UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
-------------------
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
-------
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
--------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (910) 343-0181
--------------
Former name, former address and former fiscal year,
if changed since last report.
N/A
--------------------------------------------------------------------------------
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] 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. 2,849,447 shares at October 31, 2003
------------------------------------
TABLE OF CONTENTS
Page
Part I Financial Information
Item 1 Financial Statements
Consolidated Statements of Financial Condition,
September 30, 2003 and December 31, 2002 3
Consolidated Statements of Operations, for the
three and nine months ended September 30, 2003 and 2002 4
Consolidated Statement of Stockholders' Equity, for
the nine months ended September 30, 2003 5
Consolidated Statements of Cash Flows, for the nine
months ended September 30, 2003 and 2002 6-7
Notes to Consolidated Financial Statements 8-10
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-19
Item 3 Market Risk 19
Item 4 Controls and Procedures 19
Part II Other Information
Item 1 Legal Proceedings 20
Item 2 Changes in Securities and Use of Proceeds 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit 31.1 22
Exhibit 31.2 23
Exhibit 32 24
PART 1-FINANCIAL INFORMATION-FINANCIAL STATEMENTS
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, December 31,
2003 2002*
------------ ------------
(UNAUDITED)
ASSETS
Cash and due from banks, noninterest-bearing $ 12,813,782 $ 11,858,603
Interest-bearing deposits in other banks 4,203,387 --
------------ ------------
Total cash and cash equivalents 17,017,169 11,858,603
Securities:
Available for sale (amortized cost of $43,960,375 in September 2003
and $41,033,409 in December 2002) 44,570,080 42,075,212
Held to maturity (estimated market value of $4,102,965 in September
2003 and $8,009,087 in December 2002) 4,007,310 7,859,955
FHLB stock 3,904,500 4,054,700
Loans held for sale 13,362,419 25,659,935
Loans 392,081,725 393,812,940
Less allowance for loan losses 3,283,963 2,936,795
------------ ------------
Net loans 388,797,762 390,876,145
Other real estate owned 519,320 619,163
Accrued interest receivable 2,033,905 2,239,826
Premises and equipment, net 8,492,068 7,019,219
Goodwill 1,461,543 661,543
Other assets 12,221,071 11,285,276
------------ ------------
Total assets $496,387,147 $504,209,577
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $362,967,228 $357,254,096
Short-term borrowings 45,009,605 61,585,827
Escrow deposits 343,247 223,604
Accrued interest payable 228,854 284,568
Accrued expenses and other liabilities 2,512,621 3,320,629
Long-term obligations 43,089,000 43,092,592
------------ ------------
Total liabilities 454,150,555 465,761,316
------------ ------------
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,
2,849,447 and 2,835,947 shares issued and outstanding 2,849,447 2,835,947
Additional paid-in capital 2,634,542 2,440,645
Accumulated other comprehensive income 402,405 635,500
Retained earnings 36,350,198 32,536,169
------------ ------------
Total stockholders' equity 42,236,592 38,448,261
------------ ------------
Total liabilities and stockholders' equity $496,387,147 $504,209,577
============ ============
Book value per common share $ 14.82 $ 13.56
============ ============
*Derived from audited consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial
statements.
3
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
INTEREST INCOME:
Loans $ 6,377,688 $ 6,682,082 $19,438,132 $19,930,985
Securities 451,502 610,326 1,583,490 1,980,064
Other 14,410 18,473 38,400 42,391
Dividends on FHLB stock 29,554 54,981 112,978 168,273
----------- ----------- ----------- -----------
Total interest income 6,873,154 7,365,862 21,173,000 22,121,713
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits 1,756,670 2,462,594 5,698,997 7,918,261
Borrowed funds 882,897 917,751 2,664,796 2,722,183
----------- ----------- ----------- -----------
Total interest expense 2,639,567 3,380,345 8,363,793 10,640,444
----------- ----------- ----------- -----------
NET INTEREST INCOME 4,233,587 3,985,517 12,809,207 11,481,269
Provision for loan losses 180,000 120,000 560,000 520,000
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 4,053,587 3,865,517 12,249,207 10,961,269
----------- ----------- ----------- -----------
NONINTEREST INCOME:
Gain on sale of loans 1,230,255 704,043 3,489,333 765,385
Net gain on sale of securities -- -- -- 135,182
Service charges and fees on loans 115,797 140,280 369,015 478,035
Deposit-related fees 354,046 259,586 987,561 770,515
Gain on sale of real estate -- -- -- 464,977
Bank-owned life insurance earnings 91,506 85,658 278,490 285,332
Other income, net 52,940 84,664 146,944 187,639
----------- ----------- ----------- -----------
Total noninterest income 1,844,544 1,274,231 5,271,343 3,087,065
----------- ----------- ----------- -----------
NONINTEREST EXPENSE:
Compensation and fringe benefits 2,341,495 2,083,599 7,101,557 5,053,817
Occupancy and equipment 690,012 619,565 1,997,581 1,686,959
Professional and examination fees 38,058 63,438 251,766 293,062
Advertising 169,590 103,043 435,687 239,863
Real estate owned 26,137 (1,267) 59,677 9,260
Other 490,369 408,809 1,407,395 1,155,170
----------- ----------- ----------- -----------
Total noninterest expenses 3,755,661 3,277,187 11,253,663 8,438,131
----------- ----------- ----------- -----------
Income before income taxes 2,142,470 1,862,561 6,266,887 5,610,203
Income tax expense 712,063 642,682 2,025,591 1,970,660
----------- ----------- ----------- -----------
NET INCOME $ 1,430,407 $ 1,219,879 $ 4,241,296 $ 3,639,543
=========== =========== =========== ===========
NET INCOME PER SHARE:
Basic $ 0.50 $ 0.43 $ 1.49 $ 1.28
=========== =========== =========== ===========
Diluted $ 0.49 $ 0.43 $ 1.47 $ 1.27
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 2,848,197 2,835,947 2,846,941 2,835,634
=========== =========== =========== ===========
Diluted 2,901,844 2,861,290 2,895,058 2,856,083
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
4
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK CAPITAL INCOME EARNINGS EQUITY
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 $ 2,835,947 $ 2,440,645 $ 635,500 $ 32,536,169 $ 38,448,261
Exercise of stock options 13,500 173,590 -- -- 187,090
Tax benefit of stock option exercise -- 20,307 -- -- 20,307
Other comprehensive
loss, net of taxes -- -- (233,095) -- (233,095)
Net income -- -- -- 4,241,296 4,241,296
Cash dividends ($.15 per share) -- -- -- (427,267) (427,267)
------------ ------------ ------------ ------------ ------------
Balance, September 30, 2003 $ 2,849,447 $ 2,634,542 $ 402,405 $ 36,350,198 $ 42,236,592
============ ============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
2003 2002
------------- -------------
OPERATING ACTIVITIES:
Net income $ 4,241,296 $ 3,639,543
Adjustments to reconcile net income to net cash
used in operating activities:
Net accretion, amortization, and depreciation 1,013,541 791,310
Net gain on sale of securities -- (135,182)
Gain on sale of loans (3,489,333) (765,385)
Deferred income taxes (272,710) 49,499
Gain on sale of premises and equipment -- (464,977)
Loss (gain) on sales of foreclosed real estate 24,527 (6,855)
Valuation losses on foreclosed real estate 116,543 108,446
Provision for loan losses 560,000 520,000
Proceeds from sale of loans 226,985,153 37,347,800
Loan originations held for sale (211,332,970) (54,867,693)
Changes in assets and liabilities:
Accrued interest receivable 205,921 321,744
Other assets (464,081) (328,818)
Accrued interest payable (55,714) (149,509)
Accrued expenses and other liabilities (1,187,701) 3,023,703
------------- -------------
Net cash provided (used) in operating activities 16,344,472 (10,916,374)
------------- -------------
INVESTING ACTIVITIES:
Purchases of securities available for sale (13,489,375) (22,717,557)
Purchases of securities held to maturity (2,981,944) (4,165,348)
Purchase of Lumina Mortgage Company (400,000) (773,188)
Proceeds from sale of securities available for sale 1,650,200 19,058,014
Proceeds from maturity of securities available for sale -- 4,802,669
Proceeds from maturity of securities held to maturity 5,000,000 --
Repayments of mortgage-backed securities available for sale 8,870,067 --
Repayments of mortgage-backed securities held to maturity 1,679,191 --
Loan originations, net of principal repayments 1,245,586 (14,047,379)
Proceeds from disposals of foreclosed real estate 374,471 204,766
Additions to other real estate owned (8,236) (101,455)
Purchases of premises and equipment (2,140,341) (1,217,422)
Proceeds from sale of premises and equipment 1,691 499,070
------------- -------------
Net cash used in investing activities (198,690) (18,457,830)
------------- -------------
FINANCING ACTIVITIES:
Net increase in deposits 5,713,132 20,042,822
Net change in short-term borrowings (16,576,222) 18,039,188
Net change in long-term obligations (3,592) (5,003,400)
Proceeds from issuance of common stock, net 187,090 5,424
Dividends (427,267) (425,095)
Net change in escrow deposits 119,643 509,520
------------- -------------
Net cash provided (used) by financing activities (10,987,216) 33,168,459
------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 5,158,566 3,794,255
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 11,858,603 12,295,578
------------- -------------
END OF PERIOD $ 17,017,169 $ 16,089,833
============= =============
(Continued)
6
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
------------ ------------
Cash paid for:
Interest $ 8,419,507 $ 10,789,953
Income taxes 2,388,352 1,857,763
Summary of noncash investing and financing activities:
Transfer from loans to foreclosed real estate 479,462 963,668
Loans to facilitate the sale of foreclosed real estate 72,000 918,450
Unrealized gain (loss) on securities available for sale,
net of taxes (233,095) 227,136
Accrual of goodwill for purchase of Lumina Mortgage Company 800,000 --
Reclassifications between long-term obligations
and short-term borrowings 15,000,000 15,000,000
The accompanying notes are an integral part of the consolidated financial
statements.
7
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
consolidated 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, 2002 (the "Annual Report"). The results of
operations for the nine-month period ended September 30, 2003 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 (the "Bank") and its wholly owned subsidiaries, Lumina
Mortgage Company, Inc. ("Lumina") and CS&L Holdings, Inc. ("Holdings"), and
Holdings' majority owned subsidiary, CS&L Real Estate Trust, Inc. (the
"REIT"). 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 (EPS) are calculated by dividing net
income by the weighted average number of common shares outstanding (basic
EPS) and the sum of the weighted average number of common shares
outstanding and potential common stock (diluted EPS). Potential common
stock consists of stock options issued and outstanding. In determining the
number of shares of potential common stock, 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. The following table provides a
reconciliation of income available to common stockholders and the average
number of shares outstanding for the periods below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
----------------------- -----------------------
Net income (numerator) $1,430,407 $1,219,879 $4,241,296 $3,639,543
Shares for basic EPS (denominator) 2,848,197 2,835,947 2,846,941 2,835,634
Dilutive effect of stock options 53,647 25,343 48,117 20,449
----------------------- -----------------------
Shares for diluted EPS (denominator) 2,901,844 2,861,290 2,895,058 2,856,083
======================= =======================
For the nine months ended September 30, 2003 and 2002, there were 0 and 14,204
options outstanding respectively that were antidilutive since the exercise price
exceeds the average market price. The options have been omitted from the
calculation of the dilutive effect of stock options.
8
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 nine months ended September 30:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income $ 1,430,407 $ 1,219,879 $ 4,241,296 $ 3,639,543
Other comprehensive income
Realized (gains) losses on available for sale
securities -- -- -- (135,182)
Unrealized gains (losses) on available for sale (145,278) 346,469 (432,098) 507,536
securities
Income taxes 49,395 (135,123) 199,003 (145,218)
----------- ----------- ----------- -----------
Other comprehensive income (loss) (95,883) 211,346 (233,095) 227,136
----------- ----------- ----------- -----------
Comprehensive income $ 1,334,524 $ 1,431,225 $ 4,008,201 $ 3,866,679
=========== =========== =========== ===========
5. Stock-Based Compensation: 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. The
option exercise price is the market price of the common stock on the date
the option is granted. 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.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ----------------------------
2003 2002 2003 2002
------------ ---------- ------------ -------------
Net income, as reported $ 1,430,407 $1,219,879 $ 4,241,296 $ 3,639,543
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects -- -- -- (60,543)
------------ ---------- ------------ -------------
Pro forma net income $ 1,430,407 $1,219,879 $ 4,241,296 $ 3,579,000
============ ========== ============ =============
Earnings per share:
Basic-as reported $ 0.50 $ 0.43 $ 1.49 $ 1.28
============ ========== ============ =============
Basic-pro forma $ 0.50 $ 0.43 $ 1.49 $ 1.26
============ ========== ============ =============
Diluted-as reported $ 0.49 $ 0.43 $ 1.47 $ 1.27
============ ========== ============ =============
Diluted-pro forma $ 0.49 $ 0.43 $ 1.47 $ 1.25
============ ========== ============ =============
9
6. Acquisition: On May 31, 2002, the Bank acquired the operating assets of
Wilmington-based Lumina Mortgage Company. The purchase price was $740,000
in cash with two future contingent payments based on loan origination
volume and meeting certain profitability goals of Lumina. The agreement was
subsequently amended to change the contingent payments into two payments of
$400,000 each payable on July 31, 2003 and 2004. These payments are
considered additional purchase price and accordingly, goodwill related to
this acquisition was increased by $800,000.
7. New Accounting Pronouncements: On January 1, 2003, the Company adopted SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity." The
adoption of SFAS No. 146 did not have a material effect on the Company's
consolidated financial statements.
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of
FASB Interpretation No. 34." This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after
December 31, 2002 and did not have a material effect on the Company's
consolidated financial statements. The disclosure requirements are
effective for financial statements of interim and annual periods ending
after December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51". This
Interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable interests
in variable interest entities obtained after January 31, 2003. For public
enterprises with a variable interest in a variable interest entity created
before February 1, 2003, the interpretation applies to that enterprise no
later than the beginning of the first interim or annual reporting period
beginning after December 15, 2003. The application of this Interpretation
is not expected to have a material effect on the Company's consolidated
financial statements. The Interpretation requires certain disclosures in
financial statements issued after January 31, 2003 if it is reasonably
possible that the Company will consolidate or disclose information about
variable interest entities when the Interpretation becomes effective.
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 is the parent
company of Cooperative Bank (the "Bank"); a North Carolina chartered commercial
bank. Cooperative Bank, headquartered in Wilmington, North Carolina, was
chartered in 1898. The Bank provides financial services through 18 financial
centers in Eastern North Carolina and a loan origination office in Corolla,
North Carolina. One of the Bank's subsidiaries, Lumina Mortgage Company, Inc.
("Lumina") is a mortgage banking firm originating and selling residential
mortgage loans through offices in Wilmington, North Carolina; North Myrtle
Beach, South Carolina; and Virginia Beach, Virginia. The Bank's other
subsidiary, CS&L Holdings, Inc. ("Holdings"), is a holding company for CS&L Real
Estate Trust, Inc. (the "REIT"), which is a real estate investment trust.
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, which are insured up
to the applicable limits of the Federal Deposit Insurance Corporation ("FDIC").
It offers an array of loan products: overdraft protection, commercial, consumer,
agricultural, real estate, residential mortgage and home equity
10
loans. Also offered are safe deposit boxes, ATMs and Access24 Phone Banking. The
Bank began offering Online Banking and Bill Payment on July 1, 2003. In
addition, the Bank offers discount brokerage services, annuity sales and mutual
funds through a third party arrangement with UVEST Investment Services. Lumina
delivers a wide range of mortgage loan products to its market area.
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 and secured and unsecured
consumer and business loans. As of September 30, 2003, approximately $260
million, or 66%, of the Bank's loan portfolio, which excludes loans held for
sale, consisted of loans secured by residential properties. This compared to
approximately $268 million, or 69% at December 31, 2002. The Bank originates
adjustable rate and fixed rate loans. As of September 30, 2003, adjustable rate
and fixed rate loans totaled approximately 66.9% and 33.1%, respectively, of the
Bank's total loan portfolio.
The Bank has chosen to sell a larger percentage of its fixed rate mortgage loan
originations in the secondary market and through brokered arrangements. This
enables the Bank to reinvest these funds in 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.
The Bank opened additional branches in Wilmington, North Carolina on May 12,
2003 and Morehead City, North Carolina on July 1, 2003. The Bank expects to open
additional branches in Wilmington and Southport, North Carolina around the end
of 2003.
INTEREST RATE SENSITIVITY ANALYSIS
Interest rate sensitivity refers to the change in interest spread resulting from
changes in interest rates. To the extent that interest income and interest
expense do not respond equally to changes in interest rates, or that all rates
do not change uniformly, earnings will be affected. Interest rate sensitivity,
at a point in time, can be analyzed using a static gap analysis that measures
the match in balances subject to repricing between interest-earning assets and
interest-bearing liabilities. Gap is considered positive when the amount of
interest rate sensitive assets exceed the amount of interest rate sensitive
liabilities. Gap is considered negative when the amount of interest rate
sensitive liabilities exceed the amount of interest rate sensitive assets. At
September 30, 2003, Cooperative had a one-year gap position of 0.0%. During a
period of falling interest rates, a positive gap would tend to adversely affect
net interest income, while a negative gap would tend to result in an increase in
net interest income. During a period of rising interest rates, a positive gap
would tend to result in an increase in net interest income while a negative gap
would tend to adversely affect net interest income. It is important to note that
certain shortcomings are inherent in using a 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 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.
When Lumina gives a rate lock commitment to a customer, there is a concurrent
"lock in" for the loan with a secondary market investor under a best efforts
delivery mechanism. Therefore, interest rate risk is mitigated
11
because any commitments to fund a loan available for sale is concurrently hedged
by a commitment from an investor to purchase the loan under the same terms.
Loans are usually sold within 60 days after closing.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Bank enters into agreements that obligate it to make future payments under
contracts, such as debt and lease agreements. In addition, the Bank commits to
lend funds in the future such as credit lines and loan commitments. Below is a
table of such contractual obligations and commitments at September 30, 2003 (in
thousands).
Payments Due by Period
----------------------------------------------------
Less
than 1 1-3 4-5 Over 5
Contractual Obligations Total year years years years
----------------------------------------------------
Borrowed Funds $ 88,099 $ 45,010 $ 10,000 $ 10,000 $ 23,089
Lease Obligations 4,885 381 618 492 3,394
Lumina Mortgage Company Purchase 400 400 -- -- --
Deposits 362,967 327,827 34,958 182 --
----------------------------------------------------
Total Contractual Cash Obligations $456,351 $373,618 $ 45,576 $ 10,674 $ 26,483
====================================================
Amount of Commitment Expiration
Per Period
-----------------------------------------------
Total Less
Amounts than 1 1-3 4-5 Over 5
Other Commitments Committed year years years years
-----------------------------------------------
Undisbursed portion of home equity
collateralized primarily by junior liens
on 1-4 family properties $15,590 $ 651 $ 1,522 $ 537 $12,880
Other commitments and credit lines 14,144 3,366 7,674 79 3,025
Undisbursed portion of construction loans 39,737 39,737 -- -- --
Available for sale mortgage loan commitments 4,317 4,317 -- -- --
Fixed-rate mortgage loan commitments 1,973 1,973 -- -- --
Adjustable-rate mortgage loan
commitments 5,347 5,347 -- -- --
-----------------------------------------------
Total Commitments $81,108 $55,391 $ 9,196 $ 616 $15,905
===============================================
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 ("FHLB") in an amount of up to 25% of the Bank's total
assets. At September 30, 2003, the Bank's borrowed funds from the FHLB equaled
15.1% 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.
12
At September 30, 2003, the estimated market value of liquid assets (cash, cash
equivalents, marketable securities and loans held for sale) was approximately
$79.1 million, which represents 17.5% of deposits and borrowed funds as compared
to $87.6 million or 19.0% of deposits and borrowed funds at December 31, 2002.
The decrease in liquid assets was primarily due to a decrease in loans held for
sale.
The Company's primary uses of liquidity are to fund loans and to make
investments. At September 30, 2003, outstanding off-balance sheet commitments to
extend credit totaled $41.4 million, and the undisbursed portion of construction
loans was $39.7 million. Management considers current liquidity levels adequate
to meet the Company's cash flow requirements.
CAPITAL
Stockholders' equity at September 30, 2003, was $42.2 million, up 9.9% from
$38.4 million at December 31, 2002. Stockholders' equity at September 30, 2003,
includes an unrealized gain net of tax, of $402,405 as compared to an unrealized
gain net of tax at December 31, 2002, of $635,500 on securities available for
sale marked to estimated fair market value.
Under the capital regulations of the FDIC, the Bank must satisfy minimum
leverage ratio requirements and risk-based capital requirements. Banks
supervised by the FDIC must maintain a minimum leverage ratio of core (Tier I)
capital to average adjusted assets ranging from 3% to 5%. At September 30, 2003,
the Bank's ratio of Tier I capital was 7.96%. The FDIC's risk-based capital
rules require banks supervised by the FDIC to maintain risk-based capital to
risk-weighted assets of at least 8.00%. Risk-based capital for the Bank is
defined as Tier I capital plus the balance of allowance for loan losses. At
September 30, 2003, the Bank had a ratio of qualifying total capital to
risk-weighted assets of 12.02%.
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 September 24, 2003, the Company's Board of Directors approved a quarterly
cash dividend of $0.05 per share. The dividend was paid on October 16, 2003 to
stockholders of record as of October 1, 2003. This brings the total dividend for
the year to $0.15 per share. 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.
CRITICAL ACCOUNTING POLICY
The Bank's most significant critical accounting policy is the determination of
its allowance for loan losses. A critical accounting policy is one that is both
very important to the portrayal of the Bank's financial condition and results,
and requires management's most difficult, subjective or complex judgments. What
makes these judgments difficult, subjective and/or complex is the need to make
estimates about the effects of matters that are inherently uncertain. For
further information on the allowance for loan losses, see the "Financial
Condition" in Management's Discussion and Analysis and Note 3 of "Notes to
Consolidated Financial Statements" included in the Annual Report.
FINANCIAL CONDITION AT SEPTEMBER 30, 2003, COMPARED TO DECEMBER 31, 2002
The Company's total assets decreased 1.6% to $496.4 million at September 30,
2003, as compared to $504.2 million at December 31, 2002. The major change in
assets is a decrease of $12.3 million (47.9%) in loans held for sale due to the
decrease in mortgage volume caused by an increase in mortgage rates. This
reduction along with the maturing of a held to maturity bond allowed the Bank to
reduce short-term borrowings $16.6 million (26.9%). In addition there is an
increase of $5.2 million (43.5%) in cash and cash equivalents, which was caused
by an increase in deposits of $5.7 million (1.6%). The increase in deposits was
mainly in the fifteen month certificate and non-interest-bearing checking. The
increase in the fifteen month certificate was due to the Bank offering a good
rate on a reasonably short term deposit. The Bank continues to emphasize
obtaining business accounts, which is the reason
13
for the checking account increase. The Bank also attracted an additional $5.5
million in internet deposits because the rates were competitive with the Bank's
local markets. Internet deposits are usually obtained from other financial
institutions with terms primarily of one or two years. 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. The
increase of $1.5 million in premises and equipment, during this same period, was
primarily due to the building and furnishing of new branches. Other assets
increased $1.7 million (14.5%) largely due to an increase of $475,106 in
deferred income taxes and an increase of $800,000 in goodwill. The additional
goodwill was created by amending the purchase agreement of Lumina Mortgage
Company from two contingent payments into two payments of $400,000 each payable
on July 31, 2003 and 2004. A reduction in accounts payable caused the decrease
of $808,008 in accrued expenses and other liabilities from December 31, 2002 to
September 30, 2003
The Company's non-performing assets (loans 90 days or more delinquent and
foreclosed real estate) were $1.1 million, or .22% of assets, at September 30,
2003, compared to $1.2 million, or .24% of assets, at December 31, 2002.
Foreclosed real estate decreased to $519,320 at September 30, 2003, from
$619,163 at December 31, 2002. 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. For further
information see "Comparison of Operating Results - Provision and Allowance for
Loan Losses".
COMPARISON OF OPERATING RESULTS
OVERVIEW
The net income of the Company depends primarily upon net interest income. Net
interest income is the difference between the interest earned on loans, the
securities portfolio 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. Yields and costs have declined because of the actions
the Federal Reserve has taken since 2001 to reduce interest rates in hopes of
spurring the economy.
NET INCOME
Net income for the three and nine-month periods ended September 30, 2003,
increased 17.3% to $1.4 million and 16.5% to $4.2 million respectively, as
compared to the same periods last year. The increase in net income for the
nine-month period ended September 30, 2003 can be attributed to increases in net
interest income of $1.3 million and non-interest income of $2.2 million. These
changes were partially offset by an increase in non-interest expense of $2.8
million during the same period.
INTEREST INCOME
For the three-month period ended September 30, 2003, interest income decreased
6.7% as compared to the same period a year ago. The average balance of
interest-earning assets increased 7.0% but the average yield decreased 84 basis
points as compared to the same period a year ago. Interest income decreased 4.3%
for the nine-month period ended September 30, 2003, as compared to the same
period a year ago. The decrease in interest income can be attributed to the
yield on average interest-earning assets decreasing to 5.91% as compared to
6.72% for the same period a year ago. The average balance of interest-earning
assets increased 8.9% for the nine month period ended September 30, 2003, as
compared to 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 decreased 21.9% for the three-month period ended September 30,
2003, as compared to the same period a year ago. This decrease was due to the
average cost of interest-bearing liabilities decreasing 82 basis points as
compared to the same period a year ago. In the nine-month period ended September
30, 2003, interest expense decreased 21.4% as compared to the same period a year
ago. The average balance of interest-bearing liabilities
14
increased 6.7% as compared to the same period a year ago. The cost of
interest-bearing liabilities decreased to 2.54% as compared to 3.45% for the
same period last year.
NET INTEREST INCOME
Net interest income for the three and nine-month periods ended September 30,
2003, as compared to the same period a year ago, increased 6.2% and 11.6%
respectively. The increase was due to interest-earning assets increasing faster
than interest-bearing liabilities. In addition, there was a larger decrease in
the cost of liabilities versus the yield on assets in the nine-month period,
which can be attributed to the fact that deposits continued to reprice at lower
yields caused by the Federal Reserve's previous rate reductions and the
increased use of low cost borrowings due to the Lumina purchase. See "Average
Yield/Cost Analysis" table for further information on interest income and
interest expense.
15
AVERAGE YIELD/COST ANALYSIS
The following tables contain 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
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
-----------------------------------------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Interest-earning assets:
Interest-bearing deposits in other
banks $ 5,487 $ 14 1.02% $ 3,512 $ 18 2.05%
Securities:
Available for sale 40,949 440 4.30% 39,212 504 5.14%
Held to maturity 5,681 11 0.77% 8,460 107 5.06%
FHLB stock 3,614 30 3.32% 4,155 55 5.29%
Loan portfolio 425,569 6,378 5.99% 394,554 6,682 6.77%
-------- -------- -------- --------
Total interest-earning assets 481,300 6,873 5.71% 449,893 7,366 6.55%
Non-interest earning assets 28,449 27,670
-------- --------
Total assets $509,749 $477,563
======== ========
Interest-bearing liabilities:
Deposits 342,492 1,757 2.05% 339,539 2,462 2.90%
Borrowed funds 96,694 883 3.65% 80,120 918 4.58%
-------- -------- -------- --------
Total interest-bearing liabilities 439,186 $2,640 2.40% 419,659 $3,380 3.22%
-------- --------
Non-interest bearing liabilities 28,685 21,185
-------- --------
Total liabilities 467,871 440,844
Stockholders' equity 41,878 36,719
-------- --------
Total liabilities and stockholders'
equity $509,749 $477,563
======== ========
Net interest income $ 4,233 $ 3,986
======== ========
Interest rate spread 3.31% 3.33%
===== =====
Net yield on interest-earning assets 3.52% 3.54%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 109.6% 107.2%
===== =====
16
For the nine months ended
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
-------------------------------- -----------------------------------
(Dollars in thousands) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
Interest-earning assets:
Interest-bearing deposits in other banks $ 4,675 $ 38 1.08% $ 3,150 $ 43 1.82%
Securities:
Available for sale 39,668 1,370 4.60% 41,260 1,669 5.39%
Held to maturity 6,906 213 4.11% 6,892 311 6.02%
FHLB stock 3,845 113 3.92% 4,155 168 5.39%
Loan portfolio 422,892 19,439 6.13% 383,306 19,931 6.93%
-------- -------- -------- --------
Total interest-earning assets 477,986 $ 21,173 5.91% 438,763 $ 22,122 6.72%
-------- --------
Non-interest earning assets 27,525 26,855
-------- --------
Total assets $505,511 $465,618
======== ========
Interest-bearing liabilities:
Deposits 345,212 5,699 2.20% 334,185 7,918 3.16%
Borrowed funds 93,656 2,665 3.79% 77,002 2,723 4.72%
-------- -------- -------- --------
Total interest-bearing liabilities 438,868 $ 8,364 2.54% 411,187 $ 10,641 3.45%
-------- --------
Non-interest bearing liabilities 26,173 19,047
-------- --------
Total liabilities 465,041 430,234
Stockholders' equity 40,470 35,384
-------- --------
Total liabilities and stockholders' equity $505,511 $465,618
======== ========
Net interest income $ 12,809 $ 11,481
======== ========
Interest rate spread 3.37% 3.27%
===== =====
Net yield on interest-earning assets 3.57% 3.49%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 108.9% 106.7%
===== =====
17
PROVISION AND ALLOWANCE FOR LOAN LOSSES
During the nine-month period ended September 30, 2003 the Bank had net
charge-offs against the allowance for loan losses of $212,832 compared to
$340,613 for the same period in 2002. This decrease was primarily due to one
larger credit being charged off during the first quarter of 2002. The Bank added
$560,000 to the allowance for loan losses for the current nine-month period
increasing the balance to $3.3 million at September 30, 2003. Management
considers the current level of the allowance to be appropriate based on loan
composition, 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 adjustments to the allowance for loan losses based on
their judgments of information available to them at the time of their
examination.
NONINTEREST INCOME
Noninterest income increased by 70.8% for the nine-month period ended September
30, 2003, as compared to the same period a year ago. The change in noninterest
income can be attributed to gain on sale of loans increasing over $2.7 million
primarily as a result of the purchase of Lumina and the large volume of mortgage
loans made in 2003 due to low interest rates. The Bank has also started to sell
a larger percentage of its fixed rate mortgage loan originations in the
secondary market instead of through brokered arrangements. This change causes an
increase in gain on sale of loans and a reduction to service charges and fees on
loans. Deposit related fees increased 28.2% primarily due to a new service the
Bank offered beginning in April 2003, for checking accounts with non-sufficient
funds. During the first nine months of 2002 the Bank sold a parking lot for
$500,000, resulting in the gain on sale of real estate, and the gain of $135,182
on sale of securities was due to selling bonds and purchasing mortgage backed
securities to give the Bank greater cash flow. No similar transactions occurred
during the nine months ended September 30, 2003.
In the three-month period ended September 30, 2003, noninterest income increased
44.8% as compared to the same period last year. The net gains on sale of loans
and deposit-related fees increased $526,212 and $94,460 respectively, for the
three-month period ended September 30, 2003 as compared to the same period a
year ago. The reasons for these increases are the same as stated above for the
nine month period. The reason for the decrease of $24,483 in service charges and
fees on loans during this period is due to having fewer loans being sold through
brokered arrangements. Other income has declined $31,724 during the three-month
period ended September 30, 2003 as compared to the same period a year ago mainly
due to less income from our third party brokerage service.
NONINTEREST EXPENSE
For the nine-month period ended September 30, 2003, noninterest expense
increased 33.4% as compared to the same period last year. Compensation and
related costs increased 40.5%. Higher personnel costs associated with the
purchase of Lumina accounted for the majority of the increase. Also, in January
2003, the Company granted 117 shares of preferred stock in the REIT to officers,
directors, and Bank employees with at least one month of service and certain
other parties. Each individual that was granted the preferred stock received one
share that had a $500 value, for an aggregate increase to compensation expense
of $58,500. In addition, the increase was due to increases in costs of benefits,
staffing levels, including the staffing for additional branches, incentive pay
and normal increases in salaries. Occupancy and equipment expense increased
$310,622 primarily because of the Lumina purchase and an increase in
depreciation and other expenses due to the new branches and upgrades in hardware
and software systems. The increase in advertising and other noninterest expenses
of $195,824 and $252,225 respectively, was mainly due to the purchase of Lumina
and the opening of two new branches. Real estate owned expense increased $50,407
primarily due to losses and expenses incurred in disposing properties.
In the three-month period ended September 30, 2003, noninterest expense
increased 14.6% as compared to the same period last year. This increase can be
principally attributed to compensation and fringe benefits, occupancy and
equipment expense, advertising, real estate owned and other expense increasing
$257,896, $70,447, $66,547, $27,404 and $81,560 respectively. The reasons for
the rise in compensation and fringe benefits was mainly due to increases in cost
of benefits, staffing levels, including the staffing for additional branches,
incentive pay and normal
18
increases in salaries. Occupancy and equipment expense increased primarily
because of the expenses associated with the new branches. Lumina had a more
aggressive advertising campaign during this quarter and the promotion of our new
branches and investor relations expenses were the main reasons for the boost in
advertising expense. Real estate owned expense increased generally because of
the costs associated with disposing of the real estate. The rise in other
expenses was caused by an increase in contributions and expenses related to the
new branches. In addition, a large recovery of a bad debt was received during
the three-month period ended September 30, 2002.
INCOME TAXES
The effective tax rate for the nine-month periods ended September 30, 2003 and
2002, was 32.3% and 35.1% respectively. The effective tax rate for the
three-month periods ended September 30, 2003 and 2002 was 33.2% and 34.5%
respectively. The decreases resulted from the formation of Holdings and the REIT
in December 2002.
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 changes in the economy and interest rates in
the nation, changes in the Company's regulatory environment and the Company's
market area.
ITEM 3 - 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 earning 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 earning
assets and liabilities so as to mitigate the effect of changes in the rate
environment. The Company's market risk profile has not changed significantly
since December 31, 2002.
ITEM 4 - CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the Company's disclosure controls and procedures (as such term is defined in
Rule 13a-14(c) under the Exchange Act) as of the end of the period covered by
this Form 10-Q. Based upon such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures were effective. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls during the quarter ended September 30, 2003.
19
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
Not applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 Section 302 Certification of the Chief Executive Officer
Exhibit 31.2 Section 302 Certification of the Chief Financial Officer
Exhibit 32 Certificate Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
The Company filed a current Report on Form 8-K dated October 23, 2003
to report third quarter earnings.
20
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.
Dated: November 12, 2003 Cooperative Bankshares, Inc.
/s/ Frederick Willetts, III
----------------------------------------
Frederick Willetts, III
President/Chief Executive Officer
Dated: November 12, 2003 /s/ Todd L. Sammons
----------------------------------------
Todd L. Sammons
Senior Vice President/Chief Financial
Officer
21