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 March 31, 2002
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 0-24626
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COOPERATIVE BANKSHARES, INC.
----------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1886527
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Market Street, Wilmington, North Carolina 28401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (910) 343-0181
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Former name, former address and former fiscal year, if changed since last
report.
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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.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date. 2,835,447 shares at April 30, 2002
----------------------------------
TABLE OF CONTENTS
Page
Part I Financial Information
Item 1 Financial Statements
Consolidated Statements of Financial Condition,
March 31, 2002 and December 31, 2001 2
Consolidated Statements of Operations, for the three
months ended March 31, 2002 and 2001 3
Consolidated Statement of Stockholders' Equity, for
the three months ended March 31, 2002 4
Consolidated Statements of Cash Flows, for the three
months ended March 31, 2002 and 2001 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
Item 3 Market Risk 14
Part II Other Information 15
Signatures 16
PART 1-FINANCIAL INFORMATION-ITEM 1-FINANCIAL STATEMENTS
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2002 DECEMBER 31, 2001*
-------------- ------------------
(UNAUDITED)
ASSETS
Cash and due from banks, noninterest-bearing $ 11,109,267 $ 10,709,799
Interest-bearing deposits in other banks 3,772,639 1,585,779
------------ ------------
Total cash and cash equivalents 14,881,906 12,295,578
Securities:
Available for sale (amortized cost of $43,066,181 in March 2002
and $42,661,527 in December 2001) 42,354,305 42,970,180
Held to maturity (estimated market value of $5,219,600 in March 2002
and $5,282,815 in December 2001) 5,000,000 5,000,000
FHLB stock 4,154,900 4,154,900
Loans 377,715,012 375,980,628
Less allowance for loan losses 2,589,572 2,522,737
------------ ------------
Net loans 375,125,440 373,457,891
Other real estate owned 1,192,133 759,272
Accrued interest receivable 2,403,661 2,637,367
Premises and equipment, net 6,602,898 6,471,715
Other assets 11,130,277 10,367,162
------------ ------------
Total assets $462,845,520 $458,114,065
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $352,082,543 $339,830,052
Short-term borrowings 31,199,036 35,000,000
Escrow deposits 476,972 220,944
Accrued interest payable 303,883 264,391
Accrued expenses and other liabilities 1,544,560 1,083,242
Long-term obligations 43,096,038 48,097,156
------------ ------------
Total liabilities 428,703,032 424,495,785
------------ ------------
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,
2,835,447 shares issued and outstanding 2,835,447 2,835,447
Additional paid-in capital 2,435,720 2,435,720
Accumulated other comprehensive income (loss) (434,244) 188,278
Retained earnings 29,305,565 28,158,835
------------ ------------
Total stockholders' equity 34,142,488 33,618,280
------------ ------------
Total liabilities and stockholders' equity $462,845,520 $458,114,065
============ ============
Book value per common share $ 12.04 $ 11.86
============ ============
* 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
MARCH 31,
2002 2001
----------- -----------
INTEREST INCOME:
Loans $ 6,595,546 $ 7,145,394
Securities 695,887 535,320
Other 12,293 170,206
Dividends on FHLB stock 58,909 67,132
----------- -----------
Total interest income 7,362,635 7,918,052
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INTEREST EXPENSE:
Deposits 2,845,342 4,125,279
Borrowed funds 912,653 846,806
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Total interest expense 3,757,995 4,972,085
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NET INTEREST INCOME 3,604,640 2,945,967
Provision for loan losses 280,000 90,000
----------- -----------
Net interest income after provision for loan losses 3,324,640 2,855,967
----------- -----------
NONINTEREST INCOME:
Net gains on sale of loans 18,279 --
Net gains on sale of securities 116,766 --
Service charges and fees on loans 201,382 158,716
Deposit-related fees 248,235 239,377
Gain on sale of premises and equipment 464,977 --
Bank-owned life insurance earnings 99,837 --
Other income, net 60,116 16,883
----------- -----------
Total noninterest income 1,209,592 414,976
----------- -----------
NONINTEREST EXPENSE:
Compensation and fringe benefits 1,435,853 1,296,628
Occupancy and equipment 518,210 543,818
Advertising 70,503 46,461
Real estate owned 6,542 911
Other 518,962 485,647
----------- -----------
Total noninterest expenses 2,550,070 2,373,465
----------- -----------
Income before income taxes 1,984,162 897,478
Income tax expense 695,660 323,126
----------- -----------
NET INCOME $ 1,288,502 $ 574,352
=========== =========
NET INCOME PER SHARE:
Basic $ 0.45 $ 0.21
=========== =========
Diluted $ 0.45 $ 0.20
=========== =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 2,835,447 2,747,512
=========== =========
Diluted 2,843,398 2,816,068
=========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
3
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE TOTAL
COMMON PAID-IN INCOME (LOSS), RETAINED STOCKHOLDERS'
STOCK CAPITAL NET EARNINGS EQUITY
----------- ----------- ------------ ----------- ------------
Balance, December 31, 2001 $ 2,835,447 $ 2,435,720 $ 188,278 $ 28,158,835 $ 33,618,280
Other comprehensive
loss, net of taxes -- -- (622,522) -- (622,522)
Net income for period -- -- -- 1,288,502 1,288,502
Cash dividend ($.05 per share) -- -- -- (141,772) (141,772)
----------- ----------- ---------- ------------ ------------
Balance, March 31, 2002 $ 2,835,447 $ 2,435,720 $ (434,244) $ 29,305,565 $ 34,142,488
=========== =========== ========== ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net income $ 1,288,502 $ 574,352
Adjustments to reconcile net income to net cash
provided by operating activities:
Net accretion, amortization, and depreciation 198,350 162,528
Net gain on sale securities (116,766) --
Net gain on sale of loans (18,279) --
Provision (benefit) from deferred income taxes 140,620 (47,711)
Loss (gain) on sale of premises and equipment (464,977) 3,318
Provision for loan losses 280,000 90,000
Originations of loans held for sale (1,513,000) --
Proceeds from sales of loans held for sale 1,518,418 --
Changes in assets and liabilities:
Accrued interest receivable 233,706 (184,248)
Prepaid expenses and other assets (505,728) 195,681
Accrued interest payable 39,492 60,716
Accrued expenses and other liabilities 461,318 374,450
------------ ------------
Net cash provided by operating activities 1,541,656 1,229,086
------------ ------------
INVESTING ACTIVITIES:
Purchases of securities available for sale (13,438,870) (14,553,138)
Proceeds from sale of securities available for sale 12,115,938 --
Proceeds from maturity of securities available for sale 1,016,356 2,013,112
Proceeds from maturity of securities held to maturity -- 5,000,000
Loan originations, net of principal repayments (2,435,646) (1,737,803)
Proceeds from disposals of foreclosed real estate 68,096 --
Purchases of premises and equipment (344,937) (176,084)
Proceeds from sale of premises and equipment 499,070 5,375
------------ ------------
Net cash used in investing activities (2,519,993) (9,448,538)
------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits 12,252,491 1,253,997
Net change in short-term borrowings (8,802,082) (1,058)
Proceeds from issuance of common stock -- 5,525
Dividends paid (141,772) (140,049)
Net change in escrow deposits 256,028 195,566
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Net cash provided by financing activities 3,564,665 1,313,981
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,586,328 (6,905,471)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 12,295,578 18,148,436
------------ ------------
END OF PERIOD $ 14,881,906 $ 11,242,965
============ ============
(Continued)
5
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
THREE MONTHS ENDED
MARCH 31,
2002 2001
---------- ----------
Cash paid for:
Interest $3,718,503 $4,925,854
Income taxes 92,763 64,583
Summary of noncash investing and financing activities:
Transfer from loans to foreclosed real estate 500,957 --
Unrealized gain (loss) on securities available for sale,
net of taxes (622,522) 122,887
Transfer of securities from held to maturity to available
for sale at fair value -- 5,946,000
The accompanying notes are an integral part of the consolidated financial
statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies: The significant accounting policies followed by
--------------------
Cooperative Bankshares, Inc. (the "Company") for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting. These unaudited consolidated financial statements have
been prepared in accordance with Rule 10-01 of Regulation S-X, and, in
management's opinion, all adjustments of a normal recurring nature
necessary for a fair presentation have been included. The accompanying
financial statements do not purport to contain all the necessary financial
disclosures that might otherwise be necessary in the circumstances and
should be read in conjunction with the consolidated financial statements
and notes thereto in the Company's annual report for the year ended
December 31, 2001. The results of operations for the three-month period
ended March 31, 2002 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 potential common stock. Potential common stock consists of
stock options issued and outstanding. In determining the number of
potential common stock, the treasury stock method was applied. This method
assumes that the number of shares issuable upon exercise of the stock
options is reduced by the number of common shares assumed purchased at
market prices with the proceeds from the assumed exercise of the common
stock options plus any tax benefits received as a result of the assumed
exercise. The following table provides a reconciliation of income available
to common stockholders and the average number of shares outstanding for the
periods below:
THREE MONTHS ENDED
MARCH 31,
2002 2001
---------- ----------
Net income (numerator) $1,288,502 $ 574,352
Shares for basic EPS (denominator) 2,835,447 2,747,512
Dilutive effect of stock options 7,951 68,556
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Shares for diluted EPS (denominator) 2,843,398 2,816,068
========== ==========
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 months ended March 31:
THREE MONTHS ENDED
MARCH 31,
2002 2001
------------ -----------
Net income $ 1,288,502 $ 574,352
Other comprehensive income (loss):
Reclassification to realized gains 116,766 --
Unrealized gain (loss) arising during the period (1,137,295) 201,454
Income tax (expense) benefit 398,007 (78,567)
------------ -----------
Other comprehensive income (loss) (622,522) 122,887
------------ -----------
Comprehensive income $ 665,980 $ 697,239
============ ===========
7
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
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. Real Estate Sale: During February 2002, the Bank sold a parking lot for
----------------
$500,000. A gain of $464,977 was realized on the sale.
7. Subsequent Event: During April 2002, the Bank signed a definitive agreement
----------------
to acquire Wilmington-based Lumina Mortgage Company. Lumina Mortgage has
offices in Wilmington, North Carolina, North Myrtle Beach, South Carolina
and Virginia Beach, Virginia. Their 2001 loan originations totaled $118
million. This transaction is anticipated to be completed in the second
quarter of 2002.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Cooperative Bankshares, Inc. (the "Company") is a registered bank holding
company incorporated in North Carolina in 1994. The Company was formed for the
purpose of serving as the holding company for Cooperative Bank for Savings,
Inc., SSB ("Cooperative Bank" or the "Bank"), a North Carolina chartered savings
bank. The Company's primary activities consist of holding the stock of
Cooperative Bank and operating the business of the Bank. Accordingly, the
information set forth in this report, including financial statements and related
data, relates primarily to Cooperative Bank.
Cooperative Bank was chartered in 1898. The Bank's headquarters are located in
Wilmington, North Carolina. Cooperative operates 17 financial centers throughout
the coastal and inland communities of eastern North Carolina. These centers
extend from Corolla, located on the Outer Banks of North Carolina, to Tabor
City, located on the South Carolina border. The Bank's deposit accounts are
insured up to applicable limits by the Federal Deposit Insurance Corporation
("FDIC").
Through its financial centers, the Bank provides a wide range of banking
products, including interest bearing and non-interest bearing checking accounts,
certificates of deposit and individual retirement accounts. It offers an array
of loan products: overdraft protection, commercial, consumer, agricultural, real
estate, residential mortgage and home equity loans. Also offered are safe
deposit boxes and automated banking services through ATMs and Access24 Phone
Banking. In addition, the Bank offers discount brokerage services, annuity sales
and mutual funds through a third party arrangement with UVEST Investment
Services.
MISSION STATEMENT
It is the mission of the Company to provide the maximum in safety and security
for our depositors, an equitable rate of return for our stockholders, excellent
service for our customers, and to do so while operating in a fiscally sound and
conservative manner, with fair pricing of our products and services, good
working conditions, outstanding training and opportunities for our staff, along
with a high level of corporate citizenship.
MANAGEMENT STRATEGY
Cooperative Bank's lending activities have traditionally concentrated on the
origination of loans for the purpose of constructing, financing or refinancing
residential properties. In recent years however, the Bank has emphasized
origination of nonresidential real estate loans and secured and unsecured
consumer and business loans. As of March 31, 2002, approximately $269 million,
or 71%, of the Bank's loan portfolio consisted of loans secured by residential
properties. This was down from approximately $273 million, or 73% at December
31, 2001. The Bank originates adjustable rate and fixed rate loans. As of March
31, 2002, adjustable rate and fixed rate loans totaled approximately 64.2% and
35.8%, respectively, of the Bank's total loan portfolio.
The Bank has chosen to sell a larger percentage of its fixed rate mortgage loan
originations through broker dealer arrangements. This enables the Bank to
reinvest these funds in commercial loans, while increasing fee income. This is
part of the continuing effort to restructure the balance sheet and operations to
be more reflective of a commercial bank.
8
In April 2002, the Bank had signed a definitive agreement to acquire
Wilmington-based Lumina Mortgage Company. Lumina Mortgage has offices in
Wilmington, North Carolina, North Myrtle Beach, South Carolina and Virginia
Beach, Virginia. Their 2001 loan originations totaled $118 million. Management
expects this acquisition to be accretive to earnings during the year ended 2002.
This transaction is anticipated to be completed in the second quarter of 2002.
INTEREST RATE SENSITIVITY ANALYSIS
Interest rate sensitivity refers to the change in interest spread resulting from
changes in interest rates. To the extent that interest income and interest
expense do not respond equally to changes in interest rates, or that all rates
do not change uniformly, earnings will be affected. Interest rate sensitivity,
at a point in time, can be analyzed using a static gap analysis that measures
the match in balances subject to repricing between interest-earning assets and
interest-bearing liabilities. Gap is considered positive when the amount of
interest rate sensitive assets exceed the amount of interest rate sensitive
liabilities.
Gap is considered negative when the amount of interest rate sensitive
liabilities exceed the amount of interest rate sensitive assets. At March 31,
2002, Cooperative had a one-year negative gap position of 11.4%. During a period
of rising interest rates, a negative gap would tend to adversely affect net
interest income, while a positive gap would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative gap would
tend to result in an increase in net interest income while a positive gap would
tend to adversely affect net interest income. It is important to note that
certain shortcomings are inherent in static gap analysis. Although certain
assets and liabilities may have similar maturities or periods of repricing, they
may react in different degrees to changes in market interest rates. For example,
a 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 ("FHLB") in an amount of up to 25% of the Bank's total
assets. At March 31, 2002, the Bank's borrowed funds equaled 16.0% 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 March 31, 2002, the estimated market value of liquid assets (cash, cash
equivalents, and marketable securities) was approximately $62.5 million, which
represents 14.6% of deposits and borrowed funds as compared to $60.5 million or
14.3% of deposits and borrowed funds at December 31, 2001. The increase in
liquid assets was primarily due to an increase in cash from an increase in
deposits.
The Company's primary uses of liquidity are to fund loans and to make
investments. At March 31, 2002, outstanding off-balance sheet commitments to
extend credit totaled $28.5 million, and the undisbursed portion of construction
loans was $27.4 million. Management considers current liquidity levels adequate
to meet the Company's cash flow requirements.
CAPITAL
Stockholders' equity at March 31, 2002, was $34.1 million, up 1.6% from $33.6
million at December 31, 2001. Stockholders' equity at March 31, 2002, includes
an unrealized loss net of tax, of $434,000 as compared to an unrealized gain net
of tax at December 31, 2001, of $188,000 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 March 31, 2002, the
Bank's ratio of Tier I capital was 7.57%. 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
March 31, 2002, the Bank had a ratio of qualifying total capital to
risk-weighted assets of 11.26%.
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.
9
On March 28, 2002, the Company's Board of Directors approved a quarterly cash
dividend of $.05 per share. The dividend was paid on April 16, 2002 to
stockholders of record as of April 1, 2002. Any future payment of dividends is
dependent on the financial condition, and capital needs of the Company,
requirements of regulatory agencies, and economic conditions in the marketplace.
CRITICAL ACCOUNTING POLICY
The Bank's most significant critical accounting policy is the determination of
its allowance for loan losses. A critical accounting policy is one that is both
very important to the portrayal of the Bank's financial condition and results,
and requires management's most difficult, subjective or complex judgments. What
makes these judgments inherently difficult, subjective and/or or complex are due
to the need to make estimates about the effects of matters that are inherently
uncertain. For further information on the allowance for loan losses, see the
"Financial Condition" in Management's Discussion and Analysis and Note 3 of
"Notes to Consolidated Financial Statements" included in the 2001 Annual Report.
FINANCIAL CONDITION AT MARCH 31, 2002, COMPARED TO DECEMBER 31, 2001
The Company's total assets increased 1.0% to $462.8 million at March 31, 2002,
as compared to $458.1 million at December 31, 2001. The major change in the
assets is an increase of $2.6 million (21.0%) in cash and cash equivalents,
which was caused by an increase in deposits of $12.3 million (3.6%). The
increase in deposits was mainly in the seven month certificates due to favorable
pricing and the customers' desire to stay short in the current rate environment.
The Bank also attracted an additional $3.3 million in internet deposits because
the rates were competitive with the Bank's local markets. Internet deposits are
primarily obtained from other financial institutions in increments of $99,000.
The rise in deposits enabled the Bank to repay $9.0 million of borrowed funds
from the FHLB. 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 March 31, 2002, $31.2 million in borrowed funds mature
in 1 year and $20.0 million of funds mature in 2 years. The remaining amount of
borrowed funds matures in 2010 or 2011.
The Company's non-performing assets (loans 90 days or more delinquent and
foreclosed real estate) were $2.3 million, or 0.49% of assets, at March 31,
2002, compared to $3.8 million, or 0.84% of assets, at December 31, 2001. The
majority of this reduction was due to over $1 million of loans being paid off in
the first quarter of 2002, that were classified as non-performing at December
31, 2001. In addition, over $200,000 in loans were charged off during this
period. Foreclosed real estate increased to $1.2 million at March 31, 2002, from
$800,000 at December 31, 2001, but only two properties make up this balance. The
Company assumes an aggressive position in collecting delinquent loans and
disposing of foreclosed assets to minimize balances of non-performing assets and
continues to evaluate the loan and real estate portfolios to provide loss
reserves as considered necessary.
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-month period ended March 31, 2002, of $1,288,502
represents a 124.3% increase as compared to the same period last year. The
increase in net income for the period ended March 31, 2002 can be attributed to
increases in net interest income of $659 thousand and noninterest income of $795
thousand. These increases were partially offset by increases in the provision
for loan losses of $190 thousand, noninterest expense of $177 thousand and
income taxes of $373 thousand during the same period.
INTEREST INCOME
For the three-month period ended March 31, 2002, interest income decreased 7.0%
as compared to the same period a year ago. The average balance of
interest-earning assets increased 7.8% but the average yield decreased 109 basis
points as compared to the same period a year ago. The yield on average
interest-earning assets decreased to 6.80% as compared to 7.89% 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 24.4% for the three-month period ended March 31,
2002, as compared to the same period a year ago. This decrease was due to the
average cost of interest-bearing liabilities decreasing 167 basis points as
compared to the same
10
period a year ago. The average balance of interest-bearing liabilities increased
9.7% as compared to the same period a year ago. The cost of interest-bearing
liabilities decreased to 3.71% as compared to 5.38% for the same period last
year.
NET INTEREST INCOME
Net interest income for the three-month period ended March 31, 2002, as compared
to the same period a year ago, increased 22.4%. The increase was due to a larger
decrease in the cost of liabilities versus the yield on assets, which can be
attributed to the fact that certificates of deposit continue to reprice at lower
yields caused by the rate reductions in 2001.
11
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the Company's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such annualized yields and costs are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. The average loan portfolio
balances include nonaccrual loans.
For the quarter ended
March 31, 2002 March 31, 2001
----------------------------- ------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- -------
Interest-earning assets:
Interest-bearing deposits in other banks $ 2,810 $ 12 1.71% $ 15,492 $ 170 4.39%
Securities:
Available for sale 43,398 607 5.59% 27,433 439 6.40%
Held to maturity 5,000 89 7.12% 8,122 97 4.78%
FHLB stock 4,155 59 5.68% 3,755 67 7.14%
Loan portfolio 377,481 6,596 6.99% 346,766 7,145 8.24%
-------- ------ ----- -------- ------ -----
Total interest-earning assets 432,844 7,363 6.80% 401,568 7,918 7.89%
Non-interest earning assets 23,648 12,199
-------- --------
Total assets $456,492 $413,767
======== ========
Interest-bearing liabilities:
Deposits 326,812 2,845 3.48% 314,341 4,125 5.25%
Borrowed funds 78,427 913 4.66% 55,101 847 6.15%
-------- ------ ----- -------- ------ -----
Total interest-bearing liabilities 405,239 $3,758 3.71% 369,442 $4,972 5.38%
------ ------
Non-interest bearing liabilities 16,859 12,900
-------- --------
Total liabilities 422,098 382,342
Stockholders' equity 34,394 31,425
-------- --------
Total liabilities and stockholders' equity $456,492 $413,767
======== ========
Net interest income $3,605 $2,946
====== ======
Interest rate spread 3.09% 2.51%
===== =====
Net yield on interest-earning assets 3.33% 2.93%
===== =====
Percentage of average interest-earning
assets to average interest-bearing
liabilities 106.8% 108.7%
===== =====
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 three months ended
March 31, 2001 vs. March 31, 2002
Increase (Decrease)
Due to
--------------------------------
(DOLLARS IN THOUSANDS)
Volume Rate Total
------ ---- ------
Interest income:
Interest-bearing deposits in other banks $ (90) $ (68) $ (158)
Securities:
Available for sale 229 (61) 168
Held to maturity (45) 38 (7)
FHLB stock 7 (15) (8)
Loan portfolio 598 (1,148) (550)
------- ------- -------
Total interest-earning assets 699 (1,254) (555)
------- ------- -------
Interest expense:
Deposits 158 (1,438) (1,280)
Borrowed funds 304 (238) 66
------- ------- -------
Total interest-bearing liabilities 462 (1,676) (1,214)
------- ------- -------
Net interest income $ 237 $ 422 $ 659
======= ======= =======
PROVISION AND RESERVE FOR LOAN LOSSES
During the three-month period ended March 31, 2002 the Bank had net charge-offs
against the allowance for loan losses of $213,000 compared to $45,000 for the
same period in 2001. This increase was due to one credit of $189,000, which
previously had been placed in the non-accrual status, being charged off. The
Bank added $280,000 to the allowance for loan losses for the current three-month
period increasing the balance to $2.6 million at March 31, 2002. The increase in
the provision was caused by continued restructuring of the loan portfolio to
include a higher percentage of commercial loans. Management considers the
current level of the provision to be appropriate based on loan composition, the
current level of delinquencies and other non-performing assets, overall economic
conditions and other factors. Future increases to the allowance may be
necessary, however, due to changes in loan composition or loan volume, changes
in economic or market area conditions and other factors. Additionally, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the recognition of additions to the allowance for loan losses based on
their judgments of information available to them at the time of their
examination.
13
NONINTEREST INCOME
Noninterest income increased by 191.5% for the three-month period ended March
31, 2002, as compared to the same period a year ago. The change in noninterest
income can be attributed to a $465,000 gain on the sale of real estate, a
$117,000 gain on the sale of securities and Bank-owned life insurance earnings
of $100,000, all of which occurred during the three-month period ended March 31,
2002. No similar transactions occurred during the three months ended March 31,
2001. During February 2002, the Bank sold a parking lot for $500,000 which
caused the gain on the sale of real estate. The gain on securities was due to
selling bonds and purchasing mortgage backed securities to give the Bank greater
cash flow in the event of rising rates. The Bank-owned life insurance was
purchased at the end of September 2001. In addition, for the three-month period
ended March 31, 2002, as compared to the same period a year ago, service charges
and fees on loans increased 26.9% and other income increased $43,000 in the
current period. The increase in loan fees was mainly due to an increase in loan
settlement service fees for loans processed for others due to a favorable rate
environment. The increase in other income was mainly due to an increase in
commissions from annuity sales and mutual funds, through UVEST Investment
Services.
NONINTEREST EXPENSES
For the three-month period ended March 31, 2002, noninterest expense increased
7.4% as compared to the same period last year. Compensation and related costs
increased 10.7%. The increase was due to increases in incentive based pay, costs
of benefits, staffing levels and normal increases in salaries. The increase in
other noninterest expenses of $33,000 was mainly due to an increase in
professional fees. The increase of $24,000 in advertising can be attributed to a
more progressive advertising and business development strategy. Occupancy and
equipment expense was reduced by $26,000 due to a decrease in the cost of
outside data processing services during the three-month period ended March 31,
2002 as compared to the same period last year.
INCOME TAXES
The effective tax rate for the three-month periods ended March 31, 2002 and
2001, was 35.1% and 36.0% respectively. The decrease was mainly due to the fact
that the earnings on Bank-owned life insurance are not taxable.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the discussion contains
forward-looking statements that involve risks and uncertainties. Economic
circumstances, the Company's operations, and the Company's actual results could
differ significantly from those discussed in the forward-looking statements.
Some of the factors that could cause or contribute to such differences are
discussed herein, but also include changes in the economy and interest rates in
the nation, changes in the Company's regulatory environment and the Company's
market area.
ITEM 3 - MARKET RISK
The Company's primary market risk is interest rate risk. Interest rate risk is
the result of differing maturities or repricing intervals of interest earning
assets and interest bearing liabilities and the fact that rates on these
financial instruments do not change uniformly. These conditions may impact the
earnings generated by the Company's interest earning assets or the cost of its
interest bearing liabilities, thus directly impacting the Company's overall
earnings. The Company's management actively monitors and manages interest rate
risk. One way this is accomplished is through the development of and adherence
to the Company's asset/liability policy. This policy sets forth management's
strategy for matching the risk characteristics of the Company's interest earning
assets and liabilities so as to mitigate the effect of changes in the rate
environment.
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
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
None
(b) Reports on Form 8-K
A Form 8-K was filed on January 22, 2002 reporting fourth quarter and
full fiscal year earnings.
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: May 13, 2002 /s/ Frederick Willetts, III
---------------------------------------
President and Chief Executive Officer
Dated: May 13, 2002 /s/ Todd Sammons
---------------------------------------
Treasurer and Chief Financial Officer
16