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, 2001
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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.
---------------------------
(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
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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. [ ] 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. 2,807,535 shares at July 31, 2001
---------------------------------
TABLE OF CONTENTS
Page
Part I Financial Information
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition,
June 30, 2001, and December 31, 2000 2
Consolidated Statements of Operations, for the
three and six months ended June 30, 2001 and 2000 3
Consolidated Statements of Stockholders'
Equity, for the six months ended June 30, 2001 4
Consolidated Statements of Cash Flows, for the
six months ended June 30, 2001 and 2000 5-6
Notes to Consolidated Financial Statements 7-8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-15
Part II Other Information 16
Signatures 17
Exhibit 11 - Statement Regarding Computation of Earnings Per Share 18
PART I-FINANCIAL INFORMATION-FINANCIAL STATEMENTS
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2001 December 31, 2000*
---------------- ------------------
(UNAUDITED)
ASSETS
Cash and due from banks, noninterest-bearing $ 7,956,784 $ 3,904,275
Interest-bearing deposits in other banks 3,229,902 13,994,293
------------ ------------
Total cash and cash equivalents 11,186,686 17,898,568
Securities:
Available for sale (amortized cost of $43,506,431 in June 2001
and $16,000,677 in December 2000) 43,649,860 16,049,376
Held to maturity (estimated market value of $8,040,939 in June 2001
and $18,553,526 in December 2000) 8,000,000 18,977,776
FHLB stock 3,755,300 3,755,300
Loans 353,393,974 349,645,598
Less allowance for loan losses 2,289,726 2,159,663
------------ ------------
Net loans 351,104,248 347,485,935
Other real estate owned 60,000 234,711
Accrued interest receivable 2,643,514 2,776,404
Premises and equipment, net 6,304,072 6,272,610
Prepaid expenses and other assets 1,056,646 1,260,232
------------ ------------
Total assets $427,760,326 $414,710,912
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $338,984,849 $327,312,324
Borrowed funds 55,099,346 55,101,477
Escrow deposits 754,511 560,775
Accrued interest payable 38,436 50,528
Accrued expenses and other liabilities 1,010,537 873,629
------------ ------------
Total liabilities 395,887,679 383,898,733
------------ ------------
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,
2,800,975 and 2,714,610 shares issued and outstanding 2,800,975 2,714,610
Additional paid-in capital 2,154,096 2,234,936
Accumulated other comprehensive income 87,492 29,707
Retained earnings 26,830,084 25,832,926
------------ ------------
Total stockholders' equity 31,872,647 30,812,179
------------ ------------
Total liabilities and stockholders' equity $427,760,326 $414,710,912
============ ============
Book value per common share $ 11.38 $ 11.35
============ ============
*Derived from audited consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial
statements.
2
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
----------- ----------- ------------ ------------
INTEREST INCOME:
Loans $ 7,006,622 $ 7,199,594 $ 14,152,016 $ 14,039,381
Securities 696,892 570,675 1,232,212 1,200,936
Other 58,129 82,133 228,335 199,167
Dividends on FHLB stock 63,197 72,361 130,329 144,723
------------ ------------ ------------ ------------
Total interest income 7,824,840 7,924,763 15,742,892 15,584,207
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits 3,967,552 3,674,005 8,092,831 7,023,327
Borrowed funds 855,064 1,070,179 1,701,870 2,188,710
------------ ------------ ------------ ------------
Total interest expense 4,822,616 4,744,184 9,794,701 9,212,037
------------ ------------ ------------ ------------
NET INTEREST INCOME 3,002,224 3,180,579 5,948,191 6,372,170
Provision for loan losses 90,000 90,000 180,000 790,000
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 2,912,224 3,090,579 5,768,191 5,582,170
------------ ------------ ------------ ------------
NONINTEREST INCOME:
Net gains on sale of loans 2,420 -- 2,420 --
Net gains (losses) on sale of securities 12,399 -- 12,399 (287,282)
Service charges and fees on loans 176,498 114,237 335,215 196,513
Deposit-related fees 264,660 217,739 523,894 432,362
Gain on sale of branch -- -- -- 582,583
Other income, net 6,145 124 3,171 813
------------ ------------ ------------ ------------
Total noninterest income 462,122 332,100 877,099 924,989
------------ ------------ ------------ ------------
NONINTEREST EXPENSE:
Compensation and fringe benefits 1,269,547 1,333,059 2,566,176 2,862,044
Occupancy and equipment 521,985 460,224 1,065,802 981,924
Advertising 64,485 111,358 110,945 214,061
Real estate owned (1,548) 5,601 (638) 39,564
Other 421,001 448,440 906,651 917,007
------------ ------------ ------------ ------------
Total noninterest expenses 2,275,470 2,358,682 4,648,936 5,014,600
------------ ------------ ------------ ------------
Income before income taxes 1,098,876 1,063,997 1,996,354 1,492,559
Income tax expense 395,972 368,711 719,098 523,253
------------ ------------ ------------ ------------
NET INCOME $ 702,904 $ 695,286 1,277,256 $ 969,306
============ ============ ============ ============
NET INCOME PER SHARE:
Basic $ 0.25 $ 0.26 $ 0.46 $ 0.36
============ ============ ============ ============
Diluted $ 0.25 $ 0.25 $ 0.45 $ 0.34
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 2,800,975 2,708,990 2,774,243 2,714,539
============ ============ ============ ============
Diluted 2,816,418 2,796,544 2,816,297 2,811,555
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK CAPITAL INCOME EARNINGS EQUITY
------------- ---------- ------------- --------- -------------
Balance, December 31, 2000 $ 2,714,610 2,234,936 29,707 25,832,926 30,812,179
Exercise of stock options 105,763 156,660 -- -- 262,423
Stock traded to exercise options
(19,398 shares) (19,398) (237,500) -- -- (256,898)
Other comprehensive
income, net of taxes -- -- 57,785 -- 57,785
Net income for period -- -- -- 1,277,256 1,277,256
Cash dividends ($.10 per share) -- -- -- (280,098) (280,098)
------------- --------- ------ ---------- ----------
Balance, June 30, 2001 $ 2,800,975 2,154,096 87,492 26,830,084 31,872,647
============= ========= ====== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
4
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
2001 2000
------------ ------------
OPERATING ACTIVITIES:
Net income $ 1,277,256 $ 969,306
Adjustments to reconcile net income to net cash
provided by operating activities:
Net accretion, amortization, and depreciation 329,044 331,974
Net (gain) loss on sale securities (12,399) 287,282
Gain on sale of loans (2,420) --
Benefit from deferred income taxes (106,739) (387,489)
Loss on sale of premises and equipment 3,318 2,634
Loss (gain) on sales of foreclosed real estate (6,086) 30,542
Valuation losses on foreclosed real estate 2,807 --
Gain on sale of branch office -- (582,583)
Provision for loan losses 180,000 790,000
Proceeds from sale of loans 27,115 34,685
Changes in assets and liabilities:
Accrued interest receivable 132,890 (217,551)
Prepaid expenses and other assets 273,381 962,219
Accrued interest payable (12,092) 42,119
Accrued expenses and other liabilities 136,908 54,363
------------ ------------
Net cash provided by operating activities 2,222,983 2,317,501
------------ ------------
INVESTING ACTIVITIES:
Purchases of securities available for sale (37,518,037) --
Proceeds from sale of securities available for sale 5,994,375 6,277,957
Proceeds from maturity of securities available for sale 10,004,133 189,762
Proceeds from maturity of securities held to maturity 5,000,000 --
Loan originations, net of principal repayments (3,823,008) (19,368,031)
Proceeds from disposals of foreclosed real estate 177,990 217,510
Purchases of premises and equipment (365,250) (476,613)
Proceeds from sale of premises and equipment 5,375 3,450
Net cash paid related to sale of branch office -- (5,156,761)
------------ ------------
Net cash used in investing activities (20,524,422) (18,312,726)
------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits 11,672,525 23,431,050
Proceeds from borrowed funds -- 28,000,000
Principal payments on borrowed funds (2,131) (35,002,017)
Proceeds from issuance of common stock, net 5,525 209,406
Purchase and retirement of common stock -- (480,657)
Dividends (280,098) (135,454)
Net change in escrow deposits 193,736 665,280
------------ ------------
Net cash provided by financing activities 11,589,557 16,687,608
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,711,882) 692,383
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 17,898,568 15,592,010
------------ ------------
END OF PERIOD $ 11,186,686 $ 16,284,393
============ ============
(Continued)
5
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
SIX MONTHS ENDED
JUNE 30,
2001 2000
----------- ----------
Cash paid for:
Interest $ 9,806,793 $ 9,169,918
Income taxes 764,583 872,879
Summary of noncash investing and financing activities:
Transfer from loans to foreclosed real estate - 283,049
Unrealized gain on securities available for sale,
net of taxes 57,785 114,735
Transfer of securities from held to maturity to
available for sale - fair value 5,946,000 --
The accompanying notes are an integral part of the consolidated financial
statements.
6
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, 2000. The results of operations for the three and six-month
periods ended June 30, 2001 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. Certain items for prior periods have been reclassified to
conform to the current period presentation. These reclassifications have no
effect on the net income or stockholders' equity as previously reported.
3. Earnings Per Share: Earnings per share are calculated by dividing net
-------------------
income by the sum of 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. The following table sets forth the
components of other comprehensive income and total comprehensive income for
the three and six months ended June 30, 2001 and 2000:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income $ 702,904 $ 695,286 $ 1,277,256 $ 969,306
Other comprehensive income
Realized (gain) losses on available for sale securities (12,399) -- (12,399) 287,282
Unrealized gain (losses) on available for sale securities (94,326) 66,759 107,129 (99,192)
Income tax (expense) benefit 41,623 (26,036) (36,945) (73,355)
----------- ----------- ----------- -----------
Other comprehensive income (loss) (65,102) 40,723 57,785 114,735
----------- ----------- ----------- -----------
Comprehensive income $ 637,802 $ 736,009 $ 1,335,041 $ 1,084,041
=========== =========== =========== ===========
5. Statement of Financial Accounting Standards No. 133: On January 1, 2001,
------------------------------------------------------
the Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The statement is effective for fiscal years
beginning after June 15, 2000, with earlier adoption permitted, as amended
by SFAS No. 137. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. The
statement requires an
7
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. On January 1, 2001, the Company transferred held-to-maturity
investment securities with an amortized cost of approximately $5,978,000 to
the available-for-sale category at fair value as allowed by SFAS No. 133.
The unrealized loss at the time of transfer of approximately $32,000 before
tax has been included in other comprehensive income, net of tax. Such
transfers from the held-to-maturity category at the date of initial
adoption shall not call into question the Company's intent to hold other
debt securities to maturity in the future. The Company does not engage in
any hedging activities, and, other than the aforementioned transfer of
securities, the adoption of the statement had no impact on the Company.
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 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 was chartered in 1898. The Bank's headquarters are located in
Wilmington, North Carolina. Cooperative operates 17 financial centers throughout
the coastal and inland communities of eastern North Carolina. These centers
extend from Corolla, located on the Outer Banks of North Carolina, to Tabor
City, located on the South Carolina border. The Bank's deposit accounts are
insured up to applicable limits by the Federal Deposit Insurance Corporation
("FDIC").
Through its financial centers, the Bank provides a wide range of banking
products, including interest bearing and non-interest bearing checking accounts,
certificates of deposit and individual retirement accounts. It offers an array
of loan products: overdraft protection, commercial, consumer, agricultural, real
estate, residential mortgage and home equity loans. Also offered are safe
deposit boxes and automated banking services through ATMs and Access24 Phone
Banking. In addition, the Bank offers discount brokerage services, annuity sales
and mutual funds through a third party arrangement with UVEST Investment
Services.
MISSION STATEMENT
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.
MANAGEMENT STRATEGY
Cooperative Bank's lending activities have traditionally concentrated on the
origination of loans for the purpose of constructing, financing or refinancing
residential properties. In recent years, however, the Bank has emphasized
origination of nonresidential real estate loans, home equity lines of credit
loans, and secured and unsecured consumer and business loans. As of June 30,
2001, approximately $273.6 million, or 77.2%, of the Bank's loan portfolio
consisted of loans secured by residential properties. This was down from
approximately $291 million, or 82.9% at December 31, 2000. The Bank originates
adjustable rate and fixed rate loans. As of June 30, 2001, adjustable rate and
fixed rate loans totaled approximately 60.3% and 39.7%, respectively, of the
Bank's total loan portfolio.
The Bank has chosen to begin selling a larger percentage of its fixed rate
mortgage loan originations through broker dealer arrangements. This enables the
Bank to invest its funds in higher yielding commercial loans, while increasing
fee income. This is part of the continuing effort to restructure the balance
sheet and operations to be more reflective of a commercial bank.
In April 2001, the Bank opened a branch in Whiteville, North Carolina, which is
located in Columbus County. The branch is a full-service facility, including an
ATM, with two full-time employees and one part-time employee.
8
INTEREST RATE SENSITIVITY ANALYSIS
Interest rate sensitivity refers to the change in interest spread resulting from
changes in interest rates. To the extent that interest income and interest
expense do not respond equally to changes in interest rates, or that all rates
do not change uniformly, earnings will be affected. Interest rate sensitivity,
at a point in time, can be analyzed using a static gap analysis that measures
the match in balances subject to repricing between interest-earning assets and
interest-bearing liabilities. Gap is considered positive when the amount of
interest rate sensitive assets exceed the amount of interest rate sensitive
liabilities. Gap is considered negative when the amount of interest rate
sensitive liabilities exceed the amount of interest rate sensitive assets.
At June 30, 2001, Cooperative had a one-year negative gap position of 3.9%.
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 declining 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, 2001, the Bank's borrowed funds equaled 12.9% 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, 2001, the estimated market value of liquid assets (cash, cash
equivalents, and marketable securities) was approximately $62.9 million, which
represents 16.0% of deposits and borrowed funds as compared to $52.5 million or
13.7% of deposits and borrowed funds at December 31, 2000. The increase in
liquid assets was primarily due to the investment of cash from increased retail
deposits.
The Company's primary uses of liquidity are to fund loans and to make
investments. At June 30, 2001, outstanding off-balance sheet commitments to
extend credit totaled $26.0 million, and the undisbursed portion of construction
loans was $27.8 million. Management considers current liquidity levels adequate
to meet the Company's cash flow requirements.
CAPITAL
Stockholders' equity at June 30, 2001, was $31.9 million, up 3.4% from $30.8
million at December 31, 2000. Stockholders' equity at June 30, 2001 and December
31, 2000, includes unrealized gains net of tax, of $87,492 and $29,707,
respectively, on securities available for sale marked to estimated fair market
value.
Under the capital regulations of the FDIC, the Bank must satisfy minimum
leverage ratio requirements and risk-based capital requirements. Banks
supervised by the FDIC must maintain a minimum leverage ratio of core (Tier I)
capital to average adjusted assets ranging from 3% to 5%. At June 30, 2001, the
Bank's leverage ratio of Tier I capital to average adjusted assets was 7.6%. The
FDIC's risk-based capital rules require banks supervised by the FDIC to maintain
risk-based capital to risk-weighted assets of at least 8.00%. Risk-based capital
for the Bank is defined as Tier I capital plus the balance of allowance for loan
losses. At June 30, 2001, 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.
9
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 June 21, 2001, the Company's Board of Directors approved a quarterly cash
dividend of $.05 per share. The dividend was paid on July 16, 2001 to
stockholders of record as of July 2, 2001. 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, 2001, COMPARED TO DECEMBER 31, 2000
The Company's total assets increased 3.1% to $427.8 million at June 30, 2001, as
compared to $414.7 million at December 31, 2000. The major changes in the assets
are as follows: a decrease of $6.7 million (37.5%) in cash and cash equivalents,
an increase of $27.6 million (172.0%) in securities available for sale, a
decrease of $11.0 million (57.8%) in securities held to maturity and an increase
of $3.7 million (1.1%) in loans. Although the Company has concentrated its
lending activities on the origination of loans for the purpose of the
constructing, financing or refinancing of residential properties, it is becoming
more active in the origination of small loans secured by commercial properties.
At June 30, 2001, approximately 22.8% of the Company's loan portfolio were loans
secured by collateral other than residential properties, compared to 17.1% at
December 31, 2000.
The Bank funded the increase in loans and securities with an $11.7 million
(3.6%) increase in retail deposits, and other available liquid assets. The
increase in retail deposits was in certificates with terms no greater than 7
months which management priced aggressively to meet its funding needs. 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, 2001, $20.0 million in borrowed funds mature in 1 year and
$25.0 million of funds mature in 2 to 5 years. The remaining amount of borrowed
funds mature in 2010.
The Company's non-performing assets (nonaccrual loans, loans 90 days or more
delinquent and still accruing interest and foreclosed real estate) were $2.2
million or 0.52% of assets, at June 30, 2001, compared to $925 thousand, or
0.22% of assets, at December 31, 2000. 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 $2.3 million at June 30, 2001, is adequate to cover probable
losses inherent in the loan portfolio.
COMPARISON OF OPERATING RESULTS
OVERVIEW
The net income of the Company depends primarily upon net interest income. Net
interest income is the difference between the interest earned on loans, the
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 and six-month periods ended June 30, 2001, increased
1.1% to $702,904 and 31.8% to $1.3 million, respectively, as compared to the
same periods last year. The increase in net income for the six-month period
ended June 30, 2001 can be attributed to decreases of $610 thousand and $366
thousand in provision for loan losses and noninterest expense, respectively.
These decreases were partially offset by a reduction in net interest income of
$424 thousand.
INTEREST INCOME
For the three-month period ended June 30, 2001, interest income decreased 1.3%
as compared to the same period a year ago. The average balance of
interest-earning assets increased 1.5% but the average yield decreased 21 basis
points as compared to the same period a year ago. Interest income increased 1.0%
for the six-month period ended June 30, 2001, as compared to the same period a
year ago. The increase in interest income can be attributed to an increase in
the average balance of interest-earning assets of 1.4%. The average yield only
decreased 3 basis points to 7.81% as compared to
10
7.84%, 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
reduction in yield had a negative impact on interest income.
INTEREST EXPENSE
Interest expense increased 1.7% for the three-month period ended June 30, 2001,
as compared to the same period a year ago. This increase was due to the average
balance of interest-bearing liabilities increasing 0.6% and the average cost
increasing 5 basis points as compared to the same period a year ago. In the
six-month period ended June 30, 2001, interest expense increased 6.3% as
compared to the same period a year ago. The 0.6% increase in the average balance
of interest-bearing liabilities and their subsequent increase in cost of funds
principally contributed to the increase in interest expense. The average cost of
interest-bearing liabilities increased 29 basis points to 5.28% as compared to
4.99% for the same period last year.
NET INTEREST INCOME
Net interest income for the three and six-month periods ended June 30, 2001, as
compared to the same periods a year ago, decreased 5.6% and 6.7%, respectively.
During these same periods, the yield on average interest-earning assets
decreased 21 basis points and 3 basis points, respectively. For the same
periods, the cost of average interest-bearing liabilities increased 5 basis
points and 29 basis points, respectively. These differences can be attributed to
the fact that more assets repriced within 30 days as compared to liabilities as
a result of the rapidly declining interest rate environment during the entire
six-month period ended June 30, 2001. Once interest rates stabilize, management
expects the spread between the average yield on interest-earning assets and the
average cost on interest-bearing liabilities to improve.
11
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. The average loan portfolio
balances include nonaccrual loans.
For the quarter ended
JUNE 30, 2001 JUNE 30, 2000
-------------------------------- ------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- -------- -------- -------
Interest-earning assets:
Securities and other
interest-earning assets $ 49,037 $ 704 5.74% $ 49,557 $ 725 5.85%
Mortgage-backed and related securities 8,044 114 5.67% 0 0 0.00%
Loan portfolio 348,987 7,007 8.03% 350,478 7,200 8.22%
-------- -------- -------- --------
Total interest-earning assets 406,068 $ 7,825 7.71% 400,035 $ 7,925 7.92%
-------- --------
Non-interest earning assets 14,070 13,241
-------- --------
Total assets $420,138 $413,276
======== ========
Interest-bearing liabilities:
Deposits 316,673 3,968 5.01% 304,464 3,674 4.83%
Borrowed funds 56,410 855 6.06% 66,280 1,070 6.46%
-------- -------- -------- --------
Total interest-bearing liabilities 373,083 $ 4,823 5.17% 370,744 $ 4,744 5.12%
-------- --------
Non-interest bearing liabilities 15,013 12,557
-------- --------
Total liabilities 388,096 383,301
Stockholders' equity 32,042 29,975
-------- --------
Total liabilities and stockholders' equity $420,138 $413,276
======== ========
Net interest income $ 3,002 $ 3,181
======== ========
Interest rate spread 2.54% 2.80%
====== ======
Net yield on interest-earning assets 2.96% 3.18%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 108.8% 107.9%
====== ======
12
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. The average loan portfolio
balances include nonaccrual loans.
For the six months ended
JUNE 30, 2001 JUNE 30, 2000
-------------------------------- ------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- -------- -------- -------
Interest-earning assets:
Securities and other
interest-earning assets $ 50,421 $ 1,454 5.77% $ 50,749 $ 1,483 5.84%
Mortgage-backed and related securities 4,730 137 5.79% 1,996 62 6.21%
Loan portfolio 347,877 14,152 8.14% 344,732 14,039 8.14%
-------- -------- -------- --------
Total interest-earning assets 403,028 $ 15,743 7.81% 397,477 $ 15,584 7.84%
-------- --------
Non-interest earning assets 13,925 13,299
-------- --------
Total assets $416,953 $410,776
======== ========
Interest-bearing liabilities:
Deposits 315,507 8,093 5.13% 299,862 7,023 4.68%
Borrowed funds 55,756 1,702 6.11% 69,099 2,189 6.34%
-------- -------- -------- --------
Total interest-bearing liabilities 371,263 $ 9,795 5.28% 368,961 $ 9,212 4.99%
-------- --------
Non-interest bearing liabilities 13,956 11,870
-------- --------
Total liabilities 385,219 380,831
Stockholders' equity 31,734 29,945
-------- --------
Total liabilities and stockholders' equity $416,953 $410,776
======== ========
Net interest income $ 5,948 $ 6,372
======== ========
Interest rate spread 2.53% 2.85%
====== ======
Net yield on interest-earning assets 2.95% 3.21%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 108.6% 107.7%
====== ======
13
RATE/VOLUME ANALYSIS
The table below provides information regarding changes in interest income and
interest expense for the period indicated. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in volume multiplied by old rate)
and (ii) changes in rates (change in rate multiplied by old volume). The change
attributable to changes in rate-volume has been allocated to the two categories
based on their relative values.
For the six months ended
-------------------------------
June 30, 2000 vs. June 30, 2001
-------------------------------
Increase (Decrease)
Due to
-------------------------------
Volume Rate Total
-------- -------- --------
(Dollars in thousands)
Interest income:
Securities and other
interest-earning assets $ (10) $ (19) $ (29)
Mortgage-backed and related securities 79 (4) 75
Loan portfolio 128 (15) 113
------- ------- -------
Total interest-earning assets 197 (38) 159
------- ------- -------
Interest expense:
Deposits 378 692 1,070
Borrowed funds (410) (77) (487)
------- ------- -------
Total interest-bearing liabilities (32) 615 583
------- ------- -------
Net interest income $ 229 $ (653) $ (424)
======= ======= =======
PROVISION AND RESERVE FOR LOAN LOSSES
During the six-month period ended June 30, 2001 the Bank had net charge-offs
against the allowance for loan losses of $55,000. The Bank added $180,000 to the
allowance for loan losses for the current six-month period, increasing the
balance to $2.3 million at June 30, 2001. The $790,000 provision in the
six-month period ended June 30, 2000, included an increase of approximately
$625,000 made in response to a detailed review of the Bank's loan portfolio.
Management's decision to increase the loan loss reserve was considered
appropriate in light of the successful expansion in the commercial loan
portfolio. Due to the increases made to the provision last year, even though
non-performing assets have increased, management considers the current 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. Additionally, various regulatory agencies, as an integral
part of their examination process, periodically review the Company's allowance
for loan losses. Such agencies may require the recognition of additions to the
allowance for loan losses based on their judgments of information available to
them at the time of their examination.
14
NONINTEREST INCOME
Noninterest income increased by 39.2% for the three-month period ended June 30,
2001, as compared to the same period a year ago. This increase can be attributed
to deposit-related fees increasing 21.5% and fees and service charges on loans
increasing 54.5%. The increase in deposit-related fees was due to an increase in
the number of accounts and an increase in checking related fees. The increase in
loan fees was mainly due to an increase in loan settlement service fees for
loans processed for others. This program began in May 2000 and the volume has
increased due to the favorable rate environment.
In the six-month period ended June 30, 2001, noninterest income decreased 5.2%
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 which occurred
during the six months ended June 30, 2000. No similar transactions occurred
during the six months ended June 30, 2001. In addition, deposit-related fees
increased 21.2% and service charges and fees on loans increased 70.6% for the
six-month period ended June 30, 2001, as compared to the same period a year ago.
NONINTEREST EXPENSES
For the six-month period ended June 30, 2001, noninterest expense decreased 7.3%
as compared to the same period last year. Compensation and related costs
decreased 10.3%. The decrease can be principally attributed to a modification to
the defined benefit plan in 2000 and the early retirement of certain employees
at December 31, 2000. Occupancy and equipment expense increased by 8.5%. This
increase can be attributed to additional maintenance necessary to keep the
buildings and equipment in good repair, rental increases, opening a new branch,
property tax increases, increases in the cost of data processing services and
normal increases in utility expenses. The reduction of $103 thousand in
advertising can be attributed to a more conservative advertising policy. The
reasons for the changes in the three-month period ended June 30, 2001 as
compared to the same period last year are identical to the six-month period
ended June 30, 2001.
INCOME TAXES
The effective tax rate for both the three and six- month periods ended June 30,
2001 and 2000 was 36.0% as compared to 34.7% and 35.1%, respectively, for the
same periods last year.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the discussion contains
forward-looking statements that involve risks and uncertainties. Economic
circumstances, the Company's operations, and the Company's actual results could
differ significantly from those discussed in the forward-looking statements.
Some of the factors that could cause or contribute to such differences are
discussed herein, but also include the continued availability of commercial
lending opportunities in the Company's market area, a change in the ability of
the Company to sell fixed rate loan originations, an increase in nonperforming
assets, changes in the economy and interest rates generally, changes in
regulations affecting the Company or the Bank or changes in the economic
conditions in the Company's market area.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(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 27, 2001
(a) Election of Directors
FOR WITHHELD
NUMBER PERCENTAGE NUMBER PERCENTAGE
OF VOTES OF VOTES OF VOTES OF VOTES
Russell M. Carter 2,075,209 88.75 263,083 11.25
James D. Hundley, M.D. 2,075,209 88.75 263,083 11.25
O. Richard Wright, Jr. 2,073,209 88.66 265,083 11.34
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11. Computation of Earnings Per Share
16
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 13, 2001 /s/ Frederick Willetts, III
--------------------------------------
President and Chief Executive Officer
Dated: August 13, 2001 /s/ Todd L. Sammons
--------------------------------------
Treasurer and Chief Financial Officer
17