thousand gain on the sale of a branch office
offset by a $287 thousand loss on the sale of mortgage backed securities. During
the six-month period ended June 30, 2000, the Bank recognized no gains or losses
on the sales of loans as compared to the sale of $29.5 million at a gain of $145
thousand for the same period a year ago. The balance in real estate owned
expense represents operating expense and further reduction of the carrying
amount of foreclosed real estate owned. The Bank aggressively pursues disposal
of the foreclosed real estate owned, thereby incurring various charges in the
sales of these properties. Loan fees for the six-month period ended June 30,
2000 as compared to last year increased 25.7% due to an increase in loan
settlement service fees for loans processed for others. For the same period, fee
income from deposit operations increased 11.9% due to an increase in the volume
of checking accounts.
NONINTEREST EXPENSES
For the six-month period ended June 30, 2000, noninterest expense increased
14.1% as compared to the same period last year. Compensation and related costs
increased 26.1% due to an additional $150 thousand in funding for the defined
benefit plan, a $31 thousand payment to a director upon his retirement,
increased staffing levels and normal increases in salaries and benefits.
Occupancy and equipment expense increased by 17.7%. This increase can be
attributed to additional maintenance necessary to keep the buildings and
equipment in good repair, property tax increases, increases in the cost of data
processing services and normal increases in utilities expenses.
INCOME TAXES
The effective tax rates for the six month periods ended June 30, 2000 and 1999
approximate the statutory rate after giving effect to nontaxable interest, other
permanent tax differences, and adjustments to certain deferred tax liabilities.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable
(b) Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(1) Annual Meeting of Stockholders, April 28, 2000
(a) Election of Directors
<TABLE>
<CAPTION>
Votes For Votes Against Votes Withheld Abstentions
--------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
F. Peter Fensel, Jr. 2,335,086 0 99,518 0
Frederick Willetts, III 2,183,672 0 250,932 0
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11. Computation of Earnings Per Share
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30,
2000.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COOPERATIVE BANKSHARES, INC.
Dated: August 3, 2000 /s/ Frederick Willetts, III
------------------ ---------------------------------------
Frederick Willetts, III
President and Chief Executive Officer
Dated: August 3, 2000 /s/ Edward E. Maready
------------------ ---------------------------------------
Edward E. Maready
Treasurer and Chief Financial Officer
15
