SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2001
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from _________________ to ________________
Commission File Number: 0-24626
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COOPERATIVE BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1886527
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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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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 27, 2002, the aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing sales price of the
registrant's common stock as quoted on the NASDAQ Stock Market was $27,897,607
(2,317,077 shares at $12.04 per share). For purposes of this calculation,
directors, executive officers and beneficial owners of more than 10% of the
registrant's outstanding voting stock are treated as affiliates.
As of March 22, 2002, there were issued and outstanding 2,835,447 shares of the
registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 2001. (Parts I and II)
2. Portions of Proxy Statement for the 2002 Annual Meeting of Stockholders.
(Part III)
PART I
ITEM 1. BUSINESS
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GENERAL
THE COMPANY. 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. Chartered in 1898, the Bank's headquarters is located in
Wilmington, North Carolina. Cooperative operates 17 financial centers throughout
the coastal and inland communities of eastern North Carolina. These centers
extend from Corolla, located on the Outer Banks of North Carolina, to Tabor
City, located on the South Carolina border. The Bank's deposit accounts are
insured up to applicable limits by the Federal Deposit Insurance Corporation
("FDIC"). At December 31, 2001, Cooperative Bank had total assets of $458.1
million, deposits of $339.8 million and stockholders' equity of $33.6 million.
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 retirements 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 also offers discount brokerage services, annuity
sales and mutual funds through a third party arrangement with UVEST Investment
Services.
The Bank has chosen to sell a larger percentage of its fixed rate mortgage
loan originations through broker arrangements. This enables the Bank to invest
its 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.
A new financial center was opened in Whiteville, North Carolina, (Columbus
County) in April of 2001.
The common stock of Cooperative Bankshares, Inc. is traded on the NASDAQ
National Market under the symbol "COOP".
MARKET AREA
Cooperative Bank considers its primary market area to be the communities of
eastern North Carolina extending from the Virginia to the South Carolina
borders. The market is generally segmented into the coastal communities and the
inland areas. The economies of the coastal communities (concentrated in Dare,
Carteret, Currituck, Onslow, Pender, New Hanover and Brunswick Counties) are
seasonal and largely dependent on the summer tourism industry. The economy of
Wilmington (the largest city in the market area), a historic seaport with a
population of approximately 92,000 is also reliant upon summer tourism but is
diversified into the chemicals, shipping, aircraft engines, and fiber optics
industries. Wilmington also serves as a regional retail center, a regional
medical center and is home of the University of North Carolina at Wilmington.
The inland communities served by the Bank (concentrated in Bladen, Brunswick,
Columbus, Duplin, Hyde, Beaufort and Pender Counties) are largely service areas
for the agricultural activities in eastern North Carolina.
LENDING ACTIVITIES
GENERAL. Cooperative Bank's lending activities have concentrated on the
origination of loans for the purpose of constructing, financing or refinancing
residential properties. As of December 31, 2001, approximately $273 million, or
73%, of the Bank's loan portfolio consisted of loans secured by residential
properties. To a lesser extent, the Bank originates nonresidential real estate
loans, home equity line of credit loans, and secured and unsecured consumer and
business loans. While continuing to place emphasis on residential mortgage
loans, the Bank is taking a more aggressive position in pursuing business
lending, and nonresidential real estate lending involving loans secured by small
commercial properties with balances generally ranging from $100,000 to
$1,000,000. The Bank originates adjustable rate and fixed rate loans. As of
December 31, 2001, adjustable rate and fixed rate loans totaled approximately
63% and 37%, respectively, of the Bank's total loan portfolio.
2
ANALYSIS OF LOAN PORTFOLIO. Set forth below is selected data relating to
the composition of the Bank's loan portfolio by type of loan and type of
collateral on the dates indicated. Other than as set forth below, there were no
concentrations of loans which exceeded 10% of total loans at December 31, 2001.
AT DECEMBER 31,
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2001 2000 1999
---------------------- ---------------------- ---------------------
(DOLLARS IN THOUSANDS)
AMOUNT % AMOUNT % AMOUNT %
------ -- ------ - ------ -
Real estate:
Construction and land development $ 62,142 16.64% $ 37,542 10.80% $ 1,497 0.45%
Mortgage:
1-4 family residential 209,622 56.13 234,383 67.45 253,857 75.83
Multi-family residential 15,626 4.18 17,081 4.92 17,166 5.13
Commercial 55,664 14.90 31,300 9.01 38,765 11.58
Equity line 13,131 3.52 11,954 3.44 9,772 2.92
Other 254 0.07 174 0.05 78 0.02
-------- ------ -------- ------ -------- ------
Total real estate loans 356,439 95.44 332,434 95.67 321,135 95.93
Commercial, industrial and agricultural 13,430 3.60 10,970 3.16 10,653 3.18
Consumer 7,285 1.95 7,236 2.08 5,443 1.63
-------- ------ -------- ------ -------- ------
Total gross loans 377,154 100.99 350,640 100.91 337,231 100.74
-------- ------ -------- ------ -------- ------
Less:
Unearned discounts and net deferred fees 1,173 0.31 994 0.29 1,182 0.35
Allowance for loan losses 2,523 0.68 2,160 0.62 1,306 0.39
-------- ------ -------- ------ -------- ------
Net loans $373,458 100.00% $347,486 100.00% $334,743 100.00%
======== ====== ======== ====== ======== ======
AT DECEMBER 31,
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1998 1997
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(DOLLARS IN THOUSANDS)
AMOUNT % AMOUNT %
------ - ------ -
Real estate:
Construction and land development $ 1,376 0.43% $ -- -- %
Mortgage:
1-4 family residential 265,172 82.52 252,645 88.12
Multi-family residential 12,941 4.03 9,209 3.21
Commercial 26,296 8.18 11,715 4.09
Equity line 8,811 2.74 8,074 2.82
Other 52 0.02 89 0.03
-------- ------ -------- ------
Total real estate loans 314,648 97.92 281,732 98.27
Commercial, industrial and agricultural 3,997 1.24 2,752 0.96
Consumer 5,073 1.59 4,356 1.52
-------- ------ -------- ------
Total gross loans 323,718 100.75 288,840 100.75
-------- ------ -------- ------
Less:
Unearned discounts and net deferred fees 1,216 0.38 1,274 0.44
Allowance for loan losses 1,178 0.37 874 0.31
-------- ------ -------- ------
Net loans $321,324 100.00% $286,692 100.00%
======== ====== ======== ======
3
The following table sets forth as of December 31, 2001, certain information
regarding the dollar amount of loans maturing in the Bank's loan portfolio based
on their contractual terms to maturity.
DUE WITHIN DUE AFTER DUE AFTER
ONE YEAR 1 THROUGH 5 YEARS 5 YEARS TOTAL
-------- ----------------- ------- -----
(IN THOUSANDS)
Real Estate
Construction and land development $ 29,045 $ 28,232 $ 4,865 $ 62,142
Mortgage
1-4 family residential 6,459 12,461 190,702 209,622
Multi-family residential 3,051 6,345 6,230 15,626
Commercial 7,620 35,127 12,917 55,664
Equity line 2,751 1,256 9,124 13,131
Other 15 239 -- 254
Commercial, Industrial & Agricultural 7,694 4,375 1,361 13,430
Consumer 3,442 3,316 527 7,285
-------- -------- -------- --------
Total $ 60,077 $ 91,351 $ 225,726 $377,154
======== ======== ========= ========
The next table shows at December 31, 2001, the dollar amount of all the
Bank's loans due after one year from December 31, 2001 which have fixed interest
rates and have floating or adjustable interest rates.
ONE TO FIVE AFTER
YEARS FIVE YEARS TOTAL
----------- ---------- -----
(IN THOUSANDS)
Loans maturing after one year with:
Fixed interest rates $ 41,341 $ 81,330 $ 122,671
Floating or adjustable rates 50,010 144,396 194,406
-------- ---------- ----------
Total $ 91,351 $ 225,726 $ 317,077
======== ========== ==========
RESIDENTIAL REAL ESTATE LOANS. The Bank originates one-to four-family
residential mortgage loans collateralized by property located in its market
area. While a majority of the Bank's residential real estate loans are
collateralized by owner-occupied primary residences, the Bank's portfolio also
includes some second home and investor properties. The Bank also originates
residential lot loans collateralized by vacant lots located in approved
subdivisions.
The Bank's loan originations are generally for a term of 15 to 30 years,
amortized on a monthly basis, with principal and interest due each month.
Residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms. Borrowers may refinance or prepay loans at
their option.
The Bank has offered adjustable rate mortgage loans ("ARMs") since 1979 and
presently offers one-year ARMs with rate adjustments tied to prime or the weekly
average yield on U.S. Treasury Securities adjusted to a constant maturity of one
year. The Bank offers introductory interest rates on ARMs which are not
generally fully indexed. The interest rates on these loans generally include a
cap of 2% per adjustment and 6% over the life of the loan. The Bank's
underwriting policies require that the borrower qualify for a fully indexed 1
year ARM at the fully indexed rate. While the proportion of fixed and adjustable
rate loan originations in the Bank's portfolio largely depends on the level of
interest rates, the Bank has strongly emphasized ARMs in recent years and has
been relatively successful in maintaining the level of ARM originations even
during periods of declining interest rates. In addition to the one-year ARM, the
Bank offers 3/1 and 5/1 ARM products. These loans adjust annually after the end
of the first three or five-year period. A "Low Doc" program is available for the
non-conforming loans.
Cooperative Bank also originates 15 to 30 year fixed rate mortgage loans on
one- to four-family units. The Bank generally charges a higher interest rate on
such loans if the property is not owner-occupied. The majority of
4
fixed rate loans are underwritten according to Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA")
guidelines, so that the loans qualify for sale in the secondary market. The Bank
has sold fixed rate loans in the secondary market from time to time when such
sales were consistent with the Bank's liquidity and asset/liability goals.
The Bank actively lends on the security of properties located in the Outer
Banks region of North Carolina. This region's economic base is seasonal and
driven by beach tourism, and a large number of the loans made by the Bank in
this area are secured by vacation rental properties. These loans are inherently
more risky than loans secured by the borrower's permanent residence, since the
borrower is typically dependent upon rental income to meet debt service
requirements, and repayment is therefore subject to a greater extent to adverse
economic, weather and other conditions affecting vacation rentals. Management
seeks to minimize these risks by employing what it believes are conservative
underwriting criteria.
The Bank's lending policies generally limit the maximum loan-to-value ratio
on conventional residential mortgage loans to 95% of the lesser of the appraised
value or purchase price, with the condition that private mortgage insurance is
required on loans with loan-to-value ratios in excess of 80%.
Cooperative Bank also originates loans secured by multi-family properties.
At December 31, 2001, the Bank had $15.6 million of such loans, representing
4.2% of its total loan portfolio. These loans are primarily secured by apartment
buildings located in the Bank's market area.
CONSTRUCTION LOANS. The Bank originates loans to finance the construction
of one-to four- and multi-family dwellings, housing developments, commercial
projects and condominiums. Construction loans amounted to approximately $62.1
million, or 16.6%, of the Bank's total loan portfolio at December 31, 2001. In
recent years, the Bank has emphasized the origination of construction loans in
response to the significant demand for such loans by borrowers engaged in
building and development activities in the growing communities of its market
area. In addition, construction loans afford the Bank the opportunity to
increase the interest rate sensitivity of its loan portfolio.
Many of the Bank's construction loans are converted to permanent loans. At
the time the loan is converted to a permanent loan, the Bank underwrites the
creditworthiness of the purchaser prior to approving the assumption, at which
time the original borrower is released from liability. Construction/permanent
loans have either fixed or adjustable rates and have terms of up to 30 years.
The Bank also will make short term construction loans which have fixed rates and
terms of up to 12 months. These loans are generally made in amounts up to 80% of
appraised value. Loan proceeds generally are disbursed in increments as
construction progresses and as inspections warrant.
The Bank's risk of loss on a construction loan is largely dependent upon
the accuracy of the initial estimate of the property's value at completion of
construction and the bid price (including interest) of construction. If the
estimate of construction costs proves to be inaccurate, the Bank may be required
to advance funds beyond the amount originally committed to permit completion of
the project. If the estimate of the value proves to be inaccurate, the Bank may
be confronted, at or prior to the maturity of the loan, with a project whose
value is insufficient to assure full repayment. When lending to speculation
builders, the cost of construction breakdown is provided by the builder, as well
as supported by the appraisal.
The Bank's underwriting criteria are designed to evaluate and minimize the
risks of each construction loan. Among other things, the Bank considers the
reputation of the borrower and the contractor, the amount of the borrower's
equity in the project, independent valuations and reviews of cost estimates,
pre-construction sale and leasing information, and cash flow projections of the
borrower. In addition, the Bank reviews the builder's current financial reports,
tax returns, credit reports and, if the builder has not previously borrowed from
Cooperative Bank, credit references. The Bank only makes construction loans
within its primary market area.
The Bank has in the past originated loans for the acquisition and
development of unimproved property to be used for residential purposes. Land
development lending is generally considered to involve a higher level of credit
risk than one- to four-family residential lending due to the concentration of
principal in a limited number of loans and borrowers and the effects of general
economic conditions on development projects.
5
The following table sets forth certain information as of December 31, 2001
regarding the dollar amount of construction loans secured by real estate and
real estate mortgage loans maturing in the Bank's portfolio based on their
contractual terms to maturity. A portion of these loans have provisions to
convert to permanent loans upon completion of construction. For further
information, see Note 3 of Notes to Consolidated Financial Statements included
in the Company's Annual Report to Stockholders for the Fiscal Year Ended
December 31, 2001 (the "Annual Report").
(IN THOUSANDS)
Real estate - construction
1-4 residential $17,523
Multi-family residential 17,136
Commercial 27,483
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Total $62,142
=======
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Loans secured by
nonresidential real estate constituted approximately $83.4 million, or 22.1% of
the Bank's total loans at December 31, 2001. The Bank is emphasizing the
origination of these loans because of their profitability, since they generally
carry a higher interest rate than single family residential mortgage loans as
well as being more interest rate sensitive. The Bank originates both
construction loans and permanent loans on nonresidential properties.
Nonresidential real estate loans are generally made in amounts up to 80% of the
lesser of appraised value or purchase price of the property and have generally
been made in amounts under $2.0 million. The Bank's permanent nonresidential
real estate loans are secured by improved property such as office buildings,
retail centers, warehouses, and other types of buildings located in the Bank's
primary market area. Nonresidential real estate loans are either fixed or
variable rate. The variable rate loans have interest rates tied to prime or the
weekly average yield on U.S. Treasury Securities adjusted to a constant maturity
of one year.
Loans secured by nonresidential properties are generally larger and involve
greater risks than residential mortgage loans. Because payments on loans secured
by nonresidential properties are often dependent on successful operation or
management of the properties, repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
The Bank seeks to minimize these risks in a variety of ways, including limiting
the size of its nonresidential real estate loans, generally restricting such
loans to its primary market area and attempting to employ conservative
underwriting criteria.
CONSUMER LENDING. At December 31, 2001, the Bank's consumer loan portfolio
totaled approximately $7.3 million, representing 1.9% of the Bank's total loans
receivable. The Bank also offers home equity loans, which are made for terms of
up to 15 years at adjustable interest rates. As of December 31, 2001, the Bank's
home equity loan portfolio totaled approximately $13.1 million, representing
3.5% of its total loans receivable.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or collateralized
by rapidly depreciable assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. Such
loans may also give rise to claims and defenses by a consumer loan borrower
against an assignee of such loans such as the Bank, and a borrower may be able
to assert against such assignee claims and defenses which it has against the
seller of the underlying collateral.
NON-REAL ESTATE BUSINESS LENDING. In late 1996, the Bank initiated a
program for originating loans to small businesses in the Bank's market area,
which are secured by various forms of non-real estate collateral or are
unsecured. At December 31, 2001, these loans totaled approximately $13.4
million. Management of Cooperative Bank believes that these loans are attractive
to the Bank in light of the typically higher interest rate yields associated
6
with them and the opportunity they present for expanding the Bank's
relationships with existing customers and developing broader relationships with
new customers. Accordingly, the Bank plans to actively pursue this type of
lending in the future in an effort to maintain a profitable spread between the
Bank's average loan yield and its cost of funds.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income and which are collateralized by real property whose value tends to be
more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be substantially dependent on
the success of the business itself. Further, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business. The management of Cooperative Bank
seeks to minimize these risks as the Bank's commercial business loan portfolio
grows by attempting to employ conservative underwriting criteria.
LOAN SOLICITATION AND PROCESSING. Loan originations are derived from a
number of sources, including "walk-in" customers at the Bank's offices and
solicitations by Cooperative Bank employees.
Mortgage loan applications are accepted at all full-service branches, and
are reviewed by a loan officer or branch manager. Upon receipt of a loan
application, central processing orders a credit report and verifications to
verify specific information relating to the applicant's employment, income and
credit standing. An appraisal of the real estate intended to secure the proposed
loan is undertaken by an internal appraiser or an outside appraiser approved by
the Bank. In the case of "Low Doc" loans, a tax valuation is acceptable.
Loan authorities and limits have been delegated by the Board of Directors
to a group of senior officers who function as the loan committee, except for
consumer loans, which may be approved by branch loan officers. Loans exceeding
$700,000 up to $1,000,000 can be approved by three members of the loan
committee. Any loan exceeding $1,000,000 is approved by the Bank's Board of
Directors. Fire and casualty insurance is required on all loans secured by
improved real estate.
ORIGINATIONS, PURCHASES, AND SALES OF MORTGAGE LOANS. The Bank's general
policy is to originate conventional residential mortgage loans under terms,
conditions and documentation which permit sale to the FHLMC, FNMA or private
investors in the secondary market. The Bank has chosen to begin selling a larger
percentage of its fixed rate mortgage loan originations through broker
arrangements. This enables the Bank to invest its funds in commercial loans,
while increasing fee income. The Bank has from time to time sold fixed rate,
long term mortgage loans in the secondary market to meet liquidity requirements
or as part of the asset/liability management program. In connection with such
sales, the Bank may retain the servicing of the loans (i.e., collection of
principal and interest payments), for which it generally receives a fee payable
monthly of up to 1/4% per annum of the unpaid balance of each loan. As of
December 31, 2001, the Bank was servicing approximately 1,100 loans for others
aggregating approximately $56.0 million.
The Bank generally does not purchase loans, and did not purchase any loans
during the last three fiscal years.
LOAN COMMITMENTS. The Bank issues loan origination commitments to qualified
borrowers primarily for the construction and purchase of residential real
estate. Such commitments are made on specified terms and conditions and are
typically for terms of up to 30 days. A non-refundable appraisal, flood
certificate, credit report and underwriting fee is collected at the time of
application. Management estimates that historically, less than 20% of such
commitments expire unfunded. At December 31, 2001, the Bank had outstanding loan
origination commitments of approximately $2.5 million. For further information,
see Note 3 of Notes to Consolidated Financial Statements included in the Annual
Report.
LOAN ORIGINATION AND OTHER FEES. In addition to receiving interest at the
stated rate on loans, the Bank receives loan origination fees or "points" for
originating loans. Origination fees generally are calculated as a percentage of
the principal amount of the loan and are charged to the borrower for creation of
the loan account.
7
Loan origination fees and certain direct loan origination costs are deferred,
and the net fee or cost is recognized as an adjustment to interest income over
the contractual life of the related loan.
The Bank is currently approved to broker loans to Wells Fargo and
InterFirst Wholesale Mortgage Lending. These are done on the wholesale side with
Cooperative Bank processing the loan using Wells Fargo or InterFirst closing
documents. Cooperative Bank receives a settlement service fee for processing
these loans. The Bank was successful in 2001, in originating more loans through
wholesalers to generate fee income and relieve the Bank of the interest rate
risk.
Loan origination, settlement service and commitment fees are volatile
sources of funds. Such fees vary with the volume and type of loans and
commitments made and purchased and with competitive market conditions, which in
turn respond to the demand for and availability of money.
The Bank also recognizes other fees and service charges on loans. Other
fees and service charges consist of late fees, fees collected with a change in
borrower or other loan modifications.
DELINQUENCIES. The Bank's collection procedures provide that when a loan is
30 days past due, the borrower is contacted by mail, and payment is requested.
If the delinquency continues, subsequent efforts are made to contact the
borrower. If the loan continues in a delinquent status for 60 days or more, the
Bank generally initiates legal proceedings. At December 31, 2001, the Bank had
accruing loans which are contractually past due 90 or more days totaling $2.6
million.
NON-PERFORMING ASSETS AND ASSET CLASSIFICATION. Loans are generally
classified as nonaccrual if they are past due for a period of more than 90 days,
unless such loans are well secured and in the process of collection. If any
portion of a loan is classified as doubtful or is partially charged off, the
loan is generally classified as nonaccrual. Loans that are less than 90 days
past due may also be classified as nonaccrual if repayment in full of principal
and/or interest is in doubt. As of December 31, 2001, the Bank had four loans in
non-accrual status with an aggregate principal balance of $505,000.
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold. When such property is
acquired, it is recorded at the lower of the unpaid principal balance plus
unpaid accrued interest of the related loan or the fair value of the real estate
less costs to sell the property. Any required write-down of the loan upon
foreclosure is charged to the allowance for loan losses. At December 31, 2001,
the Bank owned approximately $759,000 of property acquired as the result of
foreclosure or by deed in lieu of foreclosure and classified as "real estate
owned." At December 31, 2001, the Bank had 31 loans in the process of
foreclosure and/or bankruptcy with an aggregate principal balance of
approximately $3.3 million. Loans in bankruptcy paying as agreed are not
included in non-performing assets. Any losses management anticipates on loans in
the process of foreclosure and/or bankruptcy have already been recorded through
the allowance for loan losses.
8
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated. During the periods shown, the
Bank had no restructured loans within the meaning of Statement of Financial
Accounting Standards ("SFAS") No. 15.
AT DECEMBER 31,
-------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Non-accruing loans $ 505 $ 333 $ 267 $ -- $ --
Accruing loans which are contractually
past due 90 days or more 2,563 358 934 1,765 357
--------- --------- --------- --------- --------
Total $ 3,068 $ 691 $ 1,201 $ 1,765 $ 357
========= ========= ========= ========= ========
Percentage of total loans .81% .20% .36% .55% .12%
========= ========= ========= ========= ========
Other non-performing assets (1) $ 759 $ 234 $ 245 $ 2,439 $ 251
========= ========= ========= ========= ========
Total non-performing assets $ 3,827 $ 925 $ 1,446 $ 4,204 $ 608
========= ========= ========= ========= ========
Total non-performing assets to total assets .84% .22% .35% 1.08% .16%
========= ========= ========= ========= ========
______________
(1) Other non-performing assets represent property acquired by the Bank through
foreclosure or repossession. This property is carried at fair value less
estimated costs of sale.
During the year ended December 31, 2001, gross interest income of
approximately $16,795 would have been recorded on nonaccrual loans had such
loans been current throughout the period. Approximately $10,622 in interest
income from such loans was included in income for the year ended December 31,
2001.
Except as set forth above, the Bank had no loans which were not classified
as non-accrual, 90 days past due or restructured but which may be so classified
in the near future because management has concerns as to the ability of
borrowers to comply with repayment terms. For further information, see Note 3 of
Notes to Consolidated Financial Statements in the Annual Report.
ALLOWANCE FOR LOAN LOSSES. Management considers a variety of factors in
establishing the appropriate levels for the provision and the allowance for loan
losses. Consideration is given to, among other things, the impact of current
economic conditions, the diversification of the loan portfolio, historical loss
experience, the review of loans by the loan review personnel, the individual
borrower's financial and managerial strengths, and the adequacy of underlying
collateral.
The process used to allocate the allowance for loan losses considers, among
other factors, whether the borrower is a mortgage, retail or commercial
customer, whether the loan is secured or unsecured, and whether the loan is an
open or closed-end agreement. Generally, loans are reviewed and risk graded
among groups of loans with similar characteristics. The probable loss estimates
for each risk grade group are the basis for the allowance allocation. The loss
estimates are based on prior experience, general risk associated with each loan
group and current economic conditions. The unallocated allowance for loan losses
primarily represents the impact of certain conditions that were not considered
in allocating the allowance to the specific components of the loan portfolio.
9
The following table analyzes activity in the Bank's allowance for loan
losses for the periods indicated.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 2,160 $ 1,306 $ 1,178 $ 874 $ 807
Provision for loan losses 460 970 210 330 153
Gross loans charged-off (106) (146) (94) (29) (86)
Gross recoveries 9 30 12 3 --
--------- -------- -------- -------- --------
Balance at end of period $ 2,523 $ 2,160 $ 1,306 $ 1,178 $ 874
========= ======== ======== ======== ========
Ratio of net charge-offs to average
loans outstanding during the period .03% .03% .03% .01% .03%
========= ======== ======== ======== =======
Ratio of loan loss reserve to total loans .67% .62% .39% .36% .30%
========= ======== ======== ======== =======
Management believes that it has established the Bank's existing allowance
for loan losses in accordance with generally accepted accounting principles.
Additions to the allowance may be necessary, however, due to changes in economic
conditions, real estate market values, growth in the portfolio, and other
factors. In addition, bank regulators may require Cooperative Bank to make
additional provisions for losses in the course of their examinations based on
their judgments as to the value of the Bank's assets. For further information
regarding the Bank's allowance for loan losses see "Management's Discussion and
Analysis" and Note 3 of Notes to Consolidated Financial Statements in the Annual
Report.
10
The following table sets forth information about the Bank's allowance for
loan losses by asset category at the dates indicated. The allocation of the
allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any category.
AT DECEMBER 31,
----------------------------------------------------------------------------
2001 2000 1999
---------------------- ---------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ------------ ------ ------------ ------ -----------
(DOLLARS IN THOUSANDS)
Real estate:
Construction and land development $ 672 16% $ 428 10% $ 15 1%
Mortgage:
1-4 family residential 698 56 499 67 530 74
Multi-family residential 143 4 213 5 163 5
Commercial 589 15 526 9 380 12
Equity line 132 3 65 3 15 3
Other 2 -- 2 1 1 --
-------- --- ------- -- -------- ---
Total real estate loans 2,236 94% 1,733 95% 1,104 95%
Commercial, industrial & agricultural 214 4 166 3 152 3
Consumer 70 2 77 2 50 2
Unallocated 3 -- 184 -- -- --
-------- --- ------- --- -------- ---
Total gross loans $ 2,523 100% $ 2,160 100% $ 1,306 100%
======== === ======= === ======== ===
AT DECEMBER 31,
------------------------------------------------
1998 1997
-------------------- ----------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Real estate:
Construction and land development $ 14 1% $ -- 0%
Mortgage:
1-4 family residential 605 81 571 87
Multi-family residential 129 4 92 3
Commercial 301 8 123 4
Equity line 13 3 12 3
Other 1 -- 1 --
-------- --- -------- ---
Total real estate loans 1,063 97% 799 97%
Commercial, industrial & agricultural 59 1 41 1
Consumer 40 2 34 2
Unallocated 16 -- -- --
-------- --- -------- ---
Total gross loans $ 1,178 100% $ 874 100%
======== === ======== ===
11
INVESTMENT ACTIVITIES
The Bank is required under applicable regulations to maintain liquid assets
equal to at least 10% of its total assets. For purposes of this requirement,
liquid assets consist of cash and readily marketable investments. Cooperative
Bank has generally maintained a liquidity portfolio in excess of regulatory
requirements. Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of the level of yield that will be available in the future,
as well as management's projections as to the short term demand for funds to be
used in the Bank's loan origination and other activities.
The following table sets forth the carrying value of the Bank's investment
securities portfolio at the dates indicated. For additional information
regarding the Bank's investments, see Note 2 of Notes to Consolidated Financial
Statements in the Annual Report.
AT DECEMBER 31,
-------------------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Securities held to maturity:
U.S. Government and agency securities $ 5,000 $18,015 $ 18,025
Mortgage-backed securities -- 963 --
-------- ------- --------
Total securities held to maturity $ 5,000 $18,978 $ 18,025
Securities available for sale:
U.S. Government and agency securities $ 25,758 $16,049 $ 20,672
Mortgage-backed securities 11,123 -- 6,564
Marketable equity securities 5,099 -- --
Corporate bond 990 -- --
-------- ------- --------
Total securities available for sale $ 42,970 $16,049 $ 27,236
Total investment securities portfolio $ 47,970 $35,027 $ 45,261
======== ======= ========
12
The following table sets forth the scheduled maturities, carrying values, market
values and average yields for the Bank's investment securities portfolio at
December 31, 2001.
AFTER ONE AFTER FIVE
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS
---------------- ------------------ -------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
------- ------- -------- ------- ------- ---------
(DOLLARS IN THOUSANDS)
Securities held to maturity:
U.S. government and agency $ -- -- $ 5,000 6.20% $ -- --
----- ----- ------- ---- ------- ----
Total securities held $ -- -- $ 5,000 6.20% $ -- --
----- ----- ------- ---- ------- ----
Securities available for sale:
U.S. Government and agency
securities $ -- -- $17,157 5.25% $8,601 5.75%
Mortgage-backed securities -- -- -- -- -- --
Marketable equity securities -- -- -- -- -- --
Corporate bond $ -- -- 990 6.12% -- --
----- ----- ------- ---- ------- ----
Total securities available
for sale $ -- -- $18,147 5.30% $8,601 5.75%
----- ----- ------- ---- ------ ----
Total investment
securities portfolio $ -- -- $23,147 5.50% $8,601 5.75%
===== ===== ======= ==== ====== ====
MORE THAN TEN YEARS TOTAL INVESTMENT PORTFOLIO
------------------- --------------------------
CARRYING AVERAGE CARRYING FAIR AVERAGE
VALUE YIELD VALUE VALUE YIELD
--------- -------- -------- ------ --------
(DOLLARS IN THOUSANDS)
Securities held to maturity:
U.S. government and agency $ -- -- $ 5,000 $ 5,283 6.20%
------- ----- ------- ------- ----
Total securities held $ -- -- $ 5,000 $ 5,283 6.20%
------- ----- ------- ------- ----
Securities available for sale:
U.S. Government and agency
securities $ -- -- $25,758 $25,758 5.42%
Mortgage-backed securities 11,123 6.22% 11,123 11,123 6.22%
Marketable equity securities 5,099 6.11% 5,099 5,099 6.11%
Corporate bond -- -- 990 990 6.12%
------- ----- ------- ------- ----
Total securities available
for sale $16,222 6.19% $42,970 $42,970 5.72%
------- ---- ------- ------- ----
Total investment
securities portfolio $16,222 6.19% $47,970 $48,253 5.77%
======= ==== ======= ======= ====
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Bank's funds for lending and
other investment purposes. In addition to deposits, Cooperative Bank derives
funds from interest payments, loan principal repayments, borrowed funds and
funds provided by operations. Scheduled loan repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used to compensate for reductions in the availability of funds
from other sources. The Bank intends to fund its activities primarily through
deposits.
DEPOSITS. Deposits are attracted from within the Bank's primary market area
through the offering of a broad selection of deposit instruments including
checking, savings, money market deposit, and term certificate accounts
(including negotiated jumbo certificates in denominations of $100,000 or more)
as well as individual retirement plans. Deposit account terms vary according to
the minimum balance required, the time periods the funds must remain on deposit
and the interest rate, among other factors. The Bank does not obtain funds
through brokers; however, the Bank attracts deposits over the Internet and
considers this a viable alternative to borrowed funds. For further information
regarding the Bank's deposits, see "Management's Discussion and Analysis" and
Note 5 of Notes to Consolidated Financial Statements in the Annual Report.
The following table indicates the amount of the Company's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
2001.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- -------------
(IN THOUSANDS)
Three months or less $ 22,532
Over three through six months 17,045
Over six months through twelve
months 24,196
Over twelve months 10,837
---------
Total $ 74,610
=========
BORROWINGS. Deposits are the primary source of funds for Cooperative Bank's
lending and investment activities and for its general business purposes. If the
need arises, the Bank may obtain advances from the FHLB of
13
Atlanta to supplement its supply of loanable funds and to meet deposit
withdrawal requirements. Advances from the FHLB are typically secured by the
Bank's stock in the FHLB and a lien on a portion of the Bank's first mortgage
loans. The Bank has utilized FHLB advances in recent periods in order to meet a
larger than typical loan demand in the Bank's market area.
The FHLB of Atlanta functions as a central reserve bank providing credit
for the Bank and other member financial institutions. As a member, Cooperative
Bank is required to own capital stock in the FHLB and is authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities which are obligations of, or guaranteed
by, the United States), provided certain standards related to creditworthiness
have been met. Advances are made pursuant to several different programs. Each
credit program has its own interest rate and range of maturities. Depending on
the program, limitations on the amount of advances are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness.
For further information regarding the Bank's borrowings, see Note 6 of
Notes to Consolidated Financial Statements in the Annual Report.
COMPETITION
Cooperative Bank encounters strong competition both in the attraction of
deposits and in the making of real estate and other loans. Its most direct
competition for deposits has historically come from financial institutions in
its market area. Competition for deposits is also realized from brokerage firms
and credit unions. The Bank competes for deposits by offering depositors
competitive rates and a high level of personal service together with a wide
range of banking products and convenient office locations.
Competition for real estate and other loans comes principally from
financial institutions and mortgage companies. The Bank competes for loans
primarily through the interest rates and loan fees it charges, and the
efficiency and quality of services it provides borrowers. Factors which affect
competition include the general and local economic conditions, current interest
rate levels and volatility in the mortgage markets.
EMPLOYEES
At December 31, 2001, the Bank had 114 full-time employees and 9 part-time
employees. The employees are not represented by a collective bargaining unit.
The Bank believes its relationship with its employees to be good.
EXECUTIVE OFFICERS
At December 31, 2001, the executive officers of the Bank who were not also
directors were as follows:
AGE AT
NAME DECEMBER 31, 2001 POSITION
---- ----------------- --------
O.C. Burrell, Jr. 53 Executive Vice President and Chief Operating Officer
Todd L. Sammons, CPA 40 Senior Vice President and Chief Financial Officer
Dickson B. Bridger 43 Senior Vice President-Mortgage Lending
O. C. BURRELL, JR. was employed in May 1993 as Senior Vice President of
Retail Banking. Mr. Burrell was elected Executive Vice President and Chief
Operating Officer in 1997. Mr. Burrell has been in the banking industry since
1970 and has served in leadership capacities in various civic and professional
organizations. He is active in
14
the Wilmington Rotary Club and serves as treasurer and director of the Child
Development Center and is a member of the Retail Lending Committee of the North
Carolina Bankers Association.
TODD L. SAMMONS was employed in March 1986 as Auditor. He was promoted to
Senior Vice President-and Chief Financial Officer in December 2000. He
previously worked with a public accounting firm. He has served in leadership
capacities in various professional, church and civic organizations. He is a
Certified Public Accountant. He serves on the Board of Winter Park Optimist. He
serves as Treasurer of the Wilmington Vikings, a junior Legion Baseball Team.
DICKSON B. BRIDGER was employed in March 1984 as a mortgage loan
originator. He was promoted to Vice President in February 1990 and Senior Vice
President-Mortgage Lending in December 2000. He is a member of Wilmington Rotary
West and serves as an Elder of the Little Chapel on the Boardwalk church at
Wrightsville Beach, North Carolina.
REGULATION
GENERAL. As a North Carolina savings bank with deposits insured by the
SAIF, Cooperative Bank is subject to extensive regulation by the North Carolina
Office of the Commissioner of Banks (the Commissioner) and the FDIC. The lending
activities and other investments of Cooperative Bank must comply with various
federal regulatory requirements. The Commissioner and the FDIC periodically
examine Cooperative Bank for compliance with various regulatory requirements.
The Bank must file reports with the Commissioner and the FDIC describing its
activities and financial condition. The Bank is also subject to certain reserve
requirements promulgated by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). This supervision and regulation is intended
primarily for the protection of depositors. Certain of these regulatory
requirements are referred to below or appear elsewhere herein.
The Company is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "Holding Company Act") and, as such, is
subject to supervision and regulation by the Federal Reserve Board. The Company
is also subject to regular examination by the Federal Reserve Board. In
addition, as a savings institution holding company, the Company is subject to
supervision by the Commissioner under North Carolina law.
The following is a brief summary of certain statutes, rules and regulations
affecting the Company and the Bank. A number of other statutes and regulations
have an impact on their operations. The following summary of applicable statutes
and regulations does not purport to be complete and is qualified in its entirety
by reference to such statutes and regulations.
FINANCIAL MODERNIZATION LEGISLATION. The Gramm-Leach-Bliley ("G-L-B") Act,
which was enacted in November 1999, authorizes affiliations between banking,
securities and insurance firms and authorizes bank holding companies and
national banks to engage in a variety of new financial activities. Among the new
activities that are permitted to bank holding companies are securities and
insurance brokerage, securities underwriting, insurance underwriting and
merchant banking. The Federal Reserve Board, in consultation with the Secretary
of the Treasury, may approve additional financial activities. The G-L-B Act
imposed new requirements on financial institutions with respect to customer
privacy.
BANK HOLDING COMPANY REGULATION. As a bank holding company, the Company is
required to furnish to the Federal Reserve Board annual and quarterly reports of
its operations at the end of each period and to furnish such additional
information as the Federal Reserve Board may require pursuant to the Holding
Company Act.
Under the Holding Company Act, a bank holding company must obtain the prior
approval of the Federal Reserve Board before (1) acquiring direct or indirect
ownership or control of any voting shares of any bank or bank holding company
if, after such acquisition, the bank holding company would directly or
indirectly own or control more than 5% of such shares; (2) acquiring all or
substantially all of the assets of another bank or bank holding company; (3)
merging or consolidating with another bank holding company; or (4) acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
a company that is not a bank or a bank holding
15
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. In addition to the above restrictions under the Holding Company
Act, the Company's investments are limited under North Carolina law to those
investments permitted for North Carolina savings banks. See " -- State Law and
Regulation."
The Holding Company Act prohibits the Federal Reserve Board from approving
an application by a bank holding company to acquire voting shares of a bank
located outside the state in which the operations of the holding company's bank
subsidiaries are principally conducted, unless such an acquisition is
specifically authorized by state law. The State of North Carolina has enacted
reciprocal interstate banking statutes that authorize banks and their holding
companies in North Carolina to be acquired by banks or their holding companies
in states that have also enacted reciprocal banking legislation, and permit
North Carolina banks and their holding companies to acquire banks in such other
states.
Under the Holding Company Act, any company must obtain approval of the
Federal Reserve Board prior to acquiring control of the Company or the Bank. For
purposes of the Holding Company Act, "control" is defined as ownership of more
than 25% of any class of voting securities of the Company or the Bank, the
ability to control the election of a majority of the directors, or the exercise
of a controlling influence over management or policies of the Company or the
Bank.
The Change in Bank Control Act and the regulations of the Federal Reserve
Board thereunder require any person or persons acting in concert (except for
companies required to make application under the Holding Company Act), to file a
written notice with the Federal Reserve Board before such person or persons may
acquire control of the Company or the Bank. The Change in Bank Control Act
defines "control" as the power, directly or indirectly, to vote 25% or more of
any voting securities or to direct the management or policies of a bank holding
company or an insured bank.
The Federal Reserve Board has adopted guidelines regarding the capital
adequacy of bank holding companies, which require bank holding companies to
maintain specified minimum ratios of capital to total assets and capital to
risk-weighted assets. See " -- Capital Requirements."
The Federal Reserve Board has the power to prohibit dividends by bank
holding companies if their actions constitute unsafe or unsound practices. The
Federal Reserve Board has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve Board's
view that a bank holding company should pay cash dividends only to the extent
that the company's net income for the past year is sufficient to cover both the
cash dividends and a rate of earning retention that is consistent with the
company's capital needs, asset quality, and overall financial condition.
Bank holding companies generally are required to give the Federal Reserve
Board notice of any purchase or redemption of outstanding equity securities if
the gross consideration for the purchase or redemption, when combined with the
net consideration paid for all such purchases or redemptions during the
preceding 12 months, is equal to 10% or more of the Company's consolidated net
worth.
CAPITAL REQUIREMENTS. The regulations of the Federal Reserve Board and the
FDIC require bank holding companies and state-chartered banks that are not
members of the Federal Reserve System to maintain a minimum leverage capital
requirement consisting of a ratio of Tier 1 capital to total assets (as defined)
of 3%. Although setting a minimum 3% leverage ratio, the capital regulations
state that only the strongest bank holding companies and banks, with composite
examination ratings of 1 under the rating system used by the federal bank
regulators, would be permitted to operate at or near such minimum level of
capital. For all but the most highly rated institutions meeting the conditions
set forth above, the minimum leverage capital ratio is 3% plus an additional
"cushion" amount of at least 100 to 200 basis points. Any bank or bank holding
company experiencing or anticipating significant growth would be expected to
maintain capital well above the minimum levels. As a SAIF-insured,
state-chartered bank, the Bank must also deduct from Tier 1 capital an amount
equal to its investments in, and extensions of credit to, subsidiaries engaged
in activities that are not permissible to national banks, other than debt and
equity
16
investments in subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities or in subsidiary depository
institutions or their holding companies.
The risk-based capital rules of the Federal Reserve Board and the FDIC
require bank holding companies and state non-member banks to maintain minimum
regulatory capital levels based upon a weighting of their assets and off-balance
sheet obligations according to risk. The risk-based capital rules have two basic
components: a core capital (Tier 1) requirement and a supplementary capital
(Tier 2) requirement. The risk-based capital regulations assign balance sheet
assets and credit equivalent amounts of off-balance sheet obligations to one of
four broad risk categories based principally on the degree of credit risk
associated with the obligor. The assets and off-balance sheet items in the four
risk categories are weighted at 0%, 20%, 50% and 100%. These computations result
in the total risk-weighted assets.
The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital will be limited to no more than 100% of
core capital; and (ii) the aggregate amount of certain types of supplementary
capital will be limited. In addition, the risk-based capital regulations limit
the allowance for loan losses includable as capital to 1.25% of total
risk-weighted assets.
The federal bank regulatory agencies, including the Federal Reserve Board
and the FDIC, have revised their risk-based capital requirements to ensure that
such requirements provide for explicit consideration by commercial banks of
interest rate risk. Under these requirements, a bank's interest rate risk
exposure is quantified using either the measurement system set forth in the rule
or the bank's internal model for measuring such exposure, if such model is
determined to be adequate by the bank's examiner. If the dollar amount of a
bank's interest rate risk exposure, as measured under either measurement system,
exceeds 1% of the bank's total assets, the bank is required to hold additional
capital equal to the dollar amount of the excess. The Bank's current interest
rate risk exposure does not exceed 1% of the Bank's total assets. Management of
the Bank does not believe that this interest rate risk component has an adverse
effect on the Bank's capital. Under North Carolina law, savings banks must
maintain a net worth of not less than 5% of assets. In computing its compliance
with this requirement, the savings bank must deduct intangible assets from both
net worth and assets.
The Bank was in compliance with both the FDIC capital requirements and the
North Carolina net worth requirement at December 31, 2001. For further
information regarding the Bank's capital requirements, see Note 7 of Notes to
Consolidated Financial Statements in the Annual Report.
LIQUIDITY. North Carolina savings banks must maintain cash and readily
marketable investments in an amount not less than 10% of the assets of the
savings banks. The Bank was in compliance with this requirement at December 31,
2001.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of
17
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution.
Under regulations jointly adopted by the federal banking regulators, a
savings association's capital adequacy for purposes of the FDICIA prompt
corrective action rules is determined on the basis of the institution's total
risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to
risk-weighted assets) and leverage ratio (the ratio of its Tier 1 or core
capital to adjusted total assets).
The following table shows the capital ratio requirements for each prompt
corrective action category:
ADEQUATELY SIGNIFICANTLY
WELL-CAPITALIZED CAPITALIZED UNDERCAPITALIZED UNDERCAPITALIZED
Total risk-based
capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more * Less than 4.0% * Less than 3.0%
* 3.0% if institution has a composite 1 CAMELS rating.
For information regarding the position of the Bank with respect to the FDICIA
prompt corrective action rules, see Note 7 of Notes to Consolidated Financial
Statements included under Item 7 hereof.
COMMUNITY REINVESTMENT ACT. The Bank, like other financial institutions, is
subject to the Community Reinvestment Act ("CRA"). The purpose of the CRA is to
encourage financial institutions to help meet the credit needs of their entire
communities, including the needs of low-and moderate-income neighborhoods.
During the Bank's last compliance examination, the Bank received a
"satisfactory" rating with respect to CRA compliance. The Bank's rating with
respect to CRA compliance would be a factor to be considered by the Federal
Reserve Board and the FDIC in considering applications submitted by the Bank to
acquire branches or to acquire or combine with other financial institutions and
take other actions and, if such rating was less than "satisfactory," could
result in the denial of such applications.
DIVIDEND LIMITATIONS. The Bank may not pay dividends on its capital stock
if its regulatory capital would thereby be reduced below the amount then
required for the liquidation account established for the benefit of certain
depositors of the Bank at the time of its conversion to stock form.
Earnings of the Bank appropriated to bad debt reserves and deducted for
federal income tax purposes are not available for payment of cash dividends or
other distributions to stockholders without payment of taxes at the then current
tax rate by the Bank on the amount of earnings removed from the reserves for
such distributions. See "Taxation." The Bank intends to make full use of this
favorable tax treatment and does not contemplate use of any earnings in a manner
which would limit the Bank's bad debt deduction or create federal tax
liabilities.
Under applicable regulations, the Bank is prohibited from making any
capital distributions if after making the distribution, the Bank would have: (i)
a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; (iii) a leverage ratio of less than 4.0%, (iv)
a regulatory net worth less than the liquidation account established in
connection with the Bank's conversion to a stock institution, or (v) a
regulatory net worth less than the minimum amount required by the Commissioner.
DEPOSIT INSURANCE. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the SAIF. Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory
18
evaluations. Within each capital group, institutions are assigned to one of
three subgroups on the basis of supervisory evaluations by the institution's
primary supervisory authority and such other information as the FDIC determines
to be relevant to the institution's financial condition and the risk posed to
the deposit insurance fund. The Bank is currently classified as well capitalized
under this assessment system.
RESTRICTIONS ON CERTAIN ACTIVITIES. Under applicable law, state-chartered
banks with deposits insured by the FDIC are generally prohibited from acquiring
or retaining any equity investment of a type or in an amount that is not
permissible for a national bank. The foregoing limitation, however, does not
prohibit FDIC-insured state banks from acquiring or retaining an equity
investment in a subsidiary in which the bank is a majority owner.
State-chartered banks are also prohibited from engaging as principal in any type
of activity that is not permissible for a national bank and subsidiaries of
state-chartered, FDIC-insured state banks have been prohibited from engaging as
principal in any type of activity that is not permissible for a subsidiary of a
national bank unless in either case the FDIC determines that the activity would
pose no significant risk to the appropriate deposit insurance fund and the bank
is, and continues to be, in compliance with applicable capital standards.
The FDIC has adopted regulations to clarify the foregoing restrictions on
activities of FDIC-insured state-chartered banks and their subsidiaries. An
activity permissible for a national bank includes any activity expressly
authorized for national banks by statute or recognized as permissible in
regulations, official circulars or bulletins or in any order or written
interpretation issued by the Office of the Comptroller of the Currency ("OCC").
In its regulations, the FDIC indicates that it will not permit state banks to
directly engage in commercial ventures or directly or indirectly engage in any
insurance underwriting activity other than to the extent such activities are
permissible for a national bank or a national bank subsidiary or except for
certain other limited forms of insurance underwriting permitted under the
regulations. Under the regulations, the FDIC permits state banks that meet
applicable minimum capital requirements to engage as principal in certain
activities that are not permissible to national banks including guaranteeing
obligations of others, activities which the Federal Reserve Board has found by
regulation or order to be closely related to banking and certain securities
activities conducted through subsidiaries.
Subject to limitation by the Commissioner, North Carolina-chartered savings
banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North
Carolina-chartered savings bank cannot invest more than 15% of its total assets
in business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
TRANSACTIONS WITH AFFILIATES. Transactions between savings banks and any
affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An
affiliate of a savings bank is any company or entity which controls, is
controlled by or is under common control with the savings bank. Generally,
Sections 23A and 23B (i) limit the extent to which the savings bank or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, and contain
an aggregate limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the institution or subsidiary as those provided to a non-affiliate. A bank
holding company and its subsidiaries are considered "affiliates" of the bank
under Section 23A and 23B. The term "covered transaction" includes the making of
loans, purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
the Bank may not (i) lend or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the Bank.
19
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System,
which consists of 12 district FHLBs subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"). As a member of the FHLB of Atlanta, the
Bank is required to acquire and hold shares of capital stock in the FHLB of
Atlanta in an amount at least equal to 1% of the aggregate unpaid principal of
its home mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the FHLB of
Atlanta, whichever is greater. Cooperative Bank was in compliance with this
requirement with investment in FHLB of Atlanta stock at December 31, 2001 of
approximately $4.2 million.
FEDERAL RESERVE BOARD REGULATION. Pursuant to regulations of the Federal
Reserve Board, all FDIC-insured depository institutions must maintain average
daily reserves against their transaction accounts. Because required reserves
must be maintained in the form of vault cash or in a noninterest bearing account
at a Federal Reserve Bank, the effect of the reserve requirement is to reduce
the amount of the institution's interest-earning assets. At December 31, 2001,
the Bank met its reserve requirements.
STATE LAW AND REGULATION. North Carolina law contains comprehensive
provisions for the regulation of a savings bank business in the State of North
Carolina, including the manner of chartering a savings bank, capital
requirements, the composition and qualifications of boards of directors, the
number and manner of selection of officers, and record keeping requirements.
North Carolina savings banks may conduct operations through branch offices
located in the State of North Carolina. The North Carolina Banking Commission of
the Department of Commerce conducts hearings on all branch applications, and any
interested person may present evidence and argument.
Any plan adopted by the directors of a savings bank under which the savings
bank would reorganize or merge or consolidate with another savings bank must be
approved by the Commissioner. The plan must also be approved by the members or
stockholders who are entitled to vote, at an annual or special meeting.
The Commissioner is required to conduct a periodic examination of each
institution under his jurisdiction. The examination provides directors with an
independent assessment of the Bank's operations and compliance with applicable
laws, regulations and prudent operating policies. The Commissioner may make such
examination jointly with examiners of the FDIC.
TAXATION
The Bank is subject to the provisions of the Internal Revenue Code of 1986,
as amended (the "Code") in the same general manner as other corporations.
Legislation that was effective for tax years beginning after December 31,
1995 required savings institutions to recapture into taxable income over a six
taxable year period the portion of the tax loan reserve that exceeds the
pre-1988 tax loan loss reserve. The Bank is no longer allowed to use the reserve
method for tax loan loss provisions, but is allowed to use the experience method
of accounting for bad debts used by commercial banks under Code section 585.
There will be no future effect on net income from the recapture because the
taxes on these bad debt reserves has already been accrued as a deferred tax
liability.
For additional information regarding federal and state taxes, see Note 10
of Notes to Consolidated Financial Statements in the Annual Report.
STATE INCOME TAXATION
Under North Carolina law, the Bank is subject to an annual corporate income
tax of 6.90% of its federal taxable income as computed under the Code, subject
to certain prescribed adjustments. In addition to the state corporate income
tax, the Bank is subject to an annual state franchise tax, which is imposed at a
rate of .15% applied to the greatest of the Bank's (i) capital stock, surplus
and undivided profits, (ii) investment in tangible property in
20
North Carolina or (iii) appraised valuation of property in North Carolina. The
filing of consolidated returns is not permitted under North Carolina law.
ITEM 2. PROPERTIES
-------------------
The Bank operated 17 offices throughout the coastal and inland communities
of eastern North Carolina at December 31, 2001. The Bank has a total of four
offices that are subject to leases. The land is leased for two of these offices
on which the Bank has built it's own buildings. One office is a lease of the
land and the building on it and one is an office condominium that is leased by
the bank. For additional information relating to premises and equipment, see
Note 4 to Consolidated Financial Statements in the Annual Report.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
------------------------------------------------------------------------------
The information contained under the section captioned "Corporate
Information" in the Annual Report is incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
The information required by this item is incorporated herein by reference
to the tables captioned "Selected Financial and Other Data" in the Annual
Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion
& Analysis" in the Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion
and Analysis" in the Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
The financial statements contained in the Annual Report which are listed
under Item 14 herein are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------
None.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
(a) Directors of the Registrant
The information contained under the section captioned "Proposal I --
Election of Directors" in the Proxy Statement for the 2002 Annual Meeting of
Stockholders (the "Proxy Statement") is incorporated herein by reference.
(b) Principal Officers of the Registrant
The information contained under the caption "Executive Officers" under Part
I of this Form 10-K is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the sections captioned "Voting Securities and Principal Holders
Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference
to the sections captioned "Proposal I -- Election of Directors" in the
Proxy Statement.
(c) Changes in Control
Management of the Bank knows of no arrangements, including any pledge
of any person of securities of the Bank, the operation of which may at
a subsequent date result in a change in control of the Bank.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
The information required by this item is incorporated herein by reference
to the sections captioned "Proposal I -- Election of Directors" and "Voting
Securities and Principal Holders Thereof" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------
(a) Contents. The following financial statements are filed as part of this
--------
Annual Report on Form 10-K.
(1) Consolidated Financial Statements
1. Independent Auditors' Report of KPMG LLP *
2. Consolidated Statements of Financial Condition as of
December 31, 2001 and 2000 *
22
3. Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999 *
4. Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 2001, 2000 and 1999 *
5. Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2001, 2000 and 1999 *
6. Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000, and 1999 *
7. Notes to Consolidated Financial Statements *
_____________
* Incorporated by reference to the Annual Report attached
hereto as Exhibit 13.
(2) Financial Statement Schedules (All financial statement schedules
have been omitted as the required information is either
inapplicable or included in the Consolidated Financial Statements
or related notes.)
(b) During the fourth quarter of 2001, the Registrant filed one Current
Report on Form 8-K on October 22, 2001 reporting third quarter earnings.
(c) The following exhibits are either filed as part of this report or are
incorporated herein by reference:
No. Description Page
--- ----------- ----
3.1 Articles of Incorporation *
3.2 Bylaws *
10.1 Cooperative Bankshares, Inc. 1998 Stock Option and
Incentive Plan **
10.2 Employment Agreement with Frederick Willetts, III *
10.3 Severance Agreement with Todd L. Sammons
10.4 Severance Agreement with O.C. Burrell, Jr. ***
10.5 Severance Agreement with Dickson B. Bridger ****
10.6 Amendment to Severance Agreement of O.C. Burrell, Jr. *
10.7 Indemnity Agreement with Directors and Executive *
Officers
10.8 Director Retirement Agreements between Cooperative Bank
for Savings and Each Non-Employee Director of Cooperative Bank
10.9 Director Deferred Fee Agreements between Cooperative Bankshares, Inc.
and each Director of the Company
10.10 Director Deferred Fee Agreements between Cooperative Bank
for Savings and Each Non-Employee Director of Cooperative Bank
23
10.11 Executive Indexed Retirement Agreements between
Cooperative Bank for Savings and Frederick Willetts, III
and O. C. Burrell
11 Statement re: computation of per share earnings -
Reference is made to the Company's Consolidated
Statements of Operations attached hereto as Exhibit 13,
which are incorporated herein by reference
13 Annual Report to Stockholders for the year ended
December 31, 2001
21 Subsidiaries
23.1 Consent of KPMG LLP
23.2 Consent of PricewaterhouseCoopers, LLP
23.3 PricewaterhouseCoopers, LLP Report of Independent Accountants
________
* Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (Reg. No. 33-79206).
** Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Reg. No. 333-92219).
*** Incorporated by reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 1997.
**** Incorporated by reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 2000.
24
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
COOPERATIVE BANKSHARES, INC.
Date: March 28, 2002 By:/s/ Frederick Willetts, III
------------------------------------------
Frederick Willetts, III
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Frederick Willetts, III Date: March 28, 2002
-------------------------------------------------
Frederick Willetts, III
President, Chief Executive Officer and Chairman
(Principal Executive Officer and Director)
By: /s/ Todd Sammons Date: March 28, 2002
-------------------------------------------------
Todd Sammons
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ James D. Hundley, M.D. Date: March 28, 2002
-------------------------------------------------
James D. Hundley, M.D.
(Director)
By: /s/ O. Richard Wright, Jr. Date: March 28, 2002
-------------------------------------------------
O. Richard Wright, Jr.
(Director)
By: /s/ Paul G. Burton Date: March 28, 2002
-------------------------------------------------
Paul G. Burton
(Director)
By: /s/ H. Thompson King, III Date: March 28, 2002
-------------------------------------------------
H. Thompson King, III
(Director)
By: /s/ F. Peter Fensel, Jr. Date: March 28, 2002
-------------------------------------------------
F. Peter Fensel, Jr.
(Director)
By: /s/ R. Allen Rippy Date: March 28, 2002
-------------------------------------------------
R. Allen Rippy
(Director)
By: /s/ Russell M. Carter Date: March 20, 2002
-------------------------------------------------
Russell M. Carter
(Director)