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, 2005
-------------------
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-24626
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COOPERATIVE BANKSHARES, INC.
----------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1886527
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
201 Market Street, Wilmington, North Carolina 28401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (910) 343-0181
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Former name, former address and former fiscal year,
if changed since last report.
N/A
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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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
/_/ Yes /X/ No
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
/_/ Yes /X/ No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date: 4,303,816 shares at November 3, 2005
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1
TABLE OF CONTENTS
Page
Part I Financial Information
Item 1 Financial Statements
Consolidated Statements of Financial Condition, September 30, 2005
and December 31, 2004 3
Consolidated Statements of Operations, for the three and nine months ended
September 30, 2005 and 2004 4
Consolidated Statement of Stockholders' Equity, for the nine months
ended September 30, 2005 5
Consolidated Statements of Cash Flows, for the nine months ended
September 30, 2005 and 2004 6-7
Notes to Consolidated Financial Statements 8-10
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-18
Item 3 Quantitative and Qualitative Disclosures About Market Risk 18
Item 4 Controls and Procedures 18
Part II Other Information
Item 1 Legal Proceedings 19
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits 19-20
Signatures 21
2
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2005 December 31, 2004*
-------------------- -------------------
(UNAUDITED)
ASSETS
Cash and due from banks, noninterest-bearing $ 19,489,219 $ 12,031,627
Interest-bearing deposits in other banks - 4,360,960
------------------ ------------------
Total cash and cash equivalents 19,489,219 16,392,587
Securities:
Available for sale (amortized cost of $43,123,458 in September 2005
and $44,432,476 in December 2004) 42,575,714 44,535,010
Held to maturity (estimated market value of $2,140,085 in September
2005 and $2,678,860 in December 2004) 2,175,074 2,659,595
FHLB stock 5,423,900 4,518,500
Loans held for sale 7,240,827 7,239,131
Loans 615,853,968 453,769,733
Less allowance for loan losses 5,844,105 4,353,227
------------------ ------------------
Net loans 610,009,863 449,416,506
Other real estate owned 26,291 -
Accrued interest receivable 2,916,686 2,085,164
Premises and equipment, net 9,937,441 8,597,015
Goodwill 1,461,543 1,461,543
Other assets 14,324,461 13,202,393
------------------ ------------------
Total assets $ 715,581,019 $ 550,107,444
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 542,009,276 $ 414,757,904
Short-term borrowings 25,419,470 32,342,878
Escrow deposits 396,846 194,408
Accrued interest payable 444,701 190,689
Accrued expenses and other liabilities 3,838,634 2,629,188
Long-term obligations 93,542,668 53,082,676
------------------ ------------------
Total liabilities 665,651,595 503,197,743
------------------ ------------------
Stockholders' equity:
Preferred stock, $1 par value, 3,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $1 par value, 14,000,000 shares authorized,
4,302,816 and 2,860,764 shares issued and outstanding 4,302,816 2,860,764
Additional paid-in capital 2,711,593 2,673,233
Accumulated other comprehensive income (loss) (361,511) 67,672
Retained earnings 43,276,526 41,308,032
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Total stockholders' equity 49,929,424 46,909,701
------------------ ------------------
Total liabilities and stockholders' equity $ 715,581,019 $ 550,107,444
================== ==================
Book value per common share** $ 11.60 $ 10.93
================== ==================
* Derived from audited consolidated financial statements.
** The 2004 information is computed after giving the retroactive effect of a 3-for-2 stock split in the form of
a 50% stock dividend declared on January 19, 2005 and paid on February 24, 2005.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
3
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
----------------- ----------------- --------------- ---------------
INTEREST INCOME:
Loans $ 9,907,182 $ 6,409,154 $ 25,826,634 $ 18,445,865
Securities 524,467 557,179 1,592,552 1,675,783
Other 27,333 12,356 75,842 30,123
Dividends on FHLB stock 46,241 37,653 154,716 110,760
---------------- ---------------- ---------------- ---------------
Total interest income 10,505,223 7,016,342 27,649,744 20,262,531
---------------- ---------------- ---------------- ---------------
INTEREST EXPENSE:
Deposits 3,306,204 1,635,174 8,150,419 4,613,972
Borrowed funds 1,158,380 713,094 2,794,725 2,077,488
---------------- ---------------- ---------------- ---------------
Total interest expense 4,464,584 2,348,268 10,945,144 6,691,460
---------------- ---------------- ---------------- ---------------
NET INTEREST INCOME 6,040,639 4,668,074 16,704,600 13,571,071
Provision for loan losses 575,000 225,000 1,550,000 745,000
---------------- ---------------- ---------------- ---------------
Net interest income after provision for loan losses 5,465,639 4,443,074 15,154,600 12,826,071
---------------- ---------------- ---------------- ---------------
NONINTEREST INCOME:
Gain on sale of loans 570,694 682,115 1,895,323 1,959,574
Service charges and fees on loans 248,513 159,359 651,924 351,457
Deposit-related fees 494,672 418,910 1,304,519 1,177,449
Bank-owned life insurance earnings 95,283 73,182 253,198 244,195
Other income, net 48,813 61,750 137,064 165,500
---------------- ---------------- ---------------- ---------------
Total noninterest income 1,457,975 1,395,316 4,242,028 3,898,175
---------------- ---------------- ---------------- ---------------
NONINTEREST EXPENSES:
Compensation and fringe benefits 2,656,391 2,349,614 7,761,650 7,055,462
Occupancy and equipment 911,423 834,037 2,625,907 2,468,454
Professional and examination fees 118,623 87,276 370,852 311,552
Advertising 160,242 140,476 404,192 383,447
Other 516,777 503,713 1,576,322 1,520,666
---------------- ---------------- ---------------- ---------------
Total noninterest expenses 4,363,456 3,915,116 12,738,923 11,739,581
---------------- ---------------- ---------------- ---------------
Income before income taxes 2,560,158 1,923,274 6,657,705 4,984,665
Income tax expense 1,054,288 636,845 2,613,286 1,656,183
---------------- ---------------- ---------------- ---------------
NET INCOME $ 1,505,870 $ 1,286,429 $ 4,044,419 $ 3,328,482
================ ================ ================ ===============
NET INCOME PER SHARE:
Basic* $ 0.35 $ 0.30 $ 0.94 $ 0.78
================ ================ ================ ===============
Diluted* $ 0.34 $ 0.30 $ 0.92 $ 0.76
================ ================ ================ ===============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic* 4,301,553 4,291,146 4,296,677 4,288,533
================ ================ ================ ===============
Diluted* 4,379,214 4,360,517 4,375,156 4,364,873
================ ================ ================ ===============
* The 2004 information is computed after giving the retroactive effect of a 3-for-2 stock split in the form of a
50% stock dividend declared on January 19, 2005 and paid on February 24, 2005.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
4
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK CAPITAL INCOME (LOSS) EARNINGS EQUITY
--------------- --------------- ---------------- --------------- -----------------
Balance, December 31, 2004 $ 2,860,764 $ 2,673,233 $ 67,672 $ 41,308,032 $ 46,909,701
Exercise of stock options 16,223 101,538 -- -- 117,761
Stock traded to exercise options
(4,522 shares) (4,522) (80,944) -- -- (85,466)
Tax benefit of stock option exercised -- 17,766 -- -- 17,766
3-for-2 stock split in the form
of a 50% dividend 1,430,351 -- -- (1,430,351) --
Other comprehensive
loss, net of taxes -- -- (429,183) -- (429,183)
Net income -- -- -- 4,044,419 4,044,419
Cash dividends ($.15 per share) -- -- -- (645,574) (645,574)
-------------- --------------- --------------- --------------- ----------------
Balance, September 30, 2005 $ 4,302,816 $ 2,711,593 $ (361,511) $ 43,276,526 $ 49,929,424
============== =============== =============== =============== ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
5
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
2005 2004
----------------- ----------------
OPERATING ACTIVITIES:
Net income $ 4,044,419 $ 3,328,482
Adjustments to reconcile net income to net cash
used in operating activities:
Net accretion, amortization, and depreciation 740,902 740,770
Gain on sale of loans (1,895,323) (1,959,574)
Deferred income taxes (466,664) (308,065)
Loss on sale of premises and equipment 7,534 3,412
Gain on sale of other real estate owned - (6,486)
Valuation losses on other real estate owned 12,886 -
Provision for loan losses 1,550,000 745,000
Proceeds from sale of loans 120,055,296 137,240,700
Loan originations held for sale (118,162,339) (134,534,052)
Changes in assets and liabilities:
Accrued interest receivable (831,522) (258,610)
Other assets 29,690 994,754
Accrued interest payable 254,012 20,895
Accrued expenses and other liabilities 1,227,212 693,184
----------------- ----------------
Net cash provided in operating activities 6,566,103 6,700,410
----------------- ----------------
INVESTING ACTIVITIES:
Purchases of securities available for sale - (15,500,296)
Purchase of Lumina Mortgage Company - (400,000)
Proceeds from maturity of securities available for sale - 10,200,000
Repayments of mortgage-backed securities available for sale 1,308,718 3,276,592
Repayments of mortgage-backed securities held to maturity 484,871 912,882
Net sales (purchases) of FHLB stock (905,400) (399,800)
Loan originations, net of principal repayments (162,189,538) (43,288,953)
Proceeds from disposals of other real estate owned 14,870 40,773
Additions to other real estate owned (7,196) (9,487)
Purchases of premises and equipment (2,093,911) (416,809)
Investment in unconsolidated Trust (464,000) -
Proceeds from sale of premises and equipment 5,000 2,200
----------------- ----------------
Net cash used in investing activities (163,846,586) (45,582,898)
----------------- ----------------
FINANCING ACTIVITIES:
Net increase in deposits 127,251,372 32,260,183
Net change in short-term borrowings (11,923,408) (2,997,624)
Net change in long-term obligations 45,459,992 9,996,206
Proceeds from issuance of common stock, net 32,295 46,506
Dividends (645,574) (543,545)
Net change in escrow deposits 202,438 27,106
----------------- ----------------
Net cash provided (used) by financing activities 160,377,115 38,788,832
----------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,096,632 (93,656)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 16,392,587 18,393,365
----------------- ----------------
END OF PERIOD $ 19,489,219 $ 18,299,709
================= ================
(Continued)
6
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
NINE MONTHS ENDED
SEPTEMBER 30,
2005 2004
---------------- ----------------
Cash paid for:
Interest $ 10,691,132 $ 6,970,565
Income taxes 2,595,015 1,520,400
Summary of noncash investing and financing activities:
Transfer from loans to other real estate owned 46,851 325,886
Loans to facilitate the sale of other real estate owned - 301,086
Unrealized loss on securities available for sale,
net of taxes (429,183) (172,710)
Reclassifications between long-term obligations
and short-term borrowings 5,000,000 10,000,000
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies: The significant accounting policies followed by
-------------------
Cooperative Bankshares, Inc. (the "Company") for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting. These unaudited consolidated financial statements have
been prepared in accordance with Rule 10-01 of Regulation S-X, and, in
management's opinion, all adjustments of a normal recurring nature
necessary for a fair presentation have been included. The accompanying
consolidated financial statements do not purport to contain all the
necessary financial disclosures that might otherwise be necessary in the
circumstances and should be read in conjunction with the consolidated
financial statements and notes thereto in the Company's Annual Report on
form 10-K for the year ended December 31, 2004 (the "Annual Report"). The
results of operations for the nine-month period ended September 30, 2005
are not necessarily indicative of the results to be expected for the full
year.
2. Basis of Presentation: The accompanying unaudited consolidated financial
---------------------
statements include the accounts of Cooperative Bankshares, Inc.,
Cooperative Bank (the "Bank") and its wholly owned subsidiaries, Lumina
Mortgage Company, Inc. ("Lumina") and CS&L Holdings, Inc. ("Holdings"), and
Holdings' majority owned subsidiary, CS&L Real Estate Trust, Inc. (the
"REIT"). All significant intercompany items have been eliminated. The
Company formed Cooperative Bankshares Capital Trust I (the "Trust") on
August 30, 2005, which is wholly owned by the Company, to facilitate the
issuance of trust preferred securities totaling $15.0 million. The Trust is
not consolidated in these financial statements due to the adoption of FASB
Interpretation No. (FIN) 46, Consolidation of Variable Interest Entities.
The junior subordinated debentures issued by the Company to the Trust were
included in long-term obligations and the Company's equity interest in the
Trust was included in other assets. 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. Junior Subordinated Debentures: The Trust was formed with the sole purpose
------------------------------
of issuing the trust preferred securities and investing the proceeds from
the sale of such trust preferred securities in the debentures. The
debentures held by the Trust are the sole assets of the Trust. The Company
owns 100% of the Trust's outstanding common securities and unconditionally
guarantees the Trust's financial obligations. The debentures and the trust
preferred securities bear an interest rate of 5.74% for the first five
years, and thereafter bear an interest rate equal to 142 basis points over
the three-month LIBOR (London Inter-Bank Offered Rate). The trust preferred
securities generally rank equal to the trust common securities in priority
of payment, but will rank prior to trust common securities if and so long
as the Company fails to make principal or interest payment on the
debentures. Concurrently with the issuance of the debentures and the trust
preferred securities, the Company entered into a Guaranty Agreement, dated
August 30, 2005, related to the trust preferred securities for the benefit
of the holders. The debentures and trust preferred securities each have
30-year lives and will each be callable by the Company or the Trust, at
their option, after five years. The Company has the option to defer
interest for up to five years on the debentures. The debentures qualify as
Tier I capital under Federal Reserve Board guidelines.
4. Earnings Per Share: Earnings per share ("EPS") is calculated by dividing
------------------
net income by the weighted average number of common shares outstanding
("basic EPS") and the sum of the weighted average number of common shares
outstanding and potential common stock ("diluted EPS"). Potential common
stock consists of stock options issued and outstanding. In determining the
number of shares of potential common stock, the treasury stock method was
applied. This method assumes that the number of shares issuable upon
exercise of the stock options is reduced by the number of common shares
assumed purchased at market prices with the proceeds from the assumed
exercise of the common stock options plus any tax benefits received as a
result of the assumed exercise. The following table provides a
reconciliation of income available to common stockholders and the average
number of shares outstanding for the periods below after giving the
retroactive effect of a 3-for-2 stock split in the form of a 50% stock
dividend declared on January 19, 2005 and paid on February 24, 2005:
8
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
-------------- ------------ ------------- -------------
Net income (numerator) $ 1,505,870 $ 1,286,429 $ 4,044,419 $ 3,328,482
Shares for basic EPS (denominator) 4,301,553 4,291,146 4,296,677 4,288,533
Dilutive effect of stock options 77,661 69,371 78,479 76,340
-------------- ------------ ------------- -------------
Shares for diluted EPS (denominator) 4,379,214 4,360,517 4,375,156 4,364,873
============== ============ ============= =============
For the periods ended September 30, 2005 and 2004, there were 0 and 4,000
options outstanding, respectively, that were not dilutive since the
exercise price did not exceed the average market price. These options have
been omitted from the calculation of the dilutive effect of stock options.
5. 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,
2005 2004 2005 2004
-------------- ------------- -------------- --------------
Net income $ 1,505,870 $ 1,286,429 $ 4,044,419 $ 3,328,482
Other comprehensive income
Realized (gains) losses on available for
sale securities - - - -
Unrealized gains (losses) on available for
sale securities (537,853) 491,801 (650,277) (261,682)
Income taxes 182,870 (167,213) 221,094 88,972
-------------- ------------- -------------- --------------
Other comprehensive income (loss) (354,983) 324,588 (429,183) (172,710)
-------------- ------------- -------------- --------------
Comprehensive income $ 1,150,887 $ 1,611,017 $ 3,615,236 $ 3,155,772
============== ============= ============== ==============
6. Stock-Based Compensation: On January 1, 1996 the Company adopted SFAS
------------------------
No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS
No. 123, the Company has chosen to continue to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations. The
option exercise price is the market price of the common stock on the date
the option is granted. Accordingly, no compensation cost has been
recognized for options granted under the Option Plan. Had compensation cost
for the Company's Option Plan been determined based on the fair value at
the grant dates for awards under the option plan consistent with the method
of SFAS No. 123, the Company's net income and net income per share would
have been reduced to the pro forma amounts indicated below.
9
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Net income, as reported $ 1,505,870 $ 1,286,429 $ 4,044,419 $ 3,328,482
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects - - - (23,054)
-------------- -------------- -------------- --------------
Pro forma net income $ 1,505,870 $ 1,286,429 $ 4,044,419 $ 3,305,428
============== ============== ============== ==============
Earnings per share:
Basic-as reported $ 0.35 $ 0.30 $ 0.94 $ 0.78
============== ============== ============== ==============
Basic-pro forma $ 0.35 $ 0.30 $ 0.94 $ 0.77
============== ============== ============== ==============
Diluted-as reported $ 0.34 $ 0.30 $ 0.92 $ 0.76
============== ============== ============== ==============
Diluted-pro forma $ 0.34 $ 0.30 $ 0.92 $ 0.76
============== ============== ============== ==============
7. Recent Accounting Pronouncements: In December 2004, the FASB issued SFAS
--------------------------------
No. 123(R), "Accounting for Stock-Based Compensation (SFAS No. 123(R))."
SFAS No. 123(R) establishes standards for the accounting for transactions
in which an entity exchanges its equity instruments for goods or services.
This Statement focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. SFAS
No. 123(R) requires that the fair value of such equity instruments be
recognized as an expense in the historical financial statements as services
are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures
of fair value were required. This Statement was amended on April 14, 2005
to make the provisions of this Statement effective at the beginning of the
next fiscal year that begins after June 15, 2005. Accordingly, we will
adopt SFAS No. 123(R) on January 1, 2006. Since it is likely that we will
grant additional stock options in the future, the adoption of SFAS No.
123(R) is expected to have a material effect on our consolidated financial
statements.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Cooperative Bankshares, Inc. (the "Company") is a registered bank holding
company incorporated in North Carolina in 1994. The Company is the parent
company of Cooperative Bank (the "Bank"), a North Carolina chartered commercial
bank. The Bank, headquartered in Wilmington, North Carolina, was chartered in
1898. The Bank provides financial services through 20 offices in Eastern North
Carolina. One of the Bank's subsidiaries, Lumina Mortgage Company, Inc.
("Lumina") is a mortgage banking firm originating and selling residential
mortgage loans through 5 offices along the coast from North Myrtle Beach, South
Carolina to Virginia Beach, Virginia, with an additional office in Charlotte,
North Carolina. The Bank's other subsidiary, CS&L Holdings, Inc. ("Holdings") is
a holding company incorporated in Virginia for CS&L Real Estate Trust, Inc. (the
"REIT"), which is a real estate investment trust.
Through its offices, the Bank provides a wide range of banking products,
including interest-bearing and noninterest-bearing checking accounts,
certificates of deposit, savings accounts 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. The Bank also offers free Online Banking and Bill Pay
for personal accounts. In addition, the Bank offers discount brokerage services,
annuity sales and mutual funds through a third party arrangement with UVEST
Investment Services.
The Bank opened its new Shipyard office on August 1, 2005, which was a
relocation of its Wilmington Long Leaf branch. The Bank is scheduled to open
another Wilmington branch at Porter's Neck on January 3, 2006. The Bank will
close its Ogden office on December 30, 2005. The Bank began utilizing its new
Operations and Training Center in May 2005. On August 10, 2005, Lumina opened a
mortgage office in Charlotte, North Carolina. The Company formed Cooperative
Bankshares Capital Trust I (the "Trust") on August 30, 2005, which is wholly
10
owned by the Company, to facilitate the issuance of trust preferred securities
totaling $15.0 million. The Trust was formed with the sole purpose of issuing
the trust preferred securities and investing the proceeds from the sale of such
trust preferred securities in the debentures. The Company owns 100% of the
Trust's outstanding common securities and unconditionally guarantees the Trust's
financial obligations. The debentures held by the Trust are the sole assets of
the Trust. The debentures and the trust preferred securities bear an interest
rate of 5.74% for the first five years, and thereafter bear an interest rate
equal to 142 basis points over the three-month LIBOR (London Inter-Bank Offered
Rate). The trust preferred securities generally rank equal to the trust common
securities in priority of payment, but will rank prior to trust common
securities if and so long as the Company fails to make principal or interest
payment on the debentures. Concurrently with the issuance of the debentures and
the trust preferred securities, the Company entered into a Guaranty Agreement,
dated August 30, 2005, related to the trust preferred securities for the benefit
of the holders. The debentures and trust preferred securities each have 30-year
lives and will each be callable by the Company or the Trust, at their option,
after five years. The Company has the option to defer interest for up to five
years on the debentures. The debentures qualify as Tier I capital under Federal
Reserve Board guidelines. The Trust is not consolidated in these financial
statements due to the adoption of FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities. The junior subordinated debentures
issued by the Company to the Trust were included in long-term obligations and
the Company's equity interest in the Trust was included in other assets.
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
The 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 the Bank has emphasized the origination of
nonresidential real estate loans and secured and unsecured consumer and business
loans. As of September 30, 2005, approximately $425 million, or 69%, of the
Bank's loan portfolio, which excludes loans held for sale, consisted of loans
secured by residential properties. This compares to approximately $309 million,
or 68% at December 31, 2004. The Bank originates adjustable rate and fixed rate
loans. As of September 30, 2005, adjustable rate and fixed rate loans totaled
approximately 64% and 36%, respectively, of the Bank's total loan portfolio.
The Bank has chosen to sell a large percentage of its fixed rate mortgage loan
originations in the secondary market and through brokered arrangements. This
enables the Bank to invest these funds in commercial loans, while increasing fee
income and reducing interest rate risk.
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 exceeds the amount of interest rate sensitive
liabilities. Gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets. At
September 30, 2005, the Company had a one-year positive gap position of 3.9% as
compared to 8.8% at December 31, 2004. During a period of falling interest
rates, a positive gap would tend to adversely affect net interest income, while
a negative gap would tend to result in an increase in net interest income.
During a period of rising interest rates, a positive gap would tend to result in
an increase in net interest income while a negative gap would tend to adversely
affect net interest income. It is important to note that certain shortcomings
are inherent in 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 on these types of transaction accounts. Management takes this into
consideration in determining acceptable levels of interest rate risk.
11
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
commitment 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.
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, 2005, the Bank's borrowed funds from the FHLB equaled
13.6% 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. Additionally, during the three-months ended September 30, 2005 the
Bank issued brokered deposits of $10.6 million and the Company issued $15.5
million in junior subordinated debentures in a pooled trust preferred offering
on August 30, 2005.
At September 30, 2005, the estimated market value of liquid assets (cash, cash
equivalents, marketable securities and loans held for sale) was approximately
$71.4 million, which represents 10.8% of deposits and borrowed funds as compared
to $70.8 million or 14.2% of deposits and borrowed funds at December 31, 2004.
The decrease in the liquidity percentage was due to increases in deposits and
long-term obligations to fund the increase in loans.
The Company's primary uses of liquidity are to fund loans and to make
investments. Management considers current liquidity levels adequate to meet the
Company's cash flow requirements. If the loan portfolio continues to increase as
it has in 2005, additional funding sources, such as brokered deposits, junior
subordinated debentures or loan sales may need to be considered.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL COMMITMENTS
At September 30, 2005, outstanding off-balance sheet commitments to extend
credit totaled $71.2 million, and the undisbursed portion of construction loans
was $81.0 million. The Bank continued to be obligated to make future payments
under contracts, such as debt and lease agreements, the amounts of which were
consistent with the amounts at December 31, 2004 other than the increase in
borrowed funds of $33.5 million and the increase in deposits of $127.3 million
at September 30, 2005. For further information see "Financial Condition at
September 30, 2005 compared to December 31, 2004".
CAPITAL
Stockholders' equity at September 30, 2005, was $49.9 million, up 6.4% from
$46.9 million at December 31, 2004. Stockholders' equity at September 30, 2005,
includes an unrealized loss net of tax of $362,000 as compared to an unrealized
gain net of tax at December 31, 2004, of $68,000 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 September 30, 2005,
the Bank's ratio of Tier I capital was 8.66%. 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, 2005, the Bank had a ratio of qualifying total capital to
risk-weighted assets of 11.12%.
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.
The Company's Board of Directors approved a quarterly cash dividend of $.05 per
share, paid on October 17, 2005 to stockholders of record as of October 1, 2005.
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.
12
CRITICAL ACCOUNTING POLICIES
The Bank's most significant critical accounting policies are those that govern
accounting for loans and its allowance for loan losses and goodwill. A critical
accounting policy is one that is both very important to the portrayal of the
Company's financial condition and results, and requires a difficult, subjective
or complex judgment by management. What makes these judgments difficult,
subjective and/or complex is the need to make estimates about the effects of
matters that are inherently uncertain. For further information on the allowance
for loan losses, see the "Critical Accounting Policies" and the "Financial
Condition" in Management's Discussion and Analysis and Note 3 of "Notes to
Consolidated Financial Statements" included in the Annual Report on Form 10-K
filed with the SEC on March 30, 2005. For further information on goodwill, see
the "Critical Accounting Policies" in Management's Discussion and Analysis and
Note 13 of "Notes to Consolidated Financial Statements" included in the Annual
Report on Form 10-K filed with the SEC on March 30, 2005.
FINANCIAL CONDITION AT SEPTEMBER 30, 2005 COMPARED TO DECEMBER 31, 2004
The Company's total assets increased 30.1% to $715.6 million at September 30,
2005, as compared to $550.1 million at December 31, 2004. The primary causes of
the increase in assets were increases of $162.1 million (35.7%) in loans, and
$3.1 million (18.9%) in cash and cash equivalents which were funded primarily by
an increase in deposits of $127.3 million (30.7%) and long-term obligations of
$40.5 million (76.2%). The increase in loans and deposits was a result of
continued growth in newer branches and being located in vibrant markets. The
majority of the loan growth occurred in construction and land development loans
which grew $86.6 million (135.4%) and commercial real estate loans which grew
$39.9 million (36.7%) over the nine-month period ending September 30, 2005, due
to the economic expansion in the Bank's market area and the Bank's increased
emphasis on commercial lending. The largest increase in deposits was in the
thirteen and twenty-two month certificates and checking accounts. The increase
in the certificates was due to the Bank offering competitive promotional rates
on reasonably short term deposits in an effort to foster deposit growth. The
Bank continues to emphasize obtaining business accounts, which is the reason for
the checking account increase. The Bank also attracted an additional $24.7
million in internet deposits during the nine-month period ending September 30,
2005. Internet deposits are usually obtained from other financial institutions
with terms primarily of one to two years. In addition, the bank accepted
brokered deposits for the first time in the amount of $10.6 million. Borrowed
funds which are collateralized through an agreement with the FHLB for advances
increased $18.0 million since December 31, 2004. These advances are secured by
the Bank's investment in FHLB stock and qualifying first mortgage loans. Loans
made at Lumina are held for sale and are funded by a short-term borrowing at
another financial institution, which decreased $249,000 since December 31, 2004,
and are collateralized by Lumina's loans held for sale. The Company also issued
$15.5 million in junior subordinated debentures on August 30, 2005.
The Company's nonperforming assets (loans 90 days or more delinquent and
foreclosed real estate) were $345,000 or 0.05% of assets, at September 30, 2005,
compared to $207,000, or 0.04% of assets, at December 31, 2004. Foreclosed real
estate increased to $26,000 at September 30, 2005, from $0 at December 31, 2004.
The Company assumes an aggressive position in collecting delinquent loans and
disposing of foreclosed assets to minimize balances of nonperforming assets and
continues to evaluate the loan and real estate portfolios to provide loss
reserves as considered necessary. For further information see "Comparison of
Operating Results - Provision and Allowance for Loan Losses."
COMPARISON OF OPERATING RESULTS
OVERVIEW
The net income of the Company depends primarily upon net interest income. Net
interest income is the difference between the interest earned on loans, the
securities portfolio and interest-earning deposits and the cost of funds,
consisting principally of the interest paid on deposits and borrowings. The
Company's operations are materially affected by general economic conditions, the
monetary and fiscal policies of the Federal government, and the policies of
regulatory authorities. Yields and costs have increased because of the actions
taken by the Federal Reserve over the past several months to increase interest
rates.
13
NET INCOME
Net income for the three and nine-month periods ended September 30, 2005,
increased 17.1% to $1.5 million and 21.5% to $4.0 million respectively, as
compared to the same periods last year. The increase in net income for the three
and nine-month periods ended September 30, 2005 can be attributed to an increase
in net interest income of $1.4 million and $3.1 million respectively, as well as
an increase in noninterest income of $63,000 and $344,000 respectively. For
further information see the captions "Noninterest Income" and "Noninterest
Expense."
INTEREST INCOME
For the three-month period ended September 30, 2005, interest income increased
49.7% as compared to the same period a year ago. The average balance of
interest-earning assets increased 29.6% and the average yield increased 86 basis
points as compared to the same period a year ago. Interest income increased
36.5% for the nine-month period ended September 30, 2005, as compared to the
same period a year ago. The increase in interest income can be attributed to the
yield on average interest-earning assets increasing to 6.15% as compared to
5.51% for the same period a year ago. In addition, the average balance of
interest-earning assets increased 22.4% for the nine-month period ended
September 30, 2005, as compared to the same period a year ago.
INTEREST EXPENSE
Interest expense increased 90.1% for the three-month period ended September 30,
2005, as compared to the same period a year ago. This increase was due to the
average cost of interest-bearing liabilities increasing 97 basis points and the
average balance of interest-bearing liabilities increasing 29.5% as compared to
the same period a year ago. In the nine-month period ended September 30, 2005,
interest expense increased 63.6% as compared to the same period a year ago. The
average balance of interest-bearing liabilities increased 21.6% as compared to
the same period a year ago. The cost of interest-bearing liabilities increased
to 2.72% as compared to 2.02% for the same period last year.
NET INTEREST INCOME
Net interest income for the three and nine-month periods ended September 30,
2005, as compared to the same period a year ago, increased 29.4% and 23.1%
respectively. The increase was due to interest-earning assets increasing more
than interest-bearing liabilities. This can be attributed to the increase in
noninterest bearing checking accounts and the retention of earnings.
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, 2005 SEPTEMBER 30, 2004
---------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------ --------- ---------- ------------ ---------- -----------
Interest-earning assets:
Interest-bearing deposits in other banks $ 3,210 $ 27 3.36% $ 3,845 $ 12 1.25%
Securities:
Available for sale 43,435 499 4.60% 46,125 520 4.51%
Held to maturity 2,290 26 4.54% 2,969 37 4.98%
FHLB stock 5,667 46 3.25% 4,288 38 3.54%
Loan portfolio 599,633 9,907 6.61% 447,644 6,409 5.73%
------------ ---------- ------------ ----------
Total interest-earning assets 654,235 10,505 6.42% 504,871 7,016 5.56%
---------- ----------
Non-interest earning assets 29,643 27,434
------------ ------------
Total assets $ 683,878 $ 532,305
============ ============
Interest-bearing liabilities:
Deposits 470,601 3,306 2.81% 360,823 1,635 1.81%
Borrowed funds 114,472 1,158 4.05% 91,119 713 3.13%
------------ ---------- ------------ ----------
Total interest-bearing liabilities 585,073 $ 4,464 3.05% 451,942 $ 2,348 2.08%
---------- ----------
Non-interest bearing liabilities 48,876 35,141
------------ ------------
Total liabilities 633,949 487,083
Stockholders' equity 49,929 45,222
------------ ------------
Total liabilities and stockholders' equity $ 683,878 $ 532,305
============ ============
Net interest income $ 6,041 $ 4,668
========== ==========
Interest rate spread 3.37% 3.48%
========= =========
Net yield on interest-earning assets 3.69% 3.70%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 111.8% 111.7%
========= =========
15
For the nine months ended
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
------------------------------------------ ------------------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------------- ----------- ------------ ------------ ------------ ------------
Interest-earning assets:
Interest-bearing deposits in other banks $ 3,567 $ 76 2.84% $ 3,897 $ 30 1.03%
Securities:
Available for sale 43,866 1,506 4.58% 46,545 1,548 4.43%
Held to maturity 2,467 86 4.65% 3,346 127 5.06%
FHLB stock 5,220 155 3.96% 4,241 111 3.49%
Loan portfolio 544,810 25,827 6.32% 432,178 18,446 5.69%
-------------- ------------ ------------- ------------
Total interest-earning assets 599,930 $27,650 6.15% 490,207 $ 20,262 5.51%
------------ ------------
Non-interest earning assets 28,008 27,021
-------------- -------------
Total assets $ 627,938 $ 517,228
============== =============
Interest-bearing liabilities:
Deposits 435,037 8,150 2.50% 351,052 4,614 1.75%
Borrowed funds 101,021 2,795 3.69% 89,907 2,077 3.08%
-------------- ------------ -------------- ------------
Total interest-bearing liabilities 536,058 $ 10,945 2.72% 440,959 $ 6,691 2.02%
------------ ------------
Non-interest bearing liabilities 43,864 32,613
-------------- --------------
Total liabilities 579,922 473,572
Stockholders' equity 48,016 43,656
-------------- --------------
Total liabilities and stockholders' equity $ 627,938 $ 517,228
============== ==============
Net interest income $ 16,705 $ 13,571
============ ============
Interest rate spread 3.43% 3.49%
========== =========
Net yield on interest-earning assets 3.71% 3.69%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 111.9% 111.2%
========== =========
16
PROVISION AND ALLOWANCE FOR LOAN LOSSES
During the nine-month period ended September 30, 2005 the Bank had net
charge-offs against the allowance for loan losses of $59,000 compared to $36,000
for the same period in 2004. The Bank added $1.6 million to the allowance for
loan losses for the current nine-month period as compared to $745,000 for the
same period last year, increasing the balance to $5.8 million at September 30,
2005. The increase in the provision for loan losses was caused by the increase
in the loan portfolio and the Bank's increased emphasis on commercial loans,
which involve a higher degree of risk than one-to-four family mortgage loans.
The asset quality of the Bank remained strong. The ratio of allowance for loan
losses to total loans was 0.94% at September 30, 2005 as compared to 0.94% at
December 31, 2004. Management considers the current level of the allowance to be
appropriate based on asset classification, loan composition, the current level
of delinquencies and other nonperforming assets, overall economic conditions and
other factors. Future increases to the allowance may be necessary, however, due
to changes in loan composition or loan volume, changes in economic or market
area conditions and other factors. Additionally, various regulatory agencies, as
an integral part of their examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the recognition of
adjustments to the allowance for loan losses based on their judgments of
information available to them at the time of their examination.
NONINTEREST INCOME
Noninterest income increased by 8.8% for the nine-month period ended September
30, 2005, as compared to the same period a year ago. The change in noninterest
income can be primarily attributed to service charges and fees on loans and
deposit-related fees increasing $300,000 and $127,000 respectively. The rise in
fees on loans was primarily caused by an increase in brokered loan fees. The
deposit-related fees increase was principally caused by a boost in service
charges on deposit accounts and ATM fees resulting from an increase in deposit
accounts.
In the three-month period ended September 30, 2005, noninterest income increased
4.5% as compared to the same period last year. Service charges and fees on loans
increased $89,000 and deposit-related fees increased $76,000 for the three-month
period ended September 30, 2005 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.
NONINTEREST EXPENSE
For the nine-month period ended September 30, 2005, noninterest expense
increased 8.5% as compared to the same period last year. Compensation and fringe
benefits increased $706,000 due to increases in costs of benefits, staffing
levels, incentive pay and normal increases in salaries. Occupancy and equipment
increased $157,000 caused by normal increases and the opening of the Operations
and Training Center, a bank branch and a Lumina branch.
In the three-month period ended September 30, 2005, noninterest expense
increased 11.5% as compared to the same period last year. This increase can
primarily be attributed to increases in compensation and fringe benefits and
occupancy and equipment expense of $307,000 and $77,000 respectively. The
reasons for these changes are identical to the ones stated above for the
nine-month period ended September 30, 2005.
INCOME TAXES
The effective tax rate for the nine-month periods ended September 30, 2005 and
2004 was 39.3% and 33.2% respectively. The effective tax rate for the
three-month periods ended September 30, 2005 and 2004 was 41.2% and 33.1%
respectively. The higher rate in 2005 resulted principally from an increase in
the provision for income taxes. In addition to the business benefits resulting
from the Company's formation of Holdings and REIT in 2002, there also resulted a
reduction in state income taxes paid. State taxing authorities have recently
announced that they will vigorously pursue taxpayers who have utilized certain
organizational structures that result in reduced state income taxes, including
the structure the Company utilized for Holdings and REIT. In response to that
announcement the Company increased the provision for income taxes to provide for
additional state income taxes. As of December 31, 2004, the Company estimated
that the possible effect of the state's position could be as much as $500,000,
including interest and penalties, net of federal tax benefit. This estimate does
not include periods after 2004 and is subject to change.
17
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document, as well as other written communications made from time to time by
Cooperative Bankshares, Inc. and subsidiaries and oral communications made from
time to time by authorized officers of the Company, may contain statements
relating to the future results of the Company (including certain projections,
such as earnings projections and business trends) that are considered
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995 (the PSLRA). Such forward-looking statements may be
identified by the use of such words as "intend," "believe," "expect," "should,"
"planned," "estimated" and "potential." For these statements, the Company claims
the protection of the safe harbor for forward-looking statements contained in
the PSLRA. The Company's ability to predict future results is inherently
uncertain and the company cautions you that a number of important factors could
cause actual results to differ materially from those currently anticipated in
any forward-looking statement. These factors include among others; changes in
market interest rates and general and regional economic conditions, changes in
government regulations, changes in accounting principles and the quality or
composition of the loan and investment portfolios and other factors that may be
described in the Company's quarterly reports on Form 10-Q and in its annual
report on Form 10-K, each filed with the Securities and Exchange Commission,
which are available at the Securities and Exchange Commission's Internet website
(www.sec.gov) and to which reference is hereby made. Stockholders are cautioned
not to place undue reliance on such statements, which speak only as of the date
of those documents. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are expressly qualified in
their entirety by the cautionary statements above. Except to the extent required
by applicable law or regulation, the Company does not undertake any obligation
to update any forward-looking statement to reflect circumstances or events that
occur after the date the forward-looking statements are made.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 interest-bearing liabilities so as to mitigate the effect of changes
in the rate environment. The Company's market risk profile has not changed
materially since December 31, 2004.
ITEM 4 - CONTROLS AND PROCEDURES
The Company's management, including the Company's principal executive officer
and principal financial officer, has evaluated the effectiveness of the
Company's "disclosure controls and procedures", as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act"). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the "SEC") (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (2) is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. In
addition, based on that evaluation, no change in the Company's internal control
over financial reporting occurred during the quarter ended September 30, 2005
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not purchase any shares of its common stock during
the second quarter.
On August 30, 2005, the Company's wholly owned subsidiary, Cooperative
Bankshares Capital Trust I ("Trust I"), issued $15.5 million in trust
preferred securities pursuant to exemptions from registration under
Section 4(2) of the Securities Act of 1933, as amended (the "Act"), SEC
Rule 506 under the Act, SEC Rule 144A under the Act and/or SEC
Regulation S under the Act. The placement agent was Cohen Bros. &
Company. The aggregate offering price of the capital securities was
$15.5 million. No commissions were paid to the placement agent. In
exchange for the proceeds from the offering of the capital securities
and the proceeds from the sale of Trust I's common securities, the
Company issued $15.5 million aggregate principal amount of junior
subordinated debentures in an offering exempt from registration under
Section 4(2) of the Act. The net proceeds of the offering totaled
approximately $15.0 million and were used for the following purposes:
(1) a capital contribution to the Company's primary subsidiary, the
Bank, of $10 million to fund loan growth; and (2) investment in
interest-earning assets and other corporate purposes in the amount of
$5.0 million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibit 3.1(1) Articles of Incorporation
Exhibit 3.2(2) Articles of Amendment to Articles of Incorporation
Exhibit 3.3(1) Bylaws, as amended
Exhibit 10.1(3) Indenture, Dated as of August 30, 2005 between Cooperative Bankshares, Inc.
and LaSalle Bank National Association, as Trustee
Exhibit 10.2(4) Guarantee Agreement, dated as of August 30, 2005, by and between
Cooperative Bankshares, Inc., as Guarantor, and LaSalle Bank National
Association, as Guarantee Trustee
Exhibit 10.3(5) Amended and Restated Declaration of Trust of Cooperative Bankshares Capital
Trust I
Exhibit 11.1 Statement re: Computation of Per Share Earnings (See note 3 to Unaudited
Consolidated Financial Statements on page 8)
Exhibit 31.1 Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.2 Rule 13a-14(a) Certification of Chief Financial Officer
Exhibit 32 Certificate Pursuant to 18 U.S.C. Section 1350
19
(1) Incorporated by reference to the Registrant's Registration Statement on Form S-4 (Reg. No. 33-79206)
and any amendments thereto filed with the SEC.
(2) Incorporated by reference to Registrant's Proxy Statement filed with the SEC on March 31, 2005
(3) Incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K filed with the SEC
on August 31, 2005.
(4) Incorporated herein by reference to Exhibit 10.2 to the Company's Form 8-K filed with the SEC
on August 31, 2005.
(5) Incorporated herein by reference to Exhibit 10.3 to the Company's Form 8-K filed with the SEC
on August 31, 2005.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 9, 2005 Cooperative Bankshares, Inc.
/s/ Frederick Willetts, III
---------------------------------------------
Frederick Willetts, III
President/Chief Executive Officer
Dated: November 9, 2005 /s/ Todd L. Sammons
---------------------------------------------
Todd L. Sammons
Senior Vice President/Chief Financial Officer
21