UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 incorporation (I.R.S. Employer
or organization) Identification No.)
201 Market Street, Wilmington, North Carolina 28401
--------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (910) 343-0181
--------------
Former name, former address and former fiscal year,
if changed since last report.
--------------------------------------------------------------------------------
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. 2,835,947 shares at November 8, 2002
------------------------------------
TABLE OF CONTENTS
Page
Part I Financial Information
Item 1 Financial Statements
Consolidated Statements of Financial Condition,
September 30, 2002 and December 31, 2001 2
Consolidated Statements of Operations, for the three
and nine months ended September 30, 2002 and 2001 3
Consolidated Statement of Stockholders' Equity, for
the nine months ended September 30, 2002 4
Consolidated Statements of Cash Flows, for the nine
months ended September 30, 2002 and 2001 5-6
Notes to Consolidated Financial Statements 7-9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-18
Item 3 Market Risk 18
Item 4 Controls and Procedures 18
Part II Other Information 19
Signatures 20
Certifications 21-22
Exhibit 99 23
PART 1-FINANCIAL INFORMATION-FINANCIAL STATEMENTS
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2002 December 31, 2001*
------------------ ------------------
(UNAUDITED)
ASSETS
Cash and due from banks, noninterest-bearing $ 16,089,833 $ 10,709,799
Interest-bearing deposits in other banks -- 1,585,779
------------- -------------
Total cash and cash equivalents 16,089,833 12,295,578
Securities:
Available for sale (amortized cost of $42,307,557 in September 2002
and $42,661,527 in December 2001) 42,988,564 42,970,180
Held to maturity (estimated market value of $8,483,291 in September
2002 and $5,282,815 in December 2001) 8,309,326 5,000,000
FHLB stock 4,154,900 4,154,900
Loans held for sale 18,285,278 --
Loans 389,642,176 375,980,628
Less allowance for loan losses 2,702,124 2,522,737
------------- -------------
Net loans 386,940,052 373,457,891
Other real estate owned 599,588 759,272
Accrued interest receivable 2,315,623 2,637,367
Premises and equipment, net 7,137,366 6,471,715
Other assets 11,214,535 10,367,162
------------- -------------
Total assets $ 498,035,065 $ 458,114,065
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 359,872,874 $ 339,830,052
Short-term borrowings 53,039,188 35,000,000
Escrow deposits 730,464 220,944
Accrued interest payable 114,882 264,391
Accrued expenses and other liabilities 4,118,613 1,083,242
Long-term obligations 43,093,756 48,097,156
------------- -------------
Total liabilities 460,969,777 424,495,785
------------- -------------
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,
2,835,947 and 2,835,447 shares issued and outstanding 2,835,947 2,835,447
Additional paid-in capital 2,440,644 2,435,720
Accumulated other comprehensive income 415,414 188,278
Retained earnings 31,373,283 28,158,835
------------- -------------
Total stockholders' equity 37,065,288 33,618,280
------------- -------------
Total liabilities and stockholders' equity $ 498,035,065 $ 458,114,065
============= =============
* Derived from audited consolidated financial statements
The accompanying notes are an integral part of the consolidated financial
statements.
2
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
INTEREST INCOME:
Loans $ 6,682,082 $ 7,034,182 $ 19,930,985 $ 21,186,198
Securities 610,326 748,095 1,980,064 1,980,307
Other 18,473 23,640 42,391 251,975
Dividends on FHLB stock 54,981 63,892 168,273 194,221
------------ ------------ ------------ ------------
Total interest income 7,365,862 7,869,809 22,121,713 23,612,701
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits 2,462,594 3,857,524 7,918,261 11,950,354
Borrowed funds 917,751 889,419 2,722,183 2,591,290
------------ ------------ ------------ ------------
Total interest expense 3,380,345 4,746,943 10,640,444 14,541,644
------------ ------------ ------------ ------------
NET INTEREST INCOME 3,985,517 3,122,866 11,481,269 9,071,057
Provision for loan losses 120,000 120,000 520,000 300,000
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 3,865,517 3,002,866 10,961,269 8,771,057
------------ ------------ ------------ ------------
NONINTEREST INCOME:
Net gains on sale of loans 704,043 -- 765,385 2,420
Net gains on sale of securities -- 98,086 135,182 110,485
Service charges and fees on loans 140,280 176,025 478,035 511,240
Deposit-related fees 259,586 257,946 770,515 781,840
Gain (loss) on sale of premises and equipment -- -- 464,977 (3,318)
Bank-owned life insurance earnings 85,658 -- 285,332 --
Other income, net 84,664 813 187,639 7,302
------------ ------------ ------------ ------------
Total noninterest income 1,274,231 532,870 3,087,065 1,409,969
------------ ------------ ------------ ------------
NONINTEREST EXPENSE:
Compensation and fringe benefits 2,083,599 1,223,555 5,053,817 3,789,730
Occupancy and equipment 619,565 540,116 1,686,959 1,605,919
Advertising 103,043 89,984 239,863 200,929
Real estate owned (1,267) 5,594 9,260 4,957
Other 472,247 432,811 1,448,232 1,339,461
------------ ------------ ------------ ------------
Total noninterest expenses 3,277,187 2,292,060 8,438,131 6,940,996
------------ ------------ ------------ ------------
Income before income taxes 1,862,561 1,243,676 5,610,203 3,240,030
Income tax expense 642,682 438,211 1,970,660 1,157,309
------------ ------------ ------------ ------------
NET INCOME $ 1,219,879 $ 805,465 $ 3,639,543 $ 2,082,721
============ ============ ============ ============
NET INCOME PER SHARE:
Basic $ 0.43 $ 0.29 $ 1.28 $ 0.75
============ ============ ============ ============
Diluted $ 0.43 $ 0.28 $ 1.27 $ 0.74
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 2,835,947 2,814,347 2,835,634 2,787,611
============ ============ ============ ============
Diluted 2,861,290 2,828,829 2,856,083 2,820,185
============ ============ ============ ============
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 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
Exercise of stock options 500 4,924 -- -- 5,424
Other comprehensive
income, net of taxes -- -- 227,136 -- 227,136
Net income -- -- -- 3,639,543 3,639,543
Cash dividends ($.15 per share) -- -- -- (425,095) (425,095)
----------- ----------- --------- ------------ ------------
Balance, September 30, 2002 $ 2,835,947 $ 2,440,644 $ 415,414 $ 31,373,283 $ 37,065,288
=========== =========== ========= ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net income $ 3,639,543 $ 2,082,721
Adjustments to reconcile net income to net cash
used in operating activities:
Net accretion, amortization, and depreciation 791,310 525,593
Net gain on sale of securities (135,182) (110,485)
Gain on sale of loans (765,385) (2,420)
Deferred income taxes 49,499 (168,527)
Loss (gain) on sale of premises and equipment (464,977) 3,318
Gain on sales of foreclosed real estate (6,855) (6,956)
Valuation losses on foreclosed real estate 108,446 2,807
Provision for loan losses 520,000 300,000
Proceeds from sale of loans 37,347,800 27,115
Loan originations held for sale (54,867,693) --
Changes in assets and liabilities:
Accrued interest receivable 321,744 108,358
Other assets (328,818) (7,661,439)
Accrued interest payable (149,509) 20,291
Accrued expenses and other liabilities 3,023,703 151,136
------------ ------------
Net cash used in operating activities (10,916,374) (4,728,488)
------------ ------------
INVESTING ACTIVITIES:
Purchases of securities available for sale (22,717,557) (62,517,100)
Purchases of securities held to maturity (4,165,348) --
Purchase of Lumina Mortgage Company (773,188) --
Proceeds from sale of securities available for sale 19,058,014 28,092,663
Proceeds from maturity of securities available for sale 4,802,669 17,645,964
Proceeds from maturity of securities held to maturity -- 5,000,000
Loan originations, net of principal repayments (14,047,379) (18,225,565)
Proceeds from disposals of foreclosed real estate 204,766 238,860
Additions to other real estate owned (101,455) --
Purchases of premises and equipment (1,217,422) (453,464)
Proceeds from sale of premises and equipment 499,070 11,418
------------ ------------
Net cash used in investing activities (18,457,830) (30,207,224)
------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits 20,042,822 13,302,956
Net change in short-term borrowings 18,039,188 5,000,000
Net change in long-term obligations (5,003,400) 7,996,782
Proceeds from issuance of common stock, net 5,424 199,589
Dividends (425,095) (421,261)
Net change in escrow deposits 509,520 151,268
------------ ------------
Net cash provided by financing activities 33,168,459 26,229,334
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,794,255 (8,706,378)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 12,295,578 18,148,436
------------ ------------
END OF PERIOD $ 16,089,833 $ 9,442,058
============ ============
(Continued)
5
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
----------- -----------
Cash paid for:
Interest $10,789,953 $14,521,353
Income taxes 1,857,763 1,254,583
Summary of noncash investing and financing activities:
Transfer from loans to foreclosed real estate 963,668 1,080,372
Loans to facilitate the sale of foreclosed real estate 918,450 --
Unrealized gain on securities available for sale, net of taxes 227,136 336,766
Transfer of securities from held to maturity to
available for sale-fair value -- 5,946,000
The accompanying notes are an integral part of the consolidated financial
statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies: The significant accounting policies followed by
--------------------
Cooperative Bankshares, Inc. (the "Company") for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting. These unaudited consolidated financial statements have
been prepared in accordance with Rule 10-01 of Regulation S-X, and, in
management's opinion, all adjustments of a normal recurring nature
necessary for a fair presentation have been included. The accompanying
financial statements do not purport to contain all the necessary financial
disclosures that might otherwise be necessary in the circumstances and
should be read in conjunction with the consolidated financial statements
and notes thereto in the Company's annual report for the year ended
December 31, 2001. The results of operations for the three and nine-month
periods ended September 30, 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 (the "Bank") and its wholly owned
subsidiary, Lumina Mortgage Company, Inc. In October of 2002, the Bank
changed the name of its subsidiary from CS&L Services, Inc. to Lumina
Mortgage Company, Inc. ("Lumina"). 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 shares. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income (numerator) $ 1,219,879 $ 805,465 $3,639,543 $2,082,721
Shares for basic EPS (denominator) 2,835,947 2,814,347 2,835,634 2,787,611
Dilutive effect of stock options 25,343 14,482 20,449 32,574
----------- ---------- ---------- ----------
Shares for diluted EPS (denominator) 2,861,290 2,828,829 2,856,083 2,820,185
=========== ========== ========== ==========
For the period ended September 30, 2002 and 2001, there were 14,204 options
outstanding that were antidilutive since the exercise price exceeds the
average market price. These options have been omitted from the calculation
of the dilutive effect of stock options.
4. Comprehensive Income: Comprehensive income includes net income and all
---------------------
other changes to the Company's equity, with the exception of transactions
with shareholders ("other comprehensive income"). The Company's only
components of other comprehensive income relate to unrealized gains and
losses on available for sale securities. The following table sets forth the
components of other comprehensive income and total comprehensive income for
the three and nine months ended September 30:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income $ 1,219,879 $ 805,465 $ 3,639,543 $ 2,082,721
Other comprehensive income:
Reclassification adjustment for
realized gains on available for
sale securities -- (98,086) (135,182) (110,485)
Unrealized gains on available
for sale securities arising during
the period 346,469 555,432 507,536 662,560
Income tax expense (135,123) (178,365) (145,218) (215,309)
----------- ----------- ----------- -----------
Other comprehensive income 211,346 278,981 227,136 336,766
----------- ----------- ----------- -----------
Comprehensive income $ 1,431,225 $ 1,084,446 $ 3,866,679 $ 2,419,487
=========== =========== =========== ===========
7
5. New Accounting Pronouncements: 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 hedging activities except for the buy and
sell commitments for loans held for sale, which are deemed immaterial due
to the fact the Company issues a rate lock commitment to a customer and
concurrently "locks in" the loan with a secondary market investor under a
best efforts delivery mechanism. Therefore, market risk is mitigated
because any commitments to fund a loan available for sale is concurrently
hedged by a commitment from an investor to purchase the loan under the same
terms. Loans are usually sold within 60 days after closing. Other than the
aforementioned transfer of securities, the adoption of the Statement had no
material impact on the Company.
On July 1, 2001, the Company adopted SFAS No. 141, "Business Combinations".
This Statement improves the transparency of the accounting and reporting
for business combinations by requiring that all business combinations be
accounted for under a single method - the purchase method. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 requires
that the purchase method be used for business combinations initiated after
June 30, 2001. The purchase method was used in recording the acquisition of
Lumina Mortgage Company.
On January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and Other
Intangible Assets". This Statement requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment. The Company
did not have any goodwill until the purchase of Lumina Mortgage Company.
This purchase has created goodwill in the amount of $661,543. In accordance
with Statement No. 142, this goodwill will not be amortized but instead
will be tested for impairment at least annually.
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. Loans Held for Sale: As a part of the normal business operations, the
--------------------
Company originates mortgage loans that have been approved by secondary
investors. The Company issues a rate lock commitment to a customer and
concurrently "locks in" with a secondary market investor under a best
efforts delivery mechanism. The terms of the loan are set by the secondary
investors and are transferred within several weeks of the Company initially
funding the loan. The Company receives origination fees from borrowers and
servicing release premiums from the investors that are recognized on the
Statement of Operations in the line item "net gains on sale of loans".
Between the initial funding of the loans by the Company and the subsequent
purchase by the investor, the Company carries the loans on its balance
sheet at cost.
8. Acquisition: On May 31, 2002, the Bank acquired the operating assets of
-----------
Wilmington-based Lumina Mortgage Company. The combined resources of these
two companies enable the Bank to offer a wider range of products to a
larger customer base. Lumina has offices in Wilmington, North Carolina,
North Myrtle Beach, South Carolina and Virginia Beach, Virginia. Their 2001
loan originations totaled $118 million. The purchase price was $740,000 in
cash with two future contingent payments based on loan origination volume
and meeting certain profitability goals of Lumina in the two subsequent
years after the purchase. Due to the uncertainties surrounding the
determination of the contingent payments, such payments have not been
recorded. The two contingent payments are estimated to be approximately
$300,000 each and will be recorded as additional purchase price. The
goodwill created by this transaction was $661,543.
Lumina borrows money on a short-term basis principally from another
financial institution to fund its loans that are held for sale. At
September 30, 2002 the balance of this borrowing was $17.7 million at a
rate of 4.06%. This borrowing is collateralized by mortgage loans held for
sale. When a loan is sold, the proceeds are used to repay the borrowing.
Loans are usually sold within 60 days. This borrowing agreement provides
for a maximum line of credit up to $10 million, which has been temporarily
increased to $25 million due to the large volume increase caused by the
current low interest rate environment.
8
The following table summarizes the estimated fair value of assets acquired
and liabilities assumed at May 31, 2002, excluding $33,127 of professional
fees that were included in goodwill as part of this transaction:
Premises and equipment $ 71,584
Goodwill 628,416
Other Assets 51,729
---------
Total assets acquired $ 751,729
---------
Accrued expenses and other liabilities 11,668
---------
Total liabilities assumed 11,668
---------
Net assets acquired $ 740,061
=========
Presented below are the pro-forma consolidated condensed statements of
operations, for the Company and Lumina Mortgage Company, for the three and
nine month periods ended September 30, 2002 and 2001, assuming the
acquisition was completed at the beginning of all periods presented. The
unaudited pro-forma information presented below is not necessarily
indicative of the results of operations that would have resulted had the
merger been completed at the beginning of the applicable periods presented,
nor is it necessarily indicative of the results of operations in future
periods.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Interest income $ 7,373,837 $ 7,982,862 $ 22,274,653 $ 23,951,860
Interest expense 3,380,697 4,851,488 10,738,757 14,855,279
----------- ----------- ------------ ------------
Net interest income 3,993,140 3,131,374 11,535,896 9,096,581
Provision for loan losses 120,000 120,000 520,000 300,000
----------- ----------- ------------ ------------
Net interest income after provision for
loan losses 3,873,140 3,011,374 11,015,896 8,796,581
----------- ----------- ------------ ------------
Noninterest income 1,288,742 1,371,552 4,501,167 3,926,014
Noninterest expense 3,291,548 3,047,480 9,786,038 9,207,255
Income before income taxes 1,870,334 1,335,446 5,731,025 3,515,340
Income tax expense 645,714 474,001 2,017,781 1,264,680
----------- ----------- ------------ ------------
NET INCOME $ 1,224,620 $ 861,445 $ 3,713,244 $ 2,250,660
=========== =========== ============ ============
NET INCOME PER SHARE:
Basic $ 0.43 $ 0.31 $ 1.31 $ 0.81
=========== =========== ============ ============
Diluted $ 0.43 $ 0.30 $ 1.30 $ 0.80
=========== =========== ============ ============
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Cooperative Bankshares, Inc. (the "Company") is a registered bank holding
company incorporated in North Carolina in 1994. The Company is the parent
company of Cooperative Bank for Savings, Inc., SSB ("Cooperative Bank" or the
"Bank"), a North Carolina chartered savings bank. Cooperative Bank,
headquartered in Wilmington, North Carolina, was chartered in 1898. The Bank
provides financial services through 17 financial centers in Eastern North
Carolina. The Bank's subsidiary, Lumina Mortgage Company, Inc. ("Lumina") is a
mortgage banking firm, originating and selling residential mortgage loans
through offices in Wilmington, North Carolina, North Myrtle Beach, South
Carolina and Virginia Beach, Virginia. In October of 2002, the Bank changed the
name of its subsidiary from CS&L Services, Inc. to Lumina Mortgage Company, Inc.
Accordingly, the information set forth in this report, including financial
statements and related data, relates primarily to Cooperative Bank.
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. The Bank's deposit
accounts are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC"). It offers an array of loan products: overdraft protection,
commercial, consumer, agricultural, real estate, residential mortgage and home
equity 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. The Bank also offers a wide range of
mortgage loan products through its subsidiary, Lumina. On May 31, 2002, the Bank
acquired Wilmington-based Lumina Mortgage Company. Lumina 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.
MISSION STATEMENT
It is the mission of the Company to provide the maximum in safety and security
for our depositors, an equitable rate of return for our stockholders, excellent
service for our customers, and to do so while operating in a fiscally sound and
conservative manner, with fair pricing of our products and services, good
working conditions, outstanding training and opportunities for our staff, along
with a high level of corporate citizenship.
MANAGEMENT STRATEGY
Cooperative Bank's lending activities have traditionally concentrated on the
origination of loans for the purpose of constructing, financing or refinancing
residential properties. In recent years, however, the Bank has emphasized
origination of nonresidential real estate loans and secured and unsecured
consumer and business loans. As of September 30, 2002, approximately $273
million, or 70%, of the Bank's loan portfolio, excluding loans held for sale,
consisted of loans secured by residential properties which was reduced from 73%
at December 31, 2001. The Bank originates adjustable rate and fixed rate loans.
As of September 30, 2002, adjustable rate and fixed rate loans totaled
approximately 63.4% and 36.6%, 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 brokered arrangements. This enables the Bank to reinvest
these funds in commercial loans, while increasing fee income. This is part of
the continuing effort to restructure the balance sheet and operations to be more
reflective of a commercial bank.
The Bank has received approval to build additional branches in Wilmington, N.C.
and Morehead City, N. C.
INTEREST RATE SENSITIVITY ANALYSIS
Interest rate sensitivity refers to the change in interest spread resulting from
changes in interest rates. To the extent that interest income and interest
expense do not respond equally to changes in interest rates, or that all rates
do not change uniformly, earnings will be affected. Interest rate sensitivity,
at a point in time, can be analyzed using a static gap analysis that measures
the match in balances subject to repricing between interest-earning assets and
interest-bearing liabilities. Gap is considered positive when the amount of
interest rate sensitive assets exceed the amount of interest rate sensitive
liabilities. Gap is considered negative when the amount of interest rate
sensitive liabilities exceed the amount of interest rate sensitive assets.
At September 30, 2002, Cooperative had a one-year cumulative gap position of a
negative 2.4%. 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
10
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. For example, a part of the Company's
adjustable-rate mortgage loans are indexed to the National Monthly Median Cost
of Funds to SAIF-insured institutions. This index is considered a lagging index
that may lag behind changes in market rates. The one-year or less
interest-bearing liabilities also include checking, savings, and money market
deposit accounts. Experience has shown that the Company sees relatively modest
repricing of these transaction accounts. Management takes this into
consideration in determining acceptable levels of interest rate risk.
When Lumina gives a rate lock commitment to a customer, there is a concurrent
"lock in" for the loan with a secondary market investor under a best efforts
delivery mechanism. Therefore interest rate risk is mitigated because any
commitments to fund a loan available for sale is concurrently hedged by a
commitment from an investor to purchase the loan under the same terms. Loans are
usually sold within 60 days after closing.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Bank enters into agreements that obligate it to make future payments under
contracts, such as debt and lease agreements. In addition, the Bank commits to
lend funds in the future such as credit lines and loan commitments. Below is a
table of such contractual obligations and commitments at September 30, 2002 (in
thousands).
Payments Due by Period
---------------------------------------------------------
Less
than 1 1-3 4-5 Over 5
Contractual Obligations Total year years years years
----------------------- ---------- --------- --------- ------ --------
Borrowed Funds $ 96,133 $ 53,039 $ 20,000 $ -- $ 23,094
Lease Obligations 1,582 204 363 153 862
Deposits 359,873 296,354 63,327 59 133
---------- --------- --------- ------ --------
Total Contractual Obligations $ 457,588 $ 349,597 $ 83,690 $ 212 $ 24,089
========== ========= ========= ====== ========
Amount of Commitment Expiration
Per Period
-------------------------------------------------
Total Less
Amounts than 1 1-3 4-5 Over 5
Off Balance Sheet Commitments Committed year years years years
----------------------------- --------- ------ ----- ----- -------
Undisbursed portion of home equity loans
collateralized primarily by junior liens
on 1-4 family properties $13,456 $ 1,323 $ 326 $ 298 $11,509
Other commitments and credit lines 10,518 6,759 1,636 15 2,108
Undisbursed portion of construction loans 31,248 31,248 -- -- --
Fixed-rate mortgage loan commitments 2,976 2,976 -- -- --
Adjustable-rate mortgage loan
commitments 4,852 4,852 -- -- --
Commitments to sell loans 18,285 18,285 -- -- --
Letters of credit 1,699 1,668 31 -- --
------- ------- ------- ------- -------
Total Commitments $83,034 $67,111 $ 1,993 $ 313 $13,617
======= ======= ======= ======= =======
11
LIQUIDITY
The Company's goal is to maintain adequate liquidity to meet potential funding
needs of loan and deposit customers, pay operating expenses, and meet regulatory
liquidity requirements. Maturing securities, principal repayments of loans and
securities, deposits, income from operations and borrowings are the main sources
of liquidity. The Bank has been granted a line of credit by the Federal Home
Loan Bank of Atlanta ("FHLB") in an amount of up to 25% of the Bank's total
assets. At September 30, 2002, the Bank's borrowed funds from the FHLB equaled
15.7% of its total assets. Lumina has a borrowing agreement that provides
funding for loans held for sale. This agreement has a maximum credit limit of
$10 million, which has been temporarily increased to $25 million due to the
large volume increase caused by the current low interest rate environment. At
September 30, 2002, Lumina had borrowed $17.7 million on this line of credit.
Scheduled loan repayments are a relatively predictable source of funds, unlike
deposits and loan prepayments that are significantly influenced by general
interest rates, economic conditions and competition.
At September 30, 2002, the estimated market value of liquid assets (cash, cash
equivalents, marketable securities and loans held for sale) was approximately
$85.8 million, which represents 18.8% 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 loans held for
sale that was funded with short term borrowings.
The Company's primary uses of liquidity are to fund loans and to make
investments. At September 30, 2002, outstanding off-balance sheet commitments to
extend credit totaled $33.5 million, and the undisbursed portion of construction
loans was $31.2 million. Management considers current liquidity levels adequate
to meet the Company's cash flow requirements.
CAPITAL
Stockholders' equity at September 30, 2002, was $37.1 million, up 10.3% from
$33.6 million at December 31, 2001. Stockholders' equity at September 30, 2002
and December 31, 2001, includes unrealized gains, net of tax, of $415,000 and
$188,000, respectively, on securities available for sale marked to estimated
fair market value.
Under the capital regulations of the FDIC, the Bank must satisfy minimum
leverage ratio requirements and risk-based capital requirements. Banks
supervised by the FDIC must maintain a minimum leverage ratio of core (Tier I)
capital to average adjusted assets ranging from 3% to 5%. At September 30, 2002,
the Bank's ratio of Tier I capital was 7.27%. The FDIC's risk-based capital
rules require banks supervised by the FDIC to maintain risk-based capital to
risk-weighted assets of at least 8.00%. Risk-based capital for the Bank is
defined as Tier I capital plus the balance of allowance for loan losses. At
September 30, 2002, the Bank had a ratio of qualifying total capital to
risk-weighted assets of 11.08%.
The Company, as a bank holding company, is also subject, on a consolidated
basis, to the capital adequacy guidelines of the Board of Governors of the
Federal Reserve (the "Federal Reserve Board"). The capital requirements of the
Federal Reserve Board are similar to those of the FDIC governing the Bank.
The Company currently exceeds all of its capital requirements. Management
expects the Company to continue to exceed these capital requirements without
altering current operations or strategies.
On September 18, 2002, the Company's Board of Directors approved a quarterly
cash dividend of $.05 per share. The dividend was paid on October 16, 2002 to
stockholders of record as of October 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 Company's only 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 Company'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 is the
need to make estimates about the effects of matters that are inherently
uncertain. For further information on the allowance for loan losses, see
"Financial Condition" in Management's Discussion and Analysis and Note 3 of
"Notes to Consolidated Financial Statements" included in the 2001 Annual Report.
12
FINANCIAL CONDITION AT SEPTEMBER 30, 2002, COMPARED TO DECEMBER 31, 2001
The Company's total assets increased 8.7% to $498.0 million at September 30,
2002, as compared to $458.1 million at December 31, 2001. There was an increase
of $3.8 million (30.9%) in cash and cash equivalents, which was caused by an
increase in deposits of $20.0 million (5.9%). The increase in deposits was
primarily 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 $7.1 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, with terms
primarily of one or two years. The rise in deposits and income from operations
enabled the Bank to fund an increase in loans of $13.7 million (3.6%) and
securities held to maturity by $3.3 million (66.2%) as well as repay $5 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. There was an increase of $18.3
million in loans held for sale, which was primarily funded by a short term
borrowing at another financial institution. This loan is collateralized by the
loans held for sale. Both the loans held for sale and the corresponding
borrowing are a result of the May 2002 Lumina purchase. During the nine months
ended September 30, 2002, the Bank purchased real estate in Southport, NC for
$577,000 for possible branch expansion, which is the principal reason for the
increase of $666,000 (10.3%) to premises and equipment. Other assets increased
$847,000 (8.2%) since the beginning of the year, of which $662,000 was due to
goodwill resulting from the purchase of Lumina Mortgage Company. Accrued
expenses and other liabilities increased $3.0 million (280.2%) because of a
reclassification made due to outstanding checks. At September 30, 2002, $53.0
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 $1.1 million, or .23% of assets, at September 30,
2002, compared to $3.8 million, or 0.84% of assets, at December 31, 2001. The
majority of this reduction was due to over $1.1 million of loans being paid off
and $822,000 in loans foreclosed on during the current year that were classified
as non-performing at December 31, 2001. Foreclosed real estate decreased to
$600,000 at September 30, 2002, from $759,000 at December 31, 2001, with two
properties making 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. For further
information see "Comparison of Operating Results - Provision and Reserve for
Loan Losses".
COMPARISON OF OPERATING RESULTS
OVERVIEW
The net income of the Company depends primarily upon net interest income. Net
interest income is the difference between the interest earned on loans, the
securities portfolios, interest bearing deposits and the cost of funds,
consisting principally of the interest paid on deposits and borrowings. The
Company's operations are materially affected by general economic conditions, the
monetary and fiscal policies of the Federal government, and the policies of
regulatory authorities. Yields and costs have declined in 2002 because of the
action the Federal Reserve took to reduce interest rates throughout 2001 in
hopes to spur the economy.
NET INCOME
Net income for the three and nine-month periods ended September 30, 2002,
increased 51.5% to $1.2 million and 74.7% to $3.6 million, respectively, as
compared to the same period last year. The increase in net income for the
nine-month period ended September 30, 2002 can be attributed to increases in net
interest income of $2.4 million and noninterest income of $1.7 million. These
increases were partially offset by increases in the provision for loan losses of
$220,000, noninterest expense of $1.5 million and income taxes of $813,000
during the same period.
INTEREST INCOME
For the three-month period ended September 30, 2002, interest income decreased
6.4% as compared to the same period a year ago. The average balance of
interest-earning assets increased 7.8% while the average yield decreased 100
basis points as compared to the same period a year ago. Interest income
decreased 6.3% for the nine-month period ended September 30, 2002, as compared
to the same period a year ago. The decrease in interest income can be attributed
to the yield on average interest-earning assets decreasing to 6.72% as compared
to 7.70% for the same period a year ago. The average balance of interest-earning
assets increased 7.3% for the nine month period ended September 30, 2002, as
compared to the same period a year ago. The increase in the average balance of
interest-earning assets had a positive effect on interest income while the
reduction in yield had a negative impact on interest income.
13
INTEREST EXPENSE
Interest expense decreased 28.8% for the three-month period ended September 30,
2002, as compared to the same period a year ago. This decrease was due to the
average cost of interest-bearing liabilities decreasing 172 basis points as
compared to the same period a year ago. In the nine-month period ended September
30, 2002, interest expense decreased 26.8% as compared to the same period a year
ago. The average balance of interest-bearing liabilities increased 9.5% as
compared to the same period a year ago. The cost of interest-bearing liabilities
decreased to 3.45% as compared to 5.16% for the same period last year.
NET INTEREST INCOME
Net interest income for the three and nine-month periods ended September 30,
2002, as compared to the same period a year ago, increased 27.6% and 26.6%,
respectively. 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. See "Average Yield/Cost Analysis" tables for further
information on interest income and interest expense.
14
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the Company's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such annualized yields and costs are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. The average loan portfolio
balances include nonaccrual loans.
For the quarter ended
SEPTEMBER 30, 2002 SEPTEMBER 30, 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 $ 3,512 $ 18 2.05% $ 2,464 $ 24 3.90%
Securities:
Available for sale 39,212 504 5.14% 42,420 634 5.98%
Held to maturity 8,460 107 5.06% 8,000 114 5.70%
FHLB stock 4,155 55 5.29% 3,755 64 6.82%
Loan portfolio 394,554 6,682 6.77% 360,529 7,034 7.80%
-------- ------ -------- ------
Total interest-earning assets 449,893 7,366 6.55% 417,168 7,870 7.55%
Non-interest earning assets 27,670 16,704
-------- --------
Total assets $477,563 $433,872
======== ========
Interest-bearing liabilities:
Deposits $339,539 2,462 2.90% $323,613 3,858 4.77%
Borrowed funds 80,120 918 4.58% 60,860 889 5.84%
-------- ------ -------- ------
Total interest-bearing liabilities 419,659 3,380 3.22% 384,473 4,747 4.94%
------ ------
Non-interest bearing liabilities 21,185 16,745
-------- --------
Total liabilities 440,844 401,218
Stockholders' equity 36,719 32,654
-------- --------
Total liabilities and stockholders' equity $477,563 $433,872
======== ========
Net interest income $3,986 $3,123
====== ======
Interest rate spread 3.33% 2.61%
===== =====
Net yield on interest-earning assets 3.54% 2.99%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 107.2% 108.5%
===== =====
15
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the Company's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such annualized yields and costs are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. The average loan portfolio
balances include nonaccrual loans.
For the nine months ended
SEPTEMBER 30, 2002 SEPTEMBER 30, 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 $ 3,150 $ 43 1.82% $ 8,947 $ 252 3.76%
Securities:
Available for sale 41,260 1,669 5.39% 35,927 1,669 6.19%
Held to maturity 6,892 311 6.02% 8,041 312 5.17%
FHLB stock 4,155 168 5.39% 3,755 194 6.89%
Loan portfolio 383,306 19,931 6.93% 352,094 21,186 8.02%
-------- ------- -------- -------
Total interest-earning assets 438,763 22,122 6.72% 408,764 23,613 7.70%
Non-interest earning assets 26,855 13,829
-------- --------
Total assets $465,618 $422,593
======== =========
Interest-bearing liabilities:
Deposits $334,185 7,918 3.16% $318,209 11,951 5.01%
Borrowed funds 77,002 2,723 4.72% 57,457 2,591 6.01%
-------- ------- -------- -------
Total interest-bearing liabilities 411,187 10,641 3.45% 375,666 14,542 5.16%
------- -------
Non-interest bearing liabilities 19,047 14,887
-------- --------
Total liabilities 430,234 390,553
Stockholders' equity 35,384 32,040
-------- --------
Total liabilities and stockholders' equity $465,618 $422,593
======== =========
Net interest income $11,481 $ 9,071
======= =======
Interest rate spread 3.27% 2.54%
====== ======
Net yield on interest-earning assets 3.49% 2.96%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 106.7% 108.8%
====== ======
16
PROVISION AND ALLOWANCE FOR LOAN LOSSES
During the nine-month period ended September 30, 2002 the Bank had net
charge-offs against the allowance for loan losses of $341,000 compared to
$82,111 for the same period in 2001. This increase was due to one credit of
$189,000 which previously had been placed in non-accrual status, being charged
off and three loans that were written down to the fair value of the collateral
at the time of foreclosure. The Bank recorded $520,000 as a provision for loan
losses for the current nine-month period, as compared to a $300,000 provision
for the same period last year. The increase in the provision was primarily
caused by a continued emphasis to grow the Bank's commercial loan portfolio.
Management considers the current level of the allowance for loan losses 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 due to changes in loan
composition or loan volume, changes in economic or market area conditions and
other factors. Additionally, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the recognition of additions to the allowance
for loan losses based on their judgments of information available to them at the
time of their examination.
NONINTEREST INCOME
Noninterest income increased by 118.9% for the nine-month period ended September
30, 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 and
Bank-owned life insurance earnings of $285,000. No similar transactions occurred
during the nine months ended September 30, 2001. During February 2002, the Bank
sold a parking lot for $500,000 which caused the gain on the sale of premises
and equipment. The Bank purchased Bank-owned life insurance at the end of
September 2001. Also, net gains on sale of loans increased to $765,000 for the
nine-month period ended September 30, 2002, as compared to $2,000 for the same
period a year ago. This increase was primarily due to increased loan sale volume
resulting from the purchase of Lumina. In addition, deposit-related fees
increased $53,000 for the nine-month period ended September 30, 2002, as
compared to the same period last year. This increase is primarily due to an
increase in ATM revenues, which was caused by an increase in both the fee and
the number of ATMs in operation. For the nine-month period ended September 30,
2002, as compared to the same period a year ago, other income increased $180,000
mainly due to an increase in commissions from annuity sales and mutual funds,
through UVEST Investment Services.
In the three-month period ended September 30, 2002, noninterest income increased
139.1% as compared to the same period last year. The net gains on sale of loans,
Bank-owned life insurance and other income, net increased $704,000, $86,000, and
$84,000 respectively, for the three-month period ended September 30, 2002, as
compared to the same period a year ago. The reasons for these increases are the
same as stated above for the nine month period. During the same three-month
period, service charges and fees on loans decreased 20.3% as compared to last
year. This reduction was primarily caused by a reduction in loan settlement
service fees, where the Bank acts as a broker, due to the large number of
mortgage refinances made during the three-months ended September 30, 2001.
NONINTEREST EXPENSES
For the nine-month period ended September 30, 2002, noninterest expense
increased 21.6% as compared to the same period last year. Compensation and
related costs increased 33.4%. The increase was due to increases in incentive
based pay, costs of benefits, staffing levels and normal increases in salaries,
as well as higher personnel costs as a result of the purchase of Lumina. The
increase in other noninterest expenses of $109,000 was mainly due to an increase
in professional fees. The increases of $81,000 and $39,000 in occupancy and
equipment expense and in advertising, respectively, can be primarily attributed
to the purchase of Lumina.
In the three-month period ended September 30, 2002, noninterest expense
increased 43.0% as compared to the same period last year. This increase can be
principally attributed to compensation and fringe benefits increasing $860,000.
The reasons for this increase are identical to the nine-month period ended
September 30, 2002. The increases in occupancy and equipment expense,
advertising and other noninterest expense of $79,000, $13,000 and $39,000,
respectively, in the three-month period ended September 30, 2002, as compared to
the same period last year, were mainly due to the purchase of Lumina.
INCOME TAXES
The effective tax rates for the nine-month periods ended September 30, 2002 and
2001, were 35.1% and 35.7% respectively. The effective tax rates for the
three-month periods ended September 30, 2002 and 2001, were 34.5% and 35.2%
respectively. The decreases were mainly due to the fact that the earnings on
Bank-owned life insurance are not taxable.
17
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the discussion contains
forward-looking statements that involve risks and uncertainties. Economic
circumstances, the Company's operations, and the Company's actual results could
differ significantly from those discussed in the forward-looking statements.
Some of the factors that could cause or contribute to such differences are
discussed herein, but also include changes in the economy and interest rates in
the nation, changes in the Company's regulatory environment and the Company's
market area.
ITEM 3 - MARKET RISK
The Company's primary market risk is interest rate risk. Interest rate risk is
the result of differing maturities or repricing intervals of interest earning
assets and interest bearing liabilities and the fact that rates on these
financial instruments do not change uniformly. These conditions may impact the
earnings generated by the Company's interest earning assets or the cost of its
interest bearing liabilities, thus directly impacting the Company's overall
earnings. The Company's management actively monitors and manages interest rate
risk. One way this is accomplished is through the development of and adherence
to the Company's asset/liability policy. This policy sets forth management's
strategy for matching the risk characteristics of the Company's interest earning
assets and liabilities so as to mitigate the effect of changes in the rate
environment. The Company's market risk profile has not changed significantly
since December 31, 2001.
ITEM 4 - CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the Company's disclosure controls and procedures (as such term is defined in
Rule 13a-14 (c) under the Exchange Act) as of a date within 90 days of the date
of filing of this Form 10-Q. Based upon such evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of the evaluation described above.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable
(b) Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Exhibit 99 - CERTIFICATE PURSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated October 23, 2002
to report third quarter earnings.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COOPERATIVE BANKSHARES, INC.
Dated: November 13, 2002 /s/ Frederick Willetts, III
-------------------------------------------------
President and Chief Executive Officer
Dated: November 13, 2002 /s/ Todd L. Sammons
-------------------------------------------------
Senior Vice President and Chief Financial Officer
20
CERTIFICATION
I, Frederick Willetts, III, President and Chief Executive Officer of Cooperative
Bankshares, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cooperative Bankshares,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board or directors (or persons fulfilling the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Frederick Willetts
---------------------------------------
Frederick Willetts, III
President and Chief Executive Officer
21
CERTIFICATION
I, Todd L. Sammons, Senior Vice President and Chief Financial Officer of
Cooperative Bankshares, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cooperative Bankshares,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board or directors (or persons fulfilling the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Todd L. Sammons
-------------------------------------------------
Todd L. Sammons
Senior Vice President and Chief Financial Officer
22