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, 2001
-------------------
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
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(State or other jurisdiction of incorporation (I.R.S. Employer
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.
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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 [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. 2,823,271 shares at November 2, 2001
------------------------------------
TABLE OF CONTENTS
Page
Part I Financial Information
Item 1 Financial Statements (Unaudited)
Consolidated Statements of Financial Condition,
September 30, 2001, and December 31, 2000 2
Consolidated Statements of Operations, for the three
and nine months ended September 30, 2001 and 2000 3
Consolidated Statements of Stockholders' Equity,
for the nine months ended September 30, 2001 4
Consolidated Statements of Cash Flows, for the
nine months ended September 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 8-14
Part II Other Information 15
Signatures 16
Exhibit 11 - Statement Regarding Computation of Earnings
Per Share 17
PART 1-FINANCIAL INFORMATION-FINANCIAL STATEMENTS
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2001 December 31, 2000*
------------------ ------------------
(UNAUDITED)
ASSETS
Cash and due from banks, noninterest-bearing $ 9,340,438 $ 3,904,275
Interest-bearing deposits in other banks 101,620 14,244,161
------------ ------------
Total cash and cash equivalents 9,442,058 18,148,436
Securities:
Available for sale (amortized cost of $38,840,238 in September 2001
and $16,000,677 in December 2000) 39,441,013 16,049,376
Held to maturity (estimated market value of $8,232,190 in September
2001 and $18,553,526 in December 2000) 8,000,000 18,977,776
FHLB stock 3,755,300 3,755,300
Loans 366,683,985 349,645,598
Less allowance for loan losses 2,377,552 2,159,663
------------ ------------
Net loans 364,306,433 347,485,935
Other real estate owned 1,080,372 234,711
Accrued interest receivable 2,668,046 2,776,404
Premises and equipment, net 6,212,917 6,272,610
Other assets 8,874,889 1,260,232
------------ ------------
Total assets $443,781,028 $414,960,780
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $340,615,280 $327,312,324
Borrowed funds 68,098,259 55,101,477
Escrow deposits 712,043 560,775
Accrued interest payable 320,687 300,396
Accrued expenses and other liabilities 1,024,765 873,629
------------ ------------
Total liabilities 410,771,034 384,148,601
------------ ------------
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,
2,823,271 and 2,714,610 shares issued and outstanding 2,823,271 2,714,610
Additional paid-in capital 2,325,864 2,234,936
Accumulated other comprehensive income 366,473 29,707
Retained earnings 27,494,386 25,832,926
------------ ------------
Total stockholders' equity 33,009,994 30,812,179
------------ ------------
Total liabilities and stockholders' equity $443,781,028 $414,960,780
============ ============
Book value per common share $ 11.69 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------- ---------- ----------- -----------
INTEREST INCOME:
Loans $7,034,182 $7,332,808 $21,186,198 $21,372,189
Securities 748,095 572,311 1,980,307 1,773,247
Other 23,640 81,305 251,975 280,472
Dividends on FHLB stock 63,892 73,156 194,221 217,879
---------- ---------- ----------- -----------
Total interest income 7,869,809 8,059,580 23,612,701 23,643,787
---------- ---------- ----------- -----------
INTEREST EXPENSE:
Deposits 3,857,524 3,922,804 11,950,354 10,946,132
Borrowed funds 889,419 1,081,857 2,591,290 3,270,566
---------- ---------- ----------- -----------
Total interest expense 4,746,943 5,004,661 14,541,644 14,216,698
---------- ---------- ----------- -----------
NET INTEREST INCOME 3,122,866 3,054,919 9,071,057 9,427,089
Provision for loan losses 120,000 90,000 300,000 880,000
---------- ---------- ----------- -----------
Net interest income after provision
for loan losses 3,002,866 2,964,919 8,771,057 8,547,089
---------- ---------- ----------- -----------
NONINTEREST INCOME:
Net gains on sale of loans -- -- 2,420 --
Net gains (losses) on sale of securities 98,086 -- 110,485 (287,282)
Service charges and fees on loans 176,025 105,956 511,240 302,469
Deposit-related fees 257,946 228,342 781,840 660,704
Gain on sale of branch -- -- -- 582,583
Other income, net 813 363 3,984 1,176
---------- ---------- ----------- -----------
Total noninterest income 532,870 334,661 1,409,969 1,259,650
---------- ---------- ----------- -----------
NONINTEREST EXPENSE:
Compensation and fringe benefits 1,223,555 1,211,660 3,789,730 4,073,704
Occupancy and equipment 540,116 480,646 1,605,919 1,462,570
Advertising 89,984 84,105 200,929 298,166
Real estate owned 5,594 5,248 4,957 (34,316)
Other 432,811 379,937 1,339,461 1,376,072
---------- ---------- ----------- -----------
Total noninterest expenses 2,292,060 2,161,596 6,940,996 7,176,196
---------- ---------- ----------- -----------
Income before income taxes 1,243,676 1,137,984 3,240,030 2,630,543
Income tax expense 438,211 410,306 1,157,309 933,559
---------- ---------- ----------- -----------
NET INCOME $ 805,465 $ 727,678 $ 2,082,721 $ 1,696,984
========== ========== =========== ===========
NET INCOME PER SHARE:
Basic $ 0.29 $ 0.27 $ 0.75 $ 0.63
========== ========== =========== ===========
Diluted $ 0.28 $ 0.26 $ 0.74 $ 0.60
========== ========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 2,814,347 2,714,519 2,787,611 2,714,084
========== ========== =========== ===========
Diluted 2,828,829 2,800,564 2,820,185 2,807,443
========== ========== =========== ===========
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 $2,714,610 2,234,936 29,707 25,832,926 30,812,179
Exercise of stock options 128,059 328,428 -- -- 456,487
Stock traded to exercise options
(19,398 shares) (19,398) (237,500) -- -- (256,898)
Other comprehensive
income, net of taxes -- -- 336,766 -- 336,766
Net income for period -- -- -- 2,082,721 2,082,721
Cash dividends ($.15 per share) -- -- -- (421,261) (421,261)
---------- --------- ------- ---------- ----------
Balance, September 30, 2001 $2,823,271 2,325,864 366,473 27,494,386 33,009,994
========== ========= ======= ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
4
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
2001 2000
------------ ------------
OPERATING ACTIVITIES:
Net income $ 2,082,721 $ 1,696,984
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net accretion, amortization, and depreciation 525,593 493,504
Net (gain) loss on sale securities (110,485) 287,282
Gain on sale of loans (2,420) --
Benefit from deferred income taxes (168,527) (366,498)
Loss on sale of premises and equipment 3,318 2,670
Loss (gain) on sales of foreclosed real estate (6,956) 22,681
Valuation losses on foreclosed real estate 2,807 --
Gain on sale of branch office -- (582,583)
Provision for loan losses 300,000 880,000
Proceeds from sale of loans 27,115 34,685
Changes in assets and liabilities:
Accrued interest receivable 108,358 (439,910)
Other assets (7,661,439) 655,561
Accrued interest payable 20,291 (47,928)
Accrued expenses and other liabilities 151,136 681
------------ ------------
Net cash provided by (used in) operating activities (4,728,488) 2,637,129
------------ ------------
INVESTING ACTIVITIES:
Purchases of securities available for sale (62,517,100) --
Purchases of securities held to maturity -- (986,604)
Proceeds from sale of securities available for sale 28,092,663 6,277,957
Proceeds from maturity of securities available for sale 17,645,964 190,562
Proceeds from maturity of securities held to maturity 5,000,000 --
Loan originations, net of principal repayments (18,225,565) (16,720,488)
Proceeds from disposals of foreclosed real estate 238,860 353,420
Purchases of premises and equipment (453,464) (620,049)
Proceeds from sale of premises and equipment 11,418 19,950
Net cash paid related to sale of branch office -- (5,156,761)
------------ ------------
Net cash used in investing activities (30,207,224) (16,642,013)
------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits 13,302,956 21,911,243
Proceeds from borrowed funds 13,000,000 35,000,000
Principal payments on borrowed funds (3,218) (47,003,046)
Proceeds from issuance of common stock, net 199,589 210,286
Purchase and retirement of common stock -- (480,657)
Dividends (421,261) (271,158)
Net change in escrow deposits 151,268 520,820
------------ ------------
Net cash provided by financing activities 26,229,334 9,887,488
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (8,706,378) (4,117,396)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 18,148,436 15,985,384
------------ ------------
END OF PERIOD $ 9,442,058 $ 11,867,988
============ ============
(Continued)
5
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
NINE MONTHS ENDED
SEPTEMBER 30
2001 2000
----------- -----------
Cash paid for:
Interest $14,521,353 $14,252,110
Income taxes 1,254,583 1,306,879
Summary of noncash investing and financing activities:
Transfer from loans to foreclosed real estate 1,080,372 283,049
Unrealized gain on securities available for sale, net of taxes 336,766 213,972
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 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 nine-month
periods ended September 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 average 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 nine months ended September 30, 2001 and 2000:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
---------- --------- ---------- ----------
Net income $ 805,465 $ 727,678 $2,082,721 $1,696,984
Other comprehensive income
Realized (gains) losses on available
for sale securities (98,086) -- (110,485) 287,282
Unrealized gains (losses) on available
for sale securities 555,432 162,684 662,560 63,492
Income tax expense (178,365) (63,447) (215,309) (136,802)
---------- --------- ---------- ----------
Other comprehensive income 278,981 99,237 336,766 213,972
---------- --------- ---------- ----------
Comprehensive income $1,084,446 $ 826,915 $2,419,487 $1,910,956
========== ========= ========== ==========
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 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
7
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.
6. Statement of Financial Accounting Standards No. 141: This Statement
---------------------------------------------------------
improves the transparency of the accounting and reporting for business
combinations by requiring that all business combinations be accounted for
under a single method--the purchase method. Use of the pooling-of-interests
method is not longer permitted. Statement 141 requires that the purchase
method be used for business combination initiated after June 30, 2001.
Management of the Company anticipates that SFAS No. 141 will not have a
material effect on the Company's results of operations or its financial
position.
7. Statement of Financial Accounting Standards No. 142: This statement
---------------------------------------------------------
requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment. This change provides investors with greater
transparency regarding the economic value of goodwill and its impact on
earnings. The amortization of goodwill ceases upon adoption of the
Statement, which will be January 1, 2002. Management of the company
anticipates that due to the fact that it does not have goodwill or other
intangible assets, the adoption of SFAS No. 142 will not have a material
effect on the company's results of operations or its financial position.
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 Federal Deposit Insurance
Corporation ("FDIC") insures the Bank's deposit accounts up to applicable
limits.
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 September
30, 2001, approximately $279.6 million, or 76.0%, 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 September 30, 2001, adjustable rate
and fixed rate loans totaled approximately 62.0% and 38.0%, 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.
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
8
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, 2001, Cooperative had a one-year negative gap position of 1.9%.
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
September 30, 2001, the Bank's borrowed funds equaled 15.3% 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 September 30, 2001, the estimated market value of liquid assets (cash, cash
equivalents, and marketable securities) was approximately $57.1 million, which
represents 14.0% of deposits and borrowed funds as compared to $52.8 million or
13.8% 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 and borrowed funds.
The Company's primary uses of liquidity are to fund loans and to make
investments. At September 30, 2001, outstanding off-balance sheet commitments to
extend credit totaled $28.7 million, and the undisbursed portion of construction
loans was $27.7 million. Management considers current liquidity levels adequate
to meet the Company's cash flow requirements.
CAPITAL
Stockholders' equity at September 30, 2001, was $33.0 million, up 7.1% from
$30.8 million at December 31, 2000. Stockholders' equity at September 30, 2001
and December 31, 2000, includes unrealized gains, net of tax, of $366,473 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 September 30, 2001,
the Bank's leverage ratio of Tier I capital to average adjusted assets was 7.5%.
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, 2001, the Bank had a ratio of
qualifying total capital to risk-weighted assets of 11.4%.
The Company, as a bank holding company, is also subject, on a consolidated
basis, to the capital adequacy guidelines of the Board of Governors of the
Federal Reserve (the "Federal Reserve Board"). The capital requirements of the
Federal Reserve Board are similar to those of the FDIC governing the Bank.
The Company currently exceeds all of its capital requirements. Management
expects the Company to continue to exceed these capital requirements without
altering current operations or strategies.
On September 20, 2001, the Company's Board of Directors approved a quarterly
cash dividend of $.05 per share. The dividend was paid on October 16, 2001 to
stockholders of record as of October 1, 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 SEPTEMBER 30, 2001, COMPARED TO DECEMBER 31, 2000
The Company's total assets increased 6.9% to $443.8 million at September 30,
2001, as compared to $415.0 million at December 31, 2000. The major changes in
the assets are as follows: a decrease of $8.7 million (48.0%) in cash and cash
equivalents, an increase of $23.4 million (145.7%) in securities available for
sale, a decrease of $11.0 million (57.8%) in securities held to maturity, an
increase of $17.0 million (4.9%) in loans and an increase of 7.6 million
(604.2%) in other assets.
9
The increase in other assets was due to the cash surrender value of bank owned
life insurance that was purchased during the quarter. 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 September 30, 2001, approximately 24.0% 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, securities and other assets with a $13.3
million (4.1%) increase in retail deposits, a $13.0 million (23.6%) increase in
borrowed funds 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
September 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 or 2011.
The Company's non-performing assets (nonaccrual loans, loans 90 days or more
delinquent and still accruing interest and foreclosed real estate) were $3.1
million or 0.70% of assets, at September 30, 2001, compared to $925 thousand, or
0.22% of assets, at December 31, 2000. Foreclosed real estate increased to
$1,080,372 at September 30, 2001, from $234,711 at December 31, 2000, but only
two properties make up this balance. The Company assumes an aggressive position
in collecting delinquent loans and disposing of foreclosed 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 $2.4 million at September 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 nine-month periods ended September 30, 2001,
increased 10.7% to $805,465 and 22.7% to $2.1 million, respectively, as compared
to the same periods last year. The increase in net income for the nine-month
period ended September 30, 2001 can be attributed to decreases of $580 thousand
and $235 thousand in provision for loan losses and noninterest expense,
respectively and an increase of $150 thousand in noninterest income. These
changes were partially offset by a reduction in net interest income of $356
thousand and an increase in income tax expense of $224 thousand.
INTEREST INCOME
For the three-month period ended September 30, 2001, interest income decreased
2.4% as compared to the same period a year ago. The average balance of
interest-earning assets increased 3.9% but the average yield decreased 48 basis
points as compared to the same period a year ago. Interest income decreased
0.1%, for the nine-month period ended September 30, 2001, as compared to the
same period a year ago. The average balance of interest-earning assets increased
2.2%, while the average yield decreased 18 basis points to 7.70% as compared to
7.88%, 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 decreased 5.1% for the three-month period ended September 30,
2001, as compared to the same period a year ago. This decrease was due to the
average cost of interest-bearing liabilities decreasing 48 basis points as
compared to the same period a year ago. In the nine-month period ended September
30, 2001, interest expense increased 2.3% as compared to the same period a year
ago. The 1.8% 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 3 basis points to 5.16% as compared to 5.13% for the same period last
year.
NET INTEREST INCOME
Net interest income for the three and nine-month periods ended September 30,
2001, as compared to the same periods a year ago, increased 2.2% and decreased
3.8%, respectively. During these same periods, the yield on average
interest-earning assets decreased 48 basis points and 18 basis points,
respectively. For the same periods, the cost of average interest-bearing
liabilities decreased 48 basis points and increased 3 basis points,
respectively. The nine-month difference can be attributed to the fact that more
assets reprice within 30 days as compared to liabilities as a result of the
rapidly declining interest rate environment during the entire nine-month period
ended September 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.
10
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
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
------------------------------------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
Interest-earning assets:
Interest-bearing deposits in other banks $ 2,464 $ 24 3.90% $ 8,208 $ 81 3.95%
Securities:
Available for sale 42,420 634 5.98% 21,001 313 5.96%
Held to maturity 8,000 114 5.70% 18,501 260 5.62%
FHLB stock 3,755 64 6.82% 3,755 73 7.78%
Loan portfolio 360,529 7,034 7.80% 350,078 7,333 8.38%
-------- ------ -------- ------
Total interest-earning assets 417,168 7,870 7.55% 401,543 8,060 8.03%
Non-interest earning assets 16,704 11,956
-------- --------
Total assets $433,872 $413,499
======== ========
Interest-bearing liabilities:
Deposits 323,613 3,858 4.77% 304,774 3,923 5.15%
Borrowed funds 60,860 889 5.84% 64,831 1,082 6.68%
-------- ------ -------- ------
Total interest-bearing liabilities 384,473 $4,747 4.94% 369,605 $5,005 5.42%
Non-interest bearing liabilities 16,745 ------ 13,329 ------
Total liabilities 401,218 382,934
Stockholders' equity 32,654 30,565
-------- --------
Total liabilities and stockholders' equity $433,872 $413,499
======== ========
Net interest income $3,123 $3,055
====== ======
Interest rate spread 2.61% 2.61%
====== ======
Net yield on interest-earning assets 2.99% 3.04%
====== ======
Percentage of average interest-earning
assets to average interest-bearing
liabilities 108.5% 108.6%
====== ======
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 nine months ended
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
--------------------------------------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
Interest-earning assets:
Interest-bearing deposits in other banks $8,947 $ 252 3.76% $ 9,317 $ 280 4.01%
Securities:
Available for sale 35,927 1,669 6.19% 22,333 988 5.90%
Held to maturity 8,041 312 5.17% 18,182 786 5.76%
FHLB stock 3,755 194 6.89% 3,755 218 7.74%
Loan portfolio 352,094 21,186 8.02% 346,514 21,372 8.22%
-------- ------- -------- -------
Total interest-earning assets 408,764 $23,613 7.70% 400,101 $23,644 7.88%
Non-interest earning assets 13,829 ------- 11,584 -------
-------- --------
Total assets $422,593 $411,685
======== ========
Interest-bearing liabilities:
Deposits 318,209 11,951 5.01% 301,499 10,946 4.84%
Borrowed funds 57,457 2,591 6.01% 67,676 3,271 6.44%
-------- ------- -------- -------
Total interest-bearing liabilities 375,666 $14,542 5.16% 369,175 $14,217 5.13%
Non-interest bearing liabilities 14,887 ------- 12,359 -------
-------- --------
Total liabilities 390,553 381,534
Stockholders' equity 32,040 30,151
-------- --------
Total liabilities and stockholders' equity $422,593 $411,685
======== ========
Net interest income $ 9,071 $ 9,427
======= =======
Interest rate spread 2.53% 2.74%
====== ======
Net yield on interest-earning assets 2.96% 3.14%
====== ======
Percentage of average interest-earning
assets to average interest-bearing
liabilities 108.8% 108.4%
====== ======
12
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 nine months ended
September 30, 2000 vs. September 30, 2001
Increase (Decrease)
Due to
------------------------------------
(DOLLARS IN THOUSANDS)
Volume Rate Total
------ -------- -------
Interest income:
Interest-bearing deposits in other banks $ (11) $ (17) $ (28)
Securities:
Available for sale 629 52 681
Held to maturity (401) (73) (474)
FHLB stock -- (24) (24)
Loan portfolio 341 (527) (186)
----- ------ ------
Total interest-earning assets 558 (589) (31)
----- ------ ------
Interest expense:
Deposits 620 385 1,005
Borrowed funds (472) (208) (680)
----- ------ ------
Total interest-bearing liabilities 148 177 325
----- ------ ------
Net interest income $ 410 $ (766) $ (356)
===== ====== ======
PROVISION AND RESERVE FOR LOAN LOSSES
During the nine-month period ended September 30, 2001 the Bank had net
charge-offs against the allowance for loan losses of $82,111 compared to $92,801
for the same period in 2000. The Bank added $300,000 to the allowance for loan
losses for the current nine-month period, increasing the balance to $2.4 million
at September 30, 2001. The $880,000 provision in the nine-month period ended
September 30, 2000 included an increase of approximately $625,000 made in
response to a detailed review of the Bank's loan portfolio and was considered
appropriate in light of the successful expansion in the commercial loan
portfolio. The 2001 provision for loan losses of $300,000 represents an increase
of $45,000 when compared to the 2000 provision, excluding the effect of the
$625,000 special provision made in the nine months ended September 30, 2000.
This increase is attributable to the growth in loans as well as current economic
conditions. The increase in non-performing loans did not have a significant
effect on the provision for loan losses in 2001 since these loans are considered
to be both well secured and in the process of collection. 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.
NONINTEREST INCOME
Noninterest income increased by 59.2% for the three-month period ended September
30, 2001, as compared to the same period a year ago. This increase can be
attributed to deposit-related fees increasing 13.0%, fees and service charges on
loans increasing 66.1% and gains on sale of securities of $98,086. 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 service charges and fees on
loans 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
13
increased due to the favorable rate environment. There were no gains on sales of
securities for the three-month period ended September 30, 2000.
In the nine-month period ended September 30, 2001, noninterest income increased
11.9% as compared to the same period a year ago. The change in noninterest
income can be attributed to the increase in deposit-related fees of 18.3% and
the 69.0% increase in service charges and fees on loans. In addition, there was
an $110,485 gain on sale of securities during the nine-month period ended
September 30, 2001 as compared to a $287,282 loss on sale of securities during
the same period a year ago. The company realized a $582,583 gain on the sale of
a branch during the nine months ended September 30, 2000. No similar transaction
occurred during the nine months ended September 30, 2001.
NONINTEREST EXPENSES
For the nine-month period ended September 30, 2001, noninterest expense
decreased 3.3% as compared to the same period last year. Compensation and
related costs decreased 7.0%. 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 9.9%. 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
$97 thousand in advertising can be attributed to a more conservative advertising
policy. Noninterest expense for the three-month period ended September 30, 2001
as compared to the same period last year increased $130 thousand, of which $59
thousand can be attributed to an increase in occupancy & equipment expense.
INCOME TAXES
The effective tax rate for both the three and nine-month periods ended September
30, 2001 was 35.2% and 35.7% respectively, as compared to 36.1% and 35.5% 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.
14
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
(c) Not applicable
(d) 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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11. Computation of Earnings Per Share
(b) Not applicable
15
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: November 9, 2001 /s/ Frederick Willetts, III
-------------------------------------
President and Chief Executive Officer
Dated: November 9, 2001 /s/ Todd L. Sammons
-------------------------------------
Treasurer and Chief Financial Officer
16