SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2002
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from _________________ to ________________
Commission File Number: 0-24626
COOPERATIVE BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1886527
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
201 Market Street, Wilmington, North Carolina 28401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (910) 343-0181
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES NO X
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As of February 26, 2003, the aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing sales price of the
registrant's common stock as quoted on the NASDAQ Stock Market was $37,980,750
(2,072,054 shares at $18.33 per share). For purposes of this calculation,
directors, executive officers and beneficial owners of more than 10% of the
registrant's outstanding voting stock are treated as affiliates.
As of March 5, 2003, there were issued and outstanding 2,847,947 shares of the
registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Stockholders for the Fiscal Year Ended December 31, 2002.
(Parts I and II)
2. Proxy Statement for the 2003 Annual Meeting of Stockholders. (Part III)
PART I
ITEM 1. BUSINESS
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GENERAL
THE COMPANY. Cooperative Bankshares, Inc. (the "Company") is a registered
bank holding company incorporated in North Carolina in 1994. The Company serves
as the holding company for Cooperative Bank ("Cooperative" or the "Bank"), a
North Carolina chartered commercial bank. The Company's primary activities
consist of holding the stock of Cooperative Bank and operating the business of
the Bank. Accordingly, the information set forth in this report, including
financial statements and related data, relates primarily to Cooperative Bank.
COOPERATIVE BANK. Chartered in 1898, the Bank's headquarters is located in
Wilmington, North Carolina. Cooperative operates 17 financial centers throughout
the coastal and inland communities of eastern North Carolina. These centers
extend from Corolla, located on the Outer Banks of North Carolina, to Tabor
City, located on the South Carolina border. The Bank's deposit accounts are
insured up to applicable limits by the Federal Deposit Insurance Corporation
("FDIC"). Effective December 31, 2002, the Bank converted its charter from that
of a state savings bank to a state commercial bank. At December 31, 2002, the
Company had total assets of $504.2 million, deposits of $357.3 million and
stockholders' equity of $38.4 million.
Through its financial centers, the Bank provides a wide range of banking
products, including interest bearing and non-interest bearing checking accounts,
certificates of deposit and individual retirement accounts. It offers an array
of loan products: overdraft protection, commercial, consumer, agricultural, real
estate, residential mortgage and home equity loans. Also offered are safe
deposit boxes and automated banking services through ATMs and Access24 Phone
Banking. In addition, the Bank also offers discount brokerage services, annuity
sales and mutual funds through a third party arrangement with UVEST Investment
Services.
The Bank has chosen to sell a large percentage of its fixed rate mortgage
loan originations in the secondary market and through brokered arrangements.
This enables the Bank to invest its funds in commercial loans, while increasing
fee income. This is part of the continuing effort to restructure the balance
sheet and operations to be more reflective of a commercial bank.
On May 31, 2002, the Bank, through its subsidiary, CS&L Services, Inc.,
acquired the operating assets of Lumina Mortgage Company ("Lumina"), a
Wilmington-based mortgage banking firm with offices in Wilmington, North Myrtle
Beach, South Carolina and Virginia Beach, Virginia. The purchase price was
approximately $740,000 in cash with two future contingent payments based on loan
origination volume and achievement of certain profitability goals in the two
subsequent years after the purchase. The two contingent payments are estimated
to be approximately $650,000 each and, if made, will be recorded as additional
purchase price. In October 2002, CS&L Services, Inc. was renamed Lumina Mortgage
Company, Inc.
In December 2002, the Bank formed two new subsidiaries, CS&L Holdings,
Inc., a Virginia corporation ("Holdings") and CS&L Real Estate Trust, Inc. a
North Carolina corporation (the "REIT") which has elected to be taxed as a real
estate investment trust. At December 31, 2002, Holdings was a wholly-owned
subsidiary of the Bank and its only activity consisted of holding all of the
outstanding shares of common stock of the REIT. The REIT was formed to enhance
certain liquidity options and options for future capital needs of the Bank. At
December 31, 2002 the REIT held a participation interest in approximately $125
million in mortgage loans of the Bank. At December 31, 2002, all of the
outstanding shares of the REIT's common and preferred stock were held by
Holdings. Subsequent to December 31, 2002, 117 shares of preferred stock in the
REIT were granted to officers, directors and certain other parties.
The common stock of Cooperative Bankshares, Inc. is traded on the NASDAQ
National Market under the symbol "COOP".
2
MARKET AREA
Cooperative Bank considers its primary market area to be the communities of
eastern North Carolina between the Virginia and South Carolina borders. The
market is generally segmented into the coastal communities and the inland areas.
The economies of the coastal communities (concentrated in Dare, Carteret,
Currituck, Onslow, Pender, New Hanover and Brunswick Counties) are seasonal and
largely dependent on the summer tourism industry. The economy of Wilmington (the
largest city in the market area), a historic seaport with a population of
approximately 92,000 is also reliant upon summer tourism but is diversified into
the chemicals, shipping, aircraft engines, and fiber optics industries.
Wilmington also serves as a regional retail center, a regional medical center
and is home of the University of North Carolina at Wilmington. The inland
communities served by the Bank (concentrated in Bladen, Brunswick, Columbus,
Duplin, Hyde, Beaufort and Pender Counties) are largely service areas for the
agricultural activities in eastern North Carolina.
By acquiring Lumina, the Bank's footprint extended north into Virginia with
an office in Virginia Beach, and south into South Carolina with an office in
North Myrtle Beach. These areas offer busy real estate markets allowing our
mortgage companies to create solid bases in both purchases, refinances and
reverse mortgages. Their markets are similar to those that have proven to be
good investments in the past. The offices are located in coastal areas with a
large dependence on the tourism industry and the retirement community.
LENDING ACTIVITIES
GENERAL. Cooperative Bank's lending activities have concentrated on the
origination of loans for the purpose of constructing, financing or refinancing
residential properties. As of December 31, 2002, approximately $268 million, or
69%, of the Bank's loan portfolio consisted of loans secured by residential
properties. In recent years, however, the Bank has emphasized origination of
nonresidential real estate loans, and secured and unsecured consumer and
business loans. The Bank is taking a more aggressive position in pursuing
business lending, and nonresidential real estate lending involving loans secured
by small commercial properties with balances generally ranging from $100,000 to
$1,000,000. The Bank originates adjustable rate and fixed rate loans. As of
December 31, 2002, adjustable rate and fixed rate loans totaled approximately
65% and 35%, respectively, of the Bank's total loan portfolio.
3
ANALYSIS OF LOAN PORTFOLIO. Set forth below is selected data relating to
the composition of the Bank's loan portfolio by type of loan and type of
collateral on the dates indicated. Other than as set forth below, there were no
concentrations of loans which exceeded 10% of total loans at December 31, 2002.
AT DECEMBER 31,
----------------------------------------------------------------
2002 2001 2000
----------------- ------------------ ------------------
(DOLLARS IN THOUSANDS)
AMOUNT % AMOUNT % AMOUNT %
-------- ------ -------- ------ -------- ------
Real estate:
Construction and land development $ 51,431 13.16% $ 62,142 16.64% $ 37,542 10.80%
Mortgage:
1-4 family residential 204,395 52.29 209,622 56.13 234,383 67.45
Multi-family residential 17,044 4.36 15,626 4.18 17,081 4.92
Commercial 87,257 22.32 55,664 14.90 31,300 9.01
Equity line 14,541 3.72 13,131 3.52 11,954 3.44
Other 363 0.09 254 0.07 174 0.05
-------- ------ -------- ------ -------- ------
Total real estate loans 375,031 95.94 356,439 95.44 332,434 95.67
Commercial, industrial and agricultural 13,717 3.51 13,430 3.60 10,970 3.16
Consumer 6,396 1.64 7,285 1.95 7,236 2.08
-------- ------ -------- ------ -------- ------
Total gross loans 395,144 101.09 377,154 100.99 350,640 100.91
-------- ------ -------- ------ -------- ------
Less:
Unearned discounts and net deferred fees 1,331 .34 1,173 0.31 994 0.29
Allowance for loan losses 2,937 0.75 2,523 0.68 2,160 0.62
-------- ------ -------- ------ -------- ------
Net loans $390,876 100.00% $373,458 100.00% $347,486 100.00%
======== ====== ======== ====== ======== ======
AT DECEMBER 31,
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1999 1998
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(DOLLARS IN THOUSANDS)
AMOUNT % AMOUNT %
-------- ------ -------- ------
Real estate:
Construction and land development $ 1,497 0.45% $ 1,376 0.43%
Mortgage:
1-4 family residential 253,857 75.83 265,172 82.52
Multi-family residential 17,166 5.13 12,941 4.03
Commercial 38,765 11.58 26,296 8.18
Equity line 9,772 2.92 8,811 2.74
Other 78 0.02 52 0.02
-------- ------ -------- ------
Total real estate loans 321,135 95.93 314,648 97.92
Commercial, industrial and agricultural 10,653 3.18 3,997 1.24
Consumer 5,443 1.63 5,073 1.59
-------- ------ -------- ------
Total gross loans 337,231 100.74 323,718 100.75
-------- ------ -------- ------
Less:
Unearned discounts and net deferred fees 1,182 0.35 1,216 0.38
Allowance for loan losses 1,306 0.39 1,178 0.37
-------- ------ -------- ------
Net loans $334,743 100.00% $321,324 100.00%
======== ====== ======== ======
4
The following table sets forth as of December 31, 2002, certain information
regarding the dollar amount of loans maturing in the Bank's loan portfolio based
on their contractual terms to maturity.
DUE WITHIN DUE AFTER DUE AFTER
ONE YEAR 1 THROUGH 5 YEARS 5 YEARS TOTAL
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(IN THOUSANDS)
Real Estate
Construction and land
development $ 31,575 $ 16,910 $ 2,946 $ 51,431
Mortgage
1-4 family residential 11,955 14,634 177,806 204,395
Multi-family residential 4,039 6,434 6,571 17,044
Commercial 12,121 64,320 10,816 87,257
Equity line 2,957 690 10,894 14,541
Other 48 315 -- 363
Commercial, Industrial &
Agricultural 6,184 5,409 2,124 13,717
Consumer 2,847 3,153 396 6,396
-------- --------- ----------- ----------
Total $ 71,726 $ 111,865 $ 211,553 $ 395,144
======== ========= =========== =========
The next table shows at December 31, 2002, the dollar amount of all the
Bank's loans due after one year from December 31, 2002 which have fixed interest
rates and have floating or adjustable interest rates.
ONE TO FIVE AFTER
YEARS FIVE YEARS TOTAL
----- ---------- -----
(IN THOUSANDS)
Loans maturing after one year with:
Fixed interest rates $ 54,054 $ 64,648 $118,702
Floating or adjustable rates 57,811 146,905 204,716
-------- ---------- --------
Total $111,865 $ 211,553 $323,418
======== ========== ========
RESIDENTIAL REAL ESTATE LOANS. The Bank originates one to four family
residential mortgage loans collateralized by property located in its market
area. While a majority of the Bank's residential real estate loans are
collateralized by owner-occupied primary residences, the Bank's portfolio also
includes some second home and investor properties. The Bank also originates
residential lot loans collateralized by vacant lots located in approved
subdivisions.
The Bank's loan originations are generally for a term of 15 to 30 years,
amortized on a monthly basis, with principal and interest due each month.
Residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms. Borrowers may refinance or prepay loans at
their option.
The Bank has offered adjustable rate mortgage loans ("ARMs") since 1979 and
presently offers one-year ARMs with rate adjustments tied to prime or the weekly
average yield on U.S. Treasury Securities adjusted to a constant maturity of one
year. The Bank offers introductory interest rates on ARMs which are not
generally fully indexed. The interest rates on these loans generally include a
cap of 2% per adjustment and 6% over the life of the loan. The Bank's
underwriting policies require that the borrower qualify for a 1 year ARM at the
fully indexed rate. While the proportion of fixed and adjustable rate loan
originations in the Bank's portfolio largely depends on the level of interest
rates, the Bank has strongly emphasized ARMs in recent years and has been
relatively successful in maintaining the level of ARM originations even during
periods of declining interest rates. In addition to the one-year ARM, the Bank
offers 3/1 and 5/1 ARM products. These loans adjust annually after the end of
the first three or five-year period. A "Low Doc" program is available for the
non-conforming loans.
Cooperative Bank also originates 15 to 30 year fixed rate mortgage loans on
one to four family units. The Bank generally charges a higher interest rate on
such loans if the property is not owner-occupied. The majority of
5
fixed rate loans are underwritten according to Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA")
guidelines, so that the loans qualify for sale in the secondary market. In
recent years the Bank has sold the majority of fixed rate mortgage originations
in the secondary market or through brokered arrangements.
The Bank actively lends on the security of properties located in the Outer
Banks region of North Carolina. This region's economic base is seasonal and
driven by beach tourism, and a large number of the loans made by the Bank in
this area are secured by vacation rental properties. These loans are inherently
more risky than loans secured by the borrower's permanent residence, since the
borrower is typically dependent upon rental income to meet debt service
requirements, and repayment is therefore subject to a greater extent to adverse
economic, weather and other conditions affecting vacation rentals. Management
seeks to minimize these risks by employing what it believes are conservative
underwriting criteria.
The Bank's lending policies generally limit the maximum loan-to-value ratio
on conventional residential mortgage loans to 95% of the lesser of the appraised
value or purchase price, with the condition that private mortgage insurance is
required on loans with loan-to-value ratios in excess of 80%.
Cooperative Bank also originates loans secured by multi-family properties.
At December 31, 2002, the Bank had $17.0 million of such loans, representing
4.4% of its total loan portfolio. These loans are primarily secured by apartment
buildings located in the Bank's market area.
CONSTRUCTION LOANS. The Bank originates loans to finance the construction
of one to four and multi-family dwellings, housing developments, commercial
projects and condominiums. Construction loans amounted to approximately $51.4
million, or 13.2%, of the Bank's total loan portfolio at December 31, 2002. In
recent years, the Bank has emphasized the origination of construction loans in
response to the significant demand for such loans by borrowers engaged in
building and development activities in the growing communities of its market
area. In addition, construction loans afford the Bank the opportunity to
increase the interest rate sensitivity of its loan portfolio.
Many of the Bank's construction loans are converted to permanent loans. At
the time a spec loan is converted to a permanent loan, the Bank underwrites the
creditworthiness of the purchaser prior to approving the assumption, at which
time the original borrower is released from liability. On construction/permanent
loans, the customer is fully qualified for the permanent loan based on
information received at application. Construction/permanent loans have either
fixed or adjustable rates and have terms of up to 30 years. The Bank also will
make short term construction loans which have fixed rates and terms of up to 12
months. These loans are generally made in amounts up to 80% of appraised value.
Loan proceeds generally are disbursed in increments as construction progresses
and as inspections warrant.
The Bank's risk of loss on a construction loan by a spec builder is largely
dependent upon the accuracy of the initial estimate of the property's value at
completion of construction and the bid price (including interest) of
construction. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the project. If the estimate of the value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project whose value is insufficient to assure full repayment. When
lending to speculation builders, the cost of construction breakdown is provided
by the builder, as well as supported by the appraisal.
The Bank's underwriting criteria are designed to evaluate and minimize the
risks of each construction loan. Among other things, the Bank considers the
reputation of the borrower and the contractor, the amount of the borrower's
equity in the project, independent valuations and reviews of cost estimates,
pre-construction sale and leasing information, and cash flow projections of the
borrower. In addition, the Bank reviews the builder's current financial reports,
tax returns, credit reports and, if the builder has not previously borrowed from
Cooperative Bank, credit references. The Bank only makes construction loans
within its primary market area.
The Bank has in the past originated loans for the acquisition and
development of unimproved property to be used for residential purposes. Land
development lending is generally considered to involve a higher level of credit
6
risk than one to four family residential lending due to the concentration of
principal in a limited number of loans and borrowers and the effects of general
economic conditions on development projects.
The following table sets forth certain information as of December 31, 2002
regarding the dollar amount of construction loans secured by real estate and
real estate mortgage loans maturing in the Bank's portfolio based on their
contractual terms to maturity. A portion of these loans have provisions to
convert to permanent loans upon completion of construction. For further
information, see Note 3 of Notes to Consolidated Financial Statements included
in the Company's Annual Report to Stockholders for the Fiscal Year Ended
December 31, 2002 (the "Annual Report").
(IN THOUSANDS)
Real estate - construction
1-4 residential $ 16,047
Multi-family residential 16,116
Commercial 19,268
--------
Total $ 51,431
========
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Loans secured by
nonresidential real estate constituted approximately $106.9 million, or 27.3% of
the Bank's total loans at December 31, 2002. The Bank is emphasizing the
origination of these loans because of their profitability, since they generally
carry a higher interest rate than single family residential mortgage loans as
well as being more interest rate sensitive. The Bank originates both
construction loans and permanent loans on nonresidential properties.
Nonresidential real estate loans are generally made in amounts up to 80% of the
lesser of appraised value or purchase price of the property and have generally
been made in amounts under $2.0 million. The Bank's permanent nonresidential
real estate loans are secured by improved property such as office buildings,
retail centers, warehouses, and other types of buildings located in the Bank's
primary market area. Nonresidential real estate loans are either fixed or
variable rate. The variable rate loans have interest rates tied to prime or the
weekly average yield on U.S. Treasury Securities adjusted to a constant maturity
of one year.
Loans secured by nonresidential properties are generally larger and involve
greater risks than residential mortgage loans. Because payments on loans secured
by nonresidential properties are often dependent on successful operation or
management of the properties, repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
The Bank seeks to minimize these risks in a variety of ways, including limiting
the size of its nonresidential real estate loans, generally restricting such
loans to its primary market area and attempting to employ conservative
underwriting criteria.
CONSUMER LENDING. At December 31, 2002, the Bank's consumer loan portfolio
totaled approximately $6.4 million, representing 1.6% of the Bank's total loans
receivable. The Bank also offers home equity loans, which are made for terms of
up to 15 years at adjustable interest rates. As of December 31, 2002, the Bank's
home equity loan portfolio totaled approximately $14.5 million, representing
3.7% of its total loans receivable.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or collateralized
by rapidly depreciable assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. Such
loans may also give rise to claims and defenses by a consumer loan borrower
against an assignee of such loans such as the Bank, and a borrower may be able
to assert against such assignee claims and defenses which it has against the
seller of the underlying collateral.
7
NON-REAL ESTATE BUSINESS LENDING. The Bank originates loans to small
businesses in the Bank's market area, which are secured by various forms of
non-real estate collateral or are unsecured. At December 31, 2002, these loans
totaled approximately $13.7 million. Management of Cooperative Bank believes
that these loans are attractive to the Bank in light of the typically higher
interest rate yields associated with them and the opportunity they present for
expanding the Bank's relationships with existing customers and developing
broader relationships with new customers. Accordingly, the Bank plans to
continue to pursue this type of lending in the future in an effort to maintain a
profitable spread between the Bank's average loan yield and its cost of funds.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income and which are collateralized by real property whose value tends to be
more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be substantially dependent on
the success of the business itself. Further, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business. The management of Cooperative Bank
seeks to minimize these risks as the Bank's commercial business loan portfolio
grows by employing conservative underwriting criteria.
LOANS HELD FOR SALE. Lumina's target market includes all homeowners or
potential homeowners. Having an extensive diversity of investors offering very
competitive rates, Lumina has virtually every loan product available for
purchase or refinance. These products include, but are not limited to
conventional, jumbo, FHA, VA, 100% Rural Development financing, non-conforming
(B/C), lot loans, construction permanent, and no-income verification loans, as
well as other niche products.
LOAN SOLICITATION AND PROCESSING. Loan originations are derived from a
number of sources, including "walk-in" customers at the Bank's offices and
solicitations by Cooperative Bank employees.
Mortgage loan applications are accepted at all financial centers, and are
reviewed by a loan officer or branch manager. Upon receipt of a loan
application, central processing orders a credit report and verifications to
verify specific information relating to the applicant's employment, income and
credit standing. An appraisal of the real estate intended to secure the proposed
loan is undertaken by an internal appraiser or an outside appraiser approved by
the Bank. In the case of "Low Doc" loans, a tax valuation is acceptable.
Loan authorities and limits have been delegated by the Board of Directors
to a group of senior officers who function as the loan committee, except for
consumer loans, which may be approved by branch loan officers. Mortgage loans
exceeding 25% of the Bank's legal lending limit can be approved by the President
and two members of the Board of Directors. Any mortgage loan exceeding 50% of
the Bank's legal lending limit is approved by the Bank's Board of Directors.
Retail and Commercial loan authority is considered to be an aggregate of all
indebtedness to Cooperative exclusive of mortgage loans originated through the
mortgage loan division or loans up to $100,000 secured by a Cooperative CD.
Three members of the Loan Committee have the authority to approve individual
retail or commercial loans up to 25% of the Bank's legal lending limit.
Aggregate indebtedness exceeding 25% is reported to the Board at their next
meeting. Any retail or commercial loan exceeding 50% of the Bank's legal lending
limit must be approved by the President and two members of the Board of
Directors. Fire and casualty insurance is required on all loans secured by
improved real estate.
ORIGINATIONS, PURCHASES, AND SALES OF MORTGAGE LOANS. The Bank's general
policy is to originate conventional residential mortgage loans under terms,
conditions and documentation which permit sale to the FHLMC, FNMA or private
investors in the secondary market. The Bank has chosen to 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 its funds in
commercial loans, while increasing fee income. The Bank has from time to time
sold fixed rate, long term mortgage loans in the secondary market to meet
liquidity requirements or as part of the asset/liability management program. In
connection with such sales, the Bank may retain the servicing of the loans
(i.e., collection of principal and interest payments), for which it generally
receives a fee payable monthly of up to 1/4% per annum of the unpaid balance of
each loan. As of December 31, 2002, the Bank was servicing approximately 900
loans for others aggregating approximately $44.8 million.
8
The Bank generally does not purchase loans, and did not purchase any loans
during the last three fiscal years.
LOAN COMMITMENTS. The Bank issues loan commitments to qualified borrowers
primarily for the construction, purchase and refinancing of residential real
estate. Such commitments are made on specified terms and conditions and are
typically for terms of up to 45 days. A non-refundable application and
underwriting fee is collected by Cooperative Bank at the time of application.
Lumina collects actual fees at the time of application. Management estimates
that historically, less than 20% of such commitments expire unfunded. At
December 31, 2002, Cooperative Bank had outstanding loan commitments of
approximately $6.5 million and Lumina had approximately $3.7 million in
outstanding loan commitments. For further information, see Note 3 of Notes to
Consolidated Financial Statements included in the Annual Report.
LOAN ORIGINATION AND OTHER FEES. In addition to receiving interest at the
stated rate on loans, the Bank receives loan origination fees for originating
loans. Origination fees generally are calculated as a percentage of the
principal amount of the loan and are charged to the borrower. Loan origination
fees and certain direct loan origination costs are deferred, and the net fee or
cost is recognized as an adjustment to interest income over the contractual life
of the related loan. The net deferred fee or cost on loans originated as held
for sale is recorded to gain on sale of loans when the loan is sold.
The Bank is currently approved to broker loans to Wells Fargo and
InterFirst Wholesale Mortgage Lending. These are done on the wholesale side with
Cooperative Bank processing the loan using Wells Fargo or InterFirst closing
documents. Cooperative Bank receives a settlement service fee for processing
these loans. These loans generate fee income and reduce the interest rate risk
of the Bank.
Loan origination, settlement service and commitment fees are volatile
sources of funds. Such fees vary with the volume and type of loans and
commitments made and purchased and with competitive market conditions, which in
turn respond to the demand for and availability of money.
The Bank also recognizes other fees and service charges on loans. Other
fees and service charges consist of late fees, fees collected with a change in
borrower or other loan modifications.
DELINQUENCIES. The Bank's collection procedures provide that when a loan is
30 days past due, the borrower is contacted by mail, and payment is requested.
If the delinquency continues, subsequent efforts are made to contact the
borrower. If the loan continues in a delinquent status for 60 days or more, the
Bank generally initiates legal proceedings. At December 31, 2002, the Bank had
accruing loans which are contractually past due 90 or more days totaling
$249,000.
NON-PERFORMING ASSETS AND ASSET CLASSIFICATION. Loans are generally
classified as nonaccrual if they are past due for a period of more than 90 days,
unless such loans are well secured and in the process of collection. If any
portion of a loan is classified as doubtful or is partially charged off, the
loan is generally classified as nonaccrual. Loans that are less than 90 days
past due may also be classified as nonaccrual if repayment in full of principal
and/or interest is in doubt. As of December 31, 2002, the Bank had 4 loans in
non-accrual status with an aggregate principal balance of $335,000, which are
considered impaired in accordance with SFAS No.114, with no corresponding
valuation allowances.
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold. When such property is
acquired, it is recorded at the lower of the unpaid principal balance plus
unpaid accrued interest of the related loan or the fair value of the real estate
less costs to sell the property. Any required write-down of the loan upon
foreclosure is charged to the allowance for loan losses. At December 31, 2002,
the Bank owned approximately $619,000 of property acquired as the result of
foreclosure or by deed in lieu of foreclosure and classified as "real estate
owned." At December 31, 2002, the Bank had 24 loans in the process of
foreclosure and/or bankruptcy with an aggregate principal balance of
approximately $1.4 million. Loans in bankruptcy paying as agreed are not
included in non-performing assets. Any losses management anticipates on loans in
the process of foreclosure and/or bankruptcy have already been recorded through
the allowance for loan losses.
9
The following table sets forth information with respect to the Bank's
non-performing assets for the periods indicated. During the periods shown, the
Bank had no restructured loans within the meaning of Statement of Financial
Accounting Standards ("SFAS") No. 15.
AT DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Non-accruing loans $ 335 $ 505 $ 333 $ 267 $ --
Accruing loans which are contractually
past due 90 days or more 249 2,563 358 934 1,765
--------- --------- --------- --------- --------
Total $ 584 $ 3,068 $ 691 $ 1,201 $ 1,765
========= ========= ========= ========= ========
Percentage of total loans (1) .15% .81% .20% .36% .55%
========= ========= ========= ========= ========
Other non-performing assets (2) $ 619 $ 759 $ 234 $ 245 $ 2,439
========= ========= ========= ========= ========
Total non-performing assets $ 1,203 $ 3,827 $ 925 $ 1,446 $ 4,204
========= ========= ========= ========= ========
Total non-performing assets to total assets .24% .84% .22% .35% 1.08%
========= ========= ========= ========= ========
(1) Total loans do not include loans held for sale.
(2) Other non-performing assets represent property acquired by the Bank through
foreclosure or repossession. This property is carried at fair value less
estimated costs of sale.
During the year ended December 31, 2002, gross interest income of
approximately $11,790 would have been recorded on nonaccrual loans had such
loans been current throughout the period. Approximately $4,206 in interest
income from such loans was included in income for the year ended December 31,
2002.
Except as set forth above, the Bank had no loans which were not classified
as non-accrual, 90 days past due or restructured but which may be so classified
in the near future because management has concerns as to the ability of
borrowers to comply with repayment terms. For further information, see Note 3 of
Notes to Consolidated Financial Statements in the Annual Report.
ALLOWANCE FOR LOAN LOSSES. Management considers a variety of factors in
establishing the appropriate levels for the provision and the allowance for loan
losses. Consideration is given to, among other things, the impact of current
economic conditions, the diversification of the loan portfolio, historical loss
experience, the review of loans by the loan review personnel, the individual
borrower's financial and managerial strengths, and the adequacy of underlying
collateral.
The process used to allocate the allowance for loan losses considers, among
other factors, whether the borrower is a mortgage, retail or commercial
customer, whether the loan is secured or unsecured, and whether the loan is an
open or closed-end agreement. Generally, loans are reviewed and risk graded
among groups of loans with similar characteristics. The probable loss estimates
for each risk grade group are the basis for the allowance allocation. The loss
estimates are based on prior experience, general risk associated with each loan
group and current economic conditions. The unallocated allowance for loan losses
primarily represents the impact of certain conditions that were not considered
in allocating the allowance to the specific components of the loan portfolio
such as current economic conditions.
10
The following table analyzes activity in the Bank's allowance for loan
losses for the periods indicated.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2002 2001 2000 1999 1998
--------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 2,523 $ 2,160 $ 1,306 $ 1,178 $ 874
Provision for loan losses 740 460 970 210 330
Gross loans charged-off (360) (106) (146) (94) (29)
Gross recoveries 34 9 30 12 3
--------- -------- -------- -------- --------
Balance at end of period $ 2,937 $ 2,523 $ 2,160 $ 1,306 $ 1,178
========= ======== ======== ======== ========
Ratio of net charge-offs to average
loans outstanding during the period .08% .03% .03% .03% .01%
========= ======== ======== ======== ========
Ratio of loan loss reserve to total loans .74% .67% .62% .39% .36%
========= ======== ======== ======== ========
Management believes that it has established the Bank's existing allowance
for loan losses in accordance with generally accepted accounting principles.
Additions to the allowance may be necessary, however, due to changes in economic
conditions, real estate market values, growth in the portfolio, and other
factors. In addition, bank regulators may require Cooperative Bank to make
additional provisions for losses in the course of their examinations based on
their judgments as to the value of the Bank's assets. For further information
regarding the Bank's allowance for loan losses see "Management's Discussion and
Analysis" and Note 3 of Notes to Consolidated Financial Statements in the Annual
Report.
11
The following table sets forth information about the Bank's allowance for
loan losses by asset category at the dates indicated. The allocation of the
allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any category.
AT DECEMBER 31,
-------------------------------------------------------------------------
2002 2001 2000
---------------------- ---------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Real estate :
Construction and land development $ 511 13% $ 672 16% $ 428 10%
Mortgage:
1-4 family residential 854 52 698 56 499 67
Multi-family residential 145 4 143 4 213 5
Commercial 911 22 589 15 526 9
Equity line 135 4 132 3 65 3
Other 3 -- 2 -- 2 1
------- --- ------- --- -------- ---
Total real estate loans 2,559 95% 2,236 94% 1,733 95%
Commercial, industrial & agricultural 137 3 214 4 166 3
Consumer 58 2 70 2 77 2
Unallocated 183 -- 3 -- 184 --
------- --- ------- --- -------- ---
Total gross loans $ 2,937 100% $ 2,523 100% $ 2,160 100%
======= === ======= === ======== ===
AT DECEMBER 31,
------------------------------------------------
1999 1998
---------------------- --------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ------------
(DOLLARS IN THOUSANDS)
Real estate :
Construction and land development $ 15 1% $ 14 1%
Mortgage:
1-4 family residential 530 74 605 81
Multi-family residential 163 5 129 4
Commercial 380 12 301 8
Equity line 15 3 13 3
Other 1 -- 1 --
-------- --- ------ ---
Total real estate loans 1,104 95% 1,063 97%
Commercial, industrial & agricultural 152 3 59 1
Consumer 50 2 40 2
Unallocated -- -- 16 --
-------- --- ------ ---
Total gross loans $ 1,306 100% $1,178 100%
======== === ====== ===
12
INVESTMENT ACTIVITIES
The following table sets forth the carrying value of the Bank's investment
securities portfolio at the dates indicated. For additional information
regarding the Bank's investments, see Note 2 of Notes to Consolidated Financial
Statements in the Annual Report.
AT DECEMBER 31,
--------------------------------------------
2002 2001 2000
--------- ------- --------
(IN THOUSANDS)
Securities held to maturity:
U.S. Government and agency securities $ 5,000 $ 5,000 $ 18,015
Mortgage-backed securities 2,860 -- 963
--------- ------- --------
Total securities held to maturity $ 7,860 $ 5,000 $ 18,978
Securities available for sale:
U.S. Government and agency securities $ 19,663 $25,758 $ 16,049
Mortgage-backed securities 14,806 11,123 --
Marketable equity securities 5,074 5,099 --
Corporate bond 2,532 990 --
--------- ------- --------
Total securities available for sale $ 42,075 $42,970 $ 16,049
Total investment securities portfolio $ 49,935 $47,970 $ 35,027
========= ======= ========
The following table sets forth the scheduled maturities, carrying values, market
values and average yields for the Bank's investment securities portfolio at
December 31, 2002.
AFTER ONE AFTER FIVE
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS
------------------ ------------------ -----------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Securities held to maturity:
U.S. government and agency securities $5,000 7.64% $ -- -- $ -- --
Mortgage-backed securities -- -- -- -- -- --
------- ---- ------- ---- ------ ----
Total securities held to maturity $5,000 7.64% $ -- -- $ -- --
Securities available for sale:
U.S. government and agency securities $ 306 3.08% $10,451 3.76% $8,905 5.72%
Mortgage-backed securities -- -- -- -- -- --
Marketable equity securities -- -- -- -- -- --
Corporate bond -- -- 2,532 5.92% -- --
------- ---- ------- ---- ------ ----
Total securities available for sale $ 306 3.08% $12,983 4.19% $8,905 5.72%
Total investment securities portfolio $ 5,306 7.38% $12,983 4.19% $8,905 5.72%
======= ==== ======= ==== ====== ====
MORE THAN TEN YEARS TOTAL INVESTMENT PORTFOLIO
------------------- ---------------------------
CARRYING AVERAGE CARRYING FAIR AVERAGE
VALUE YIELD VALUE VALUE YIELD
-------- ------- -------- ----- -------
(DOLLARS IN THOUSANDS)
Securities held to maturity:
U.S. government and agency securities $ -- -- $5,000 $ 5,123 7.64%
Mortgage-backed securities 2,860 3.25% 2,860 2,886 3.25%
-------- ----- -------- ------- ----
Total securities held to maturity $ 2,860 3.25% $7,860 $ 8,009 6.04%
Securities available for sale:
U.S. government and agency securities $ -- -- $19,662 $19,662 4.63%
Mortgage-backed securities 14,806 5.21% 14,806 14,806 5.21%
Marketable equity securities 5,075 6.14% 5,075 5,075 6.14%
Corporate bond -- -- 2,532 2,532 5.92%
-------- ---- -------- ------- ----
Total securities available for sale $ 19,881 5.45% $ 42,075 $42,075 5.10%
Total investment securities portfolio $ 22,741 5.16% $ 49,935 $50,084 5.25%
======== ==== ======== ======= ====
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Bank's funds for lending and
other investment purposes. In addition to deposits, Cooperative Bank derives
funds from interest payments, loan principal repayments, borrowed funds and
funds provided by operations. Scheduled loan repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used to compensate for reductions in the availability of funds
from other sources. The Bank intends to fund its activities primarily through
deposits.
13
DEPOSITS. Deposits are attracted from within the Bank's primary market area
through the offering of a broad selection of deposit instruments including
checking, savings, money market deposit, and term certificate accounts
(including negotiated jumbo certificates in denominations of $100,000 or more)
as well as individual retirement plans. Deposit account terms vary according to
the minimum balance required, the time periods the funds must remain on deposit
and the interest rate, among other factors. The Bank does not obtain funds
through brokers; however, the Bank attracts deposits over the Internet and
considers this a viable alternative to borrowed funds. For further information
regarding the Bank's deposits, see "Management's Discussion and Analysis" and
Note 5 of Notes to Consolidated Financial Statements in the Annual Report.
The following table indicates the amount of the Company's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
2002.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- ----------
(IN THOUSANDS)
Three months or less $ 25,687
Over three through six months 23,359
Over six months through twelve
months 22,276
Over twelve months 14,509
---------
Total $ 85,831
=========
BORROWINGS. Deposits are the primary source of funds for Cooperative Bank's
lending and investment activities and for its general business purposes. If the
need arises, the Bank may obtain advances from the FHLB of Atlanta to supplement
its supply of loanable funds and to meet deposit withdrawal requirements.
Advances from the FHLB are typically secured by the Bank's stock in the FHLB and
a lien on a portion of the Bank's first mortgage loans. The Bank has utilized
FHLB advances in recent periods in order to meet a larger than typical loan
demand in the Bank's market area.
The FHLB of Atlanta functions as a central reserve bank providing credit
for the Bank and other member financial institutions. As a member, Cooperative
Bank is required to own capital stock in the FHLB and is authorized to apply for
advances on the security of such stock and certain of its home mortgages and
other assets (principally, securities which are obligations of, or guaranteed
by, the United States), provided certain standards related to creditworthiness
have been met. Advances are made pursuant to several different programs. Each
credit program has its own interest rate and range of maturities. Depending on
the program, limitations on the amount of advances are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness.
Lumina borrows money on a short-term basis principally from another
financial institution to fund its loans that are held for sale. 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, but the financial institution continues to supply sufficient funds for
loans originated by Lumina during the large volume increase caused by the
current low interest rate environment.
For further information regarding the Bank's borrowings, see Note 6 of
Notes to Consolidated Financial Statements in the Annual Report.
COMPETITION
Cooperative Bank encounters strong competition both in the attraction of
deposits and in the making of real estate and other loans. Its most direct
competition for deposits has historically come from financial institutions in
its market area. Competition for deposits is also realized from brokerage firms
and credit unions. The Bank competes
14
for deposits by offering depositors competitive rates and a high level of
personal service together with a wide range of banking products and convenient
office locations.
Competition for real estate and other loans comes principally from
financial institutions and mortgage companies. The Bank and Lumina compete for
loans primarily through the interest rates and loan fees it charges, and the
efficiency and quality of services it provides borrowers. Factors which affect
competition include general and local economic conditions, current interest rate
levels and volatility in the mortgage markets.
EMPLOYEES
At December 31, 2002, the Bank had 122 full-time employees and 7 part-time
employees. Lumina had 46 full time employees and 1 part-time employee at
December 31, 2002. None of the employees are represented by a collective
bargaining unit. Both companies believe its relationship with its employees to
be good.
EXECUTIVE OFFICERS
At December 31, 2002, the executive officers of the Bank who were not also
directors were as follows:
AGE AT
NAME DECEMBER 31, 2002 POSITION
- ---- ----------------- --------
O.C. Burrell, Jr. 54 Executive Vice President and Chief Operating Officer
Todd L. Sammons, CPA 41 Senior Vice President and Chief Financial Officer
Dickson B. Bridger 43 Senior Vice President-Mortgage Lending
O. C. BURRELL, JR. was employed in May 1993 as Senior Vice President of
Retail Banking. Mr. Burrell was elected Executive Vice President and Chief
Operating Officer in 1997. Mr. Burrell has been in the banking industry since
1970 and has served in leadership capacities in various civic and professional
organizations. He is active in the Wilmington Rotary Club and serves as
treasurer and director of the Child Development Center and is a member of the
Retail Lending Committee of the North Carolina Bankers Association.
TODD L. SAMMONS was employed in March 1986 as Auditor. He was promoted to
Senior Vice President-and Chief Financial Officer in December 2000. He
previously worked with a public accounting firm. He has served in leadership
capacities in various professional, church and civic organizations. He is a
Certified Public Accountant. He serves on the Board of Winter Park Optimist and
as the treasurer of the Wilmington Vikings, a junior Legion Baseball Team.
DICKSON B. BRIDGER was employed in March 1984 as a mortgage loan
originator. He was promoted to Vice President in February 1990 and Senior Vice
President-Mortgage Lending in December 2000. He is a member of Wilmington Rotary
West and serves as an Elder of the Little Chapel on the Boardwalk church at
Wrightsville Beach, North Carolina.
REGULATION
GENERAL. As a North Carolina-chartered commercial bank with deposits
insured by the SAIF, Cooperative Bank is subject to extensive regulation by the
North Carolina Office of the Commissioner of Banks (the Commissioner) and the
FDIC. The lending activities and other investments of Cooperative Bank must
comply with various federal regulatory requirements. The Commissioner and the
FDIC periodically examine Cooperative Bank for compliance with various
regulatory requirements. The Bank must file reports with the Commissioner and
the
15
FDIC describing its activities and financial condition. The Bank is also subject
to certain reserve requirements promulgated by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). This supervision and
regulation is intended primarily for the protection of depositors. Certain of
these regulatory requirements are referred to below or appear elsewhere herein.
The Company is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "Holding Company Act") and, as such, is
subject to supervision and regulation by the Federal Reserve Board. The Company
is also subject to regular examination by the Federal Reserve Board. In
addition, as a savings bank holding company, the Company is subject to
supervision by the Commissioner under North Carolina law.
The following is a brief summary of certain statutes, rules and regulations
affecting the Company and the Bank. A number of other statutes and regulations
have an impact on their operations. The following summary of applicable statutes
and regulations does not purport to be complete and is qualified in its entirety
by reference to such statutes and regulations.
FINANCIAL MODERNIZATION LEGISLATION. The Gramm-Leach-Bliley ("G-L-B") Act,
which was enacted in November 1999, authorizes affiliations between banking,
securities and insurance firms and authorizes bank holding companies and
national banks to engage in a variety of new financial activities. Among the new
activities that are permitted to bank holding companies are securities and
insurance brokerage, securities underwriting, insurance underwriting and
merchant banking. The Federal Reserve Board, in consultation with the Secretary
of the Treasury, may approve additional financial activities. The G-L-B Act
imposed new requirements on financial institutions with respect to customer
privacy.
BANK HOLDING COMPANY REGULATION. As a bank holding company, the Company is
required to furnish to the Federal Reserve Board annual and quarterly reports of
its operations at the end of each period and to furnish such additional
information as the Federal Reserve Board may require pursuant to the Holding
Company Act.
Under the Holding Company Act, a bank holding company must obtain the prior
approval of the Federal Reserve Board before (1) acquiring direct or indirect
ownership or control of any voting shares of any bank or bank holding company
if, after such acquisition, the bank holding company would directly or
indirectly own or control more than 5% of such shares; (2) acquiring all or
substantially all of the assets of another bank or bank holding company; (3)
merging or consolidating with another bank holding company; or (4) acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
a company that is not a bank or a bank holding company, or from engaging
directly or indirectly in activities other than those of banking, managing or
controlling banks, or providing services for its subsidiaries.
The Holding Company Act prohibits the Federal Reserve Board from approving
an application by a bank holding company to acquire voting shares of a bank
located outside the state in which the operations of the holding company's bank
subsidiaries are principally conducted, unless such an acquisition is
specifically authorized by state law. The State of North Carolina has enacted
reciprocal interstate banking statutes that authorize banks and their holding
companies in North Carolina to be acquired by banks or their holding companies
in states that have also enacted reciprocal banking legislation, and permit
North Carolina banks and their holding companies to acquire banks in such other
states.
Under the Holding Company Act, any company must obtain approval of the
Federal Reserve Board prior to acquiring control of the Company or the Bank. For
purposes of the Holding Company Act, "control" is defined as ownership of more
than 25% of any class of voting securities of the Company or the Bank, the
ability to control the election of a majority of the directors, or the exercise
of a controlling influence over management or policies of the Company or the
Bank.
The Change in Bank Control Act and the regulations of the Federal Reserve
Board thereunder require any person or persons acting in concert (except for
companies required to make application under the Holding Company Act), to file a
written notice with the Federal Reserve Board before such person or persons may
acquire control of the Company or the Bank. The Change in Bank Control Act
defines "control" as the power, directly or indirectly, to
16
vote 25% or more of any voting securities or to direct the management or
policies of a bank holding company or an insured bank.
The Federal Reserve Board has adopted guidelines regarding the capital
adequacy of bank holding companies, which require bank holding companies to
maintain specified minimum ratios of capital to total assets and capital to
risk-weighted assets. See " -- Capital Requirements."
The Federal Reserve Board has the power to prohibit dividends by bank
holding companies if their actions constitute unsafe or unsound practices. The
Federal Reserve Board has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve Board's
view that a bank holding company should pay cash dividends only to the extent
that the company's net income for the past year is sufficient to cover both the
cash dividends and a rate of earning retention that is consistent with the
company's capital needs, asset quality, and overall financial condition.
Bank holding companies generally are required to give the Federal Reserve
Board notice of any purchase or redemption of outstanding equity securities if
the gross consideration for the purchase or redemption, when combined with the
net consideration paid for all such purchases or redemptions during the
preceding 12 months, is equal to 10% or more of the Company's consolidated net
worth.
CAPITAL REQUIREMENTS. The regulations of the Federal Reserve Board and the
FDIC require bank holding companies and state-chartered banks that are not
members of the Federal Reserve System to maintain a minimum leverage capital
requirement consisting of a ratio of Tier 1 capital to total assets (as defined)
of 3%. Although setting a minimum 3% leverage ratio, the capital regulations
state that only the strongest bank holding companies and banks, with composite
examination ratings of 1 under the rating system used by the federal bank
regulators, would be permitted to operate at or near such minimum level of
capital. For all but the most highly rated institutions meeting the conditions
set forth above, the minimum leverage capital ratio is 3% plus an additional
"cushion" amount of at least 100 to 200 basis points. Any bank or bank holding
company experiencing or anticipating significant growth would be expected to
maintain capital well above the minimum levels. As a SAIF-insured,
state-chartered bank, the Bank must also deduct from Tier 1 capital an amount
equal to its investments in, and extensions of credit to, subsidiaries engaged
in activities that are not permissible to national banks, other than debt and
equity investments in subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities or in subsidiary depository
institutions or their holding companies.
The risk-based capital rules of the Federal Reserve Board and the FDIC
require bank holding companies and state non-member banks to maintain minimum
regulatory capital levels based upon a weighting of their assets and off-balance
sheet obligations according to risk. The risk-based capital rules have two basic
components: a core capital (Tier 1) requirement and a supplementary capital
(Tier 2) requirement. The risk-based capital regulations assign balance sheet
assets and credit equivalent amounts of off-balance sheet obligations to one of
four broad risk categories based principally on the degree of credit risk
associated with the obligor. The assets and off-balance sheet items in the four
risk categories are weighted at 0%, 20%, 50% and 100%. These computations result
in the total risk-weighted assets.
The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital will be limited to no more than 100% of
core capital; and (ii) the aggregate amount of certain types of supplementary
capital will be limited. In addition, the risk-based capital regulations limit
the allowance for loan losses includable as capital to 1.25% of total
risk-weighted assets.
The federal bank regulatory agencies, including the Federal Reserve Board
and the FDIC, have revised their risk-based capital requirements to ensure that
such requirements provide for explicit consideration by commercial banks of
interest rate risk. Under these requirements, a bank's interest rate risk
exposure is quantified using either the measurement system set forth in the rule
or the bank's internal model for measuring such exposure, if such model is
determined to be adequate by the bank's examiner. If the dollar amount of a
bank's interest rate risk exposure, as measured under either measurement system,
exceeds 1% of the bank's total assets, the bank is
17
required to hold additional capital equal to the dollar amount of the excess.
The Bank's current interest rate risk exposure does not exceed 1% of the Bank's
total assets. Management of the Bank does not believe that this interest rate
risk component has an adverse effect on the Bank's capital.
In addition to the FDIC regulatory capital requirements, the Commissioner
requires North Carolina-chartered commercial banks to have adequate
capitalization, which is determined based upon each bank's particular set of
circumstances. In addition, regulations require all North Carolina-chartered
commercial banks to maintain a capital surplus at least equal to 50% of its
common capital. Common capital is defined as the par value of its shares times
the number of shares outstanding.
The Bank was in compliance with both the FDIC capital requirements and the
North Carolina net worth requirement at December 31, 2002. For further
information regarding the Bank's capital requirements, see Note 7 of Notes to
Consolidated Financial Statements in the Annual Report.
LIQUIDITY REQUIREMENTS. FDIC policy requires that banks maintain an average
daily balance of liquid assets in an amount which it deems adequate to protect
safety and soundness of the bank. Liquid assets include cash, certain time
deposits, bankers' acceptances and specified United States government, state, or
federal agency obligations. The FDIC currently has no specific level which it
requires.
North Carolina banks must maintain a reserve fund in an amount and/or ratio
set by the North Carolina Banking Commission to account for the level of
liquidity necessary to assure the safety and soundness of the State banking
system.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution.
Under regulations jointly adopted by the federal banking regulators, a
savings association's capital adequacy for purposes of the FDICIA prompt
corrective action rules is determined on the basis of the institution's total
risk-based capital ratio (the ratio of its total capital to risk-weighted
assets), Tier 1 risk-based capital ratio (the ratio of its core capital to
risk-weighted assets) and leverage ratio (the ratio of its Tier 1 or core
capital to adjusted total assets).
18
The following table shows the capital ratio requirements for each prompt
corrective action category:
ADEQUATELY SIGNIFICANTLY
WELL-CAPITALIZED CAPITALIZED UNDERCAPITALIZED UNDERCAPITALIZED
Total risk-based
capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0%
Tier 1 risk-based
capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0%
Leverage ratio 5.0% or more 4.0% or more * Less than 4.0% * Less than 3.0%
* 3.0% if institution has a composite 1 CAMELS rating.
For information regarding the position of the Bank with respect to the FDICIA
prompt corrective action rules, see Note 7 of Notes to Consolidated Financial
Statements included in the Annual Report hereof.
COMMUNITY REINVESTMENT ACT. The Bank, like other financial institutions, is
subject to the Community Reinvestment Act ("CRA"). The purpose of the CRA is to
encourage financial institutions to help meet the credit needs of their entire
communities, including the needs of low and moderate income neighborhoods.
During the Bank's last compliance examination, the Bank received a
"satisfactory" rating with respect to CRA compliance. The Bank's rating with
respect to CRA compliance would be a factor to be considered by the Federal
Reserve Board and the FDIC in considering applications submitted by the Bank to
acquire branches or to acquire or combine with other financial institutions and
take other actions and, if such rating was less than "satisfactory," could
result in the denial of such applications.
DIVIDEND LIMITATIONS. The Bank may not pay dividends on its capital stock
if its regulatory capital would thereby be reduced below the amount then
required for the liquidation account established for the benefit of certain
depositors of the Bank at the time of its conversion to stock form.
Under applicable regulations, the Bank is prohibited from making any
capital distributions if after making the distribution, the Bank would have: (i)
a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; (iii) a leverage ratio of less than 4.0%, or
(iv) a regulatory net worth less than the liquidation account established in
connection with the Bank's conversion to a stock institution.
DEPOSIT INSURANCE. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the SAIF. Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Within each
capital group, institutions are assigned to one of three subgroups on the basis
of supervisory evaluations by the institution's primary supervisory authority
and such other information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
fund. The Bank is currently classified as well capitalized under this assessment
system.
RESTRICTIONS ON CERTAIN ACTIVITIES. Under applicable law, state-chartered
banks with deposits insured by the FDIC are generally prohibited from acquiring
or retaining any equity investment of a type or in an amount that is not
permissible for a national bank. The foregoing limitation, however, does not
prohibit FDIC-insured state banks from acquiring or retaining an equity
investment in a subsidiary in which the bank is a majority owner.
State-chartered banks are also prohibited from engaging as principal in any type
of activity that is not permissible for a national bank and subsidiaries of
state-chartered, FDIC-insured state banks have been prohibited from engaging as
principal in any type of activity that is not permissible for a subsidiary of a
national bank unless in either case the FDIC determines that the activity would
pose no significant risk to the appropriate deposit insurance fund and the bank
is, and continues to be, in compliance with applicable capital standards.
19
The FDIC has adopted regulations to clarify the foregoing restrictions on
activities of FDIC-insured state-chartered banks and their subsidiaries. An
activity permissible for a national bank includes any activity expressly
authorized for national banks by statute or recognized as permissible in
regulations, official circulars or bulletins or in any order or written
interpretation issued by the Office of the Comptroller of the Currency ("OCC").
In its regulations, the FDIC indicates that it will not permit state banks to
directly engage in commercial ventures or directly or indirectly engage in any
insurance underwriting activity other than to the extent such activities are
permissible for a national bank or a national bank subsidiary or except for
certain other limited forms of insurance underwriting permitted under the
regulations. Under the regulations, the FDIC permits state banks that meet
applicable minimum capital requirements to engage as principal in certain
activities that are not permissible to national banks including guaranteeing
obligations of others, activities which the Federal Reserve Board has found by
regulation or order to be closely related to banking and certain securities
activities conducted through subsidiaries.
TRANSACTIONS WITH AFFILIATES. Transactions between banks and any affiliate
are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of
a bank is any company or entity which controls, is controlled by or is under
common control with the bank. Generally, Sections 23A and 23B (i) limit the
extent to which the bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. A bank holding company and its
subsidiaries are considered "affiliates" of the bank under Section 23A and 23B.
The term "covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and similar other types of transactions. In addition to
the restrictions imposed by Sections 23A and 23B, the Bank may not (i) lend or
otherwise extend credit to an affiliate, except for any affiliate which engages
only in activities which are permissible for bank holding companies, or (ii)
purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the Bank.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System,
which consists of 12 district FHLBs subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"). As a member of the FHLB of Atlanta, the
Bank is required to acquire and hold shares of capital stock in the FHLB of
Atlanta in an amount at least equal to 1% of the aggregate unpaid principal of
its home mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the FHLB of
Atlanta, whichever is greater. Cooperative Bank was in compliance with this
requirement with investment in FHLB of Atlanta stock at December 31, 2002 of
approximately $4.1 million.
FEDERAL RESERVE BOARD REGULATION. Pursuant to regulations of the Federal
Reserve Board, all FDIC-insured depository institutions must maintain average
daily reserves against their transaction accounts. Because required reserves
must be maintained in the form of vault cash or in a noninterest bearing account
at a Federal Reserve Bank, the effect of the reserve requirement is to reduce
the amount of the institution's interest-earning assets. At December 31, 2002,
the Bank met its reserve requirements.
North Carolina law also required the Bank to maintain a reserve fund at
least equal to the Federal Reserve requirement. In the event the reservable
liabilities of the Bank are such that no reserve is required by the Federal
Reserve, the Bank would be required under North Carolina law to maintain a
reserve fund equal to 3% of its total deposits of every kind which are not
otherwise secured by acceptable collateral.
SARBANES-OXLEY ACT OF 2002. On July 30, 2002, the President signed into law
the Sarbanes-Oxley Act of 2002 (the "Act") which mandated a variety of reforms
intended to address corporate and accounting fraud. The Act provides for the
establishment of a new Public Company Accounting Oversight Board ("PCAOB") which
will enforce auditing, quality control and independence standards for firms that
audit SEC-reporting companies and will be funded by fees from all SEC reporting
companies. The Act imposes higher standards for auditor independence and
restricts provision of consulting services by auditing firms to companies they
audit. Any non-audit services being provided to an audit client will require
pre-approval by the Company's audit committee members. In addition, certain
audit partners must be rotated periodically. The Act requires chief executive
officers and chief financial
20
officers, or their equivalent, to certify to the accuracy of periodic reports
filed with the SEC, subject to civil and criminal penalties if they knowingly or
willfully violate this certification requirement. In addition, under the Act,
counsel will be required to report evidence of a material violation of the
securities laws or a breach of fiduciary duty by a company to its chief
executive officer or its chief legal officer, and, if such officer does not
appropriately respond, to report such evidence to the audit committee or other
similar committee of the board of directors or the board itself.
Longer prison terms will also be applied to corporate executives who
violate federal securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended, and bonuses
issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading during
retirement plan "blackout" periods, and loans to company executives are
restricted. In addition, a provision directs that civil penalties levied by the
SEC as a result of any judicial or administrative action under the Act be
deposited in a fund for the benefit of harmed investors. Directors and executive
officers must also report most changes in their ownership of a company's
securities within two business days of the change.
The Act also increases the oversight and authority of audit committees of
publicly traded companies. Audit committee members must be independent and are
barred from accepting consulting, advisory or other compensatory fees from the
issuer. In addition, all SEC reporting companies will be required to disclose
whether at least one member of the committee is a "financial expert" (as such
term is defined by the SEC rules) and if not, why not. Audit committees of
publicly traded companies will have authority to retain their own counsel and
other advisors funded by the company. Audit committees must establish procedures
for the receipt, retention and treatment of complaints regarding accounting and
auditing matters and procedures for confidential, anonymous submission of
employee concerns regarding questionable accounting or auditing matters. The SEC
has promulgated regulations implementing these provisions which are not yet in
effect.
Beginning six months after the SEC determines that the PCAOB is able to
carry out its functions, it will be unlawful for any person that is not a
registered public accounting firm ("RPAF") to audit an SEC-reporting company.
Under the Act, a RPAF is prohibited from performing statutorily mandated audit
services for a company if such company's chief executive officer, chief
financial officer, comptroller, chief accounting officer or any person serving
in equivalent positions has been employed by such firm and participated in the
audit of such company during the one-year period preceding the audit initiation
date. The Act also prohibits any officer or director of a company or any other
person acting under their direction from taking any action to fraudulently
influence, coerce, manipulate or mislead any independent public or certified
accountant engaged in the audit of the Company's financial statements for the
purpose of rendering the financial statements materially misleading. The Act
also requires the SEC to prescribe rules requiring inclusion of an internal
control report and assessment by management in the annual report to
shareholders. The Act requires the RPAF that issues the audit report to attest
to and report on management's assessment of the Company's internal controls. In
addition, the Act requires that each financial report required to be prepared in
accordance with (or reconciled to) generally accepted accounting principles and
filed with the SEC reflect all material correcting adjustments that are
identified by a RPAF in accordance with generally accepted accounting principles
and the rules and regulations of the SEC.
Although the Company anticipates it will incur additional expense in
complying with the provisions of the Act and the related rules, management does
not expect that such compliance will have a material impact on the Company's
financial condition or results of operations.
THE USA PATRIOT ACT. In response to the events of September 11, 2001, the
United and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"), was signed
into law on October 26, 2001. The USA PATRIOT Act gives the federal government
new powers to address terrorist threats through enhanced domestic security
measures, expanded surveillance powers, increased information sharing, and
broadened anti-money laundering requirements. By way of amendments to the Bank
Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose
21
affirmative obligations on a broad range of financial institutions, including
banks, thrifts, brokers, dealers, credit unions, money transfer agents and
parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that includes, at a minimum: (i)
internal policies, procedures, and controls; (ii) specific designation
of an anti-money laundering compliance officer; (iii) ongoing employee
training programs; and (iv) an independent audit function to test the
anti-money laundering program.
o Section 326 authorizes the Secretary of the Department of the
Treasury, in conjunction with other bank regulators, to issue
regulations that provide for minimum standards with respect to
customer identification at the time new accounts are opened.
o Section 312 requires financial institutions that establish, maintain,
administer or manage private banking accounts or correspondence
accounts in the United States for non-United States persons or their
representatives (including foreign individuals visiting the United
States) to establish appropriate, specific and, where necessary,
enhanced due diligence policies, procedures, and controls designed to
detect and report money laundering.
o A prohibition against establishing, maintaining, administering or
managing correspondent accounts for foreign shell banks (foreign banks
that do not have a physical presence in any country), and certain
record keeping obligations with respect to correspondent accounts of
foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
The federal banking agencies have begun to propose and implement
regulations pursuant to the USA PATRIOT Act. These proposed and interim
regulations require financial institutions to adopt the policies and procedures
contemplated by the USA PATRIOT Act.
TAXATION
The Bank is subject to the provisions of the Internal Revenue Code of 1986,
as amended (the "Code") in the same general manner as other corporations.
Legislation that was effective for tax years beginning after December 31,
1995 required savings institutions to recapture into taxable income over a six
taxable year period the portion of the tax loan reserve that exceeds the
pre-1988 tax loan loss reserve. Circumstances that would require an accrual of a
portion or all of this unrecorded tax liability are a reduction in qualifying
loan levels relative to the end of 1987, failure to meet the definition of a
bank, dividend payments in excess of accumulated tax earnings and profits, or
other distribution, liquidation or redemption of the Bank's stock.
For additional information regarding federal and state taxes, see Note 10
of Notes to Consolidated Financial Statements in the Annual Report.
STATE INCOME TAXATION
Under North Carolina law, the Bank is subject to an annual corporate income
tax of 6.90% of its federal taxable income as computed under the Code, subject
to certain prescribed adjustments. In addition to the state corporate income
tax, the Bank is subject to an annual state franchise tax, which is imposed at a
rate of .15% applied to the greatest of the Bank's (i) capital stock, surplus
and undivided profits, (ii) investment in tangible property in
22
North Carolina or (iii) appraised valuation of property in North Carolina. The
filing of consolidated returns is not permitted under North Carolina law.
23
ITEM 2. PROPERTIES
- --------------------
The Bank operated 17 financial centers throughout the coastal and inland
communities of eastern North Carolina at December 31, 2002. The Bank has a total
of four offices that are subject to leases. The land is leased for two of these
offices on which the Bank has built its own buildings. One office is a lease of
the land and the building on it and one is an office condominium that is leased
by the bank. Lumina operated 4 offices in Wilmington, North Carolina; North
Myrtle Beach, South Carolina; and Virginia Beach, Virginia. All of these offices
are leased. For additional information relating to premises and equipment, see
Note 4 of Notes to Consolidated Financial Statements in the Annual Report.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The information contained under the section captioned "Corporate
Information" in the Annual Report is incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information required by this item is incorporated herein by reference
to the tables captioned "Selected Financial and Other Data" in the Annual
Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion
& Analysis" in the Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The information contained in the section captioned "Management's Discussion
and Analysis" in the Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements contained in the Annual Report which are listed
under Item 15 herein are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
None.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
(a) Directors of the Registrant
The information contained under the section captioned "Proposal I --
Election of Directors" in the Proxy Statement for the 2003 Annual Meeting of
Stockholders (the "Proxy Statement") is incorporated herein by reference.
(b) Principal Officers of the Registrant
The information contained under the caption "Executive Officers" under Part
I of this Form 10-K is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference
to the sections captioned "Voting Securities and Principal Holders
Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference
to the sections captioned "Proposal I -- Election of Directors" in the
Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including any
pledge of any person of securities of the Company, the operation of
which may at a subsequent date result in a change in control of the
Company.
25
(d) Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information with respect to the
Company's equity compensation plans.
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO BE AVAILABLE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE UNDER EQUITY COMPENSATION
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING PLANS (EXCLUDING SECURITIES
WARRANTS & RIGHTS OPTIONS, WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
-------------------------- ---------------------------- -----------------------------
Equity compensation plans
approved by security holders 141,943 11.28 135,062
Equity compensation plans not
approved by security holders -- -- --
------- ----- -------
Total 141,943 11.28 135,062
------- ----- -------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the sections captioned "Proposal I -- Election of Directors" and "Voting
Securities and Principal Holders Thereof" in the Proxy Statement.
ITEM 14. CONTROLS AND PROCEDURES
- --------------------------------
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) Contents. The following financial statements are filed as part of this
--------
Annual Report on Form 10-K.
(1) Consolidated Financial Statements
1. Independent Auditors' Report of KPMG LLP *
2. Consolidated Statements of Financial Condition as of
December 31, 2002 and 2001*
3. Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000 *
4. Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 2002, 2001 and 2000 *
26
5. Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2002, 2001 and 2000 *
6. Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001, and 2000 *
7. Notes to Consolidated Financial Statements *
___________
* Incorporated by reference to the Annual Report attached
hereto as Exhibit 13.
(2) Financial Statement Schedules (All financial statement schedules
have been omitted as the required information is either
inapplicable or included in the Consolidated Financial Statements
or related notes.)
(b) During the fourth quarter of 2002, the Registrant filed two Current
Reports on Form 8-K, one on December 31, 2002 announcing the conversion from a
North Carolina chartered savings bank to a North Carolina chartered commercial
bank and one on October 23, 2002 reporting third quarter earnings.
(c) The following exhibits are either filed as part of this report or are
incorporated herein by reference:
No. Description
--- -----------
3.1 Articles of Incorporation *
3.2 Bylaws, as amended
10.1 Cooperative Bankshares, Inc. 1998 Stock Option and
Incentive Plan **
10.2 Employment Agreement with Frederick Willetts, III *
10.3 Severance Agreement with Todd L. Sammons ***
10.4 Severance Agreement with O.C. Burrell, Jr. ****
10.5 Severance Agreement with Dickson B. Bridger *****
10.6 Amendment to Severance Agreement of O.C. Burrell, Jr. *
10.7 Indemnity Agreement with Directors and Executive *
Officers
10.8 Director Retirement Agreements between Cooperative Bank ***
and Each Non-Employee Director of Cooperative Bank
10.9 Director Deferred Fee Agreements between Cooperative Bankshares, ***
Inc. and each Director of the Company
10.10 Director Deferred Fee Agreements between Cooperative Bank ***
and Each Non-Employee Director of Cooperative Bank
27
10.11 Executive Indexed Retirement Agreements between ***
Cooperative Bank and Frederick Willetts, III
and O. C. Burrell
11 Statement re: computation of per share earnings -
Reference is made to the Company's Consolidated
Statements of Operations attached hereto as Exhibit 13,
which are incorporated herein by reference
13 Annual Report to Stockholders for the year ended
December 31, 2002
21 Subsidiaries
23.1 Consent of KPMG LLP
99 Certification pursuant to 18 U.S.C. Section 1350
___________
* Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (Reg. No. 33-79206).
** Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Reg. No. 333-92219)
*** Incorporated by reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 2001.
**** Incorporated by reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 1997.
*****Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 2000.
28
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
COOPERATIVE BANKSHARES, INC.
Date: March 13, 2003 By: /s/ Frederick Willetts, III
--------------------------------------
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Frederick Willetts, III Date: March 13, 2003
---------------------------------------------------
President, Chief Executive Officer and Chairman
(Principal Executive Officer and Director)
By: /s/ Todd L. Sammons Date: March 13, 2003
---------------------------------------------------
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ James D. Hundley, M.D. Date: March 13, 2003
---------------------------------------------------
(Director)
By: /s/ O. Richard Wright, Jr. Date: March 13, 2003
---------------------------------------------------
(Director)
By: /s/ Paul G. Burton Date: March 17, 2003
---------------------------------------------------
(Director)
By: /s/ H. Thompson King, III Date: March 13, 2003
---------------------------------------------------
(Director)
By: /s/ F. Peter Fensel, Jr. Date: March 13, 2003
---------------------------------------------------
(Director)
By: /s/ R. Allen Rippy Date: March 13, 2003
---------------------------------------------------
(Director)
By: /s/ Russell M. Carter Date: March 13, 2002
---------------------------------------------------
(Director)
CERTIFICATION
I, Frederick Willetts, III, President and Chief Executive Officer of
Cooperative Bankshares, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Cooperative
Bankshares, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) Presented in this annual 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 of directors (or persons performing 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
annual 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: March 12, 2003
/s/Frederick Willetts, III
--------------------------------------
President and Chief Executive Officer
CERTIFICATION
I, Todd Sammons, Senior Vice President and Chief Financial Officer of
Cooperative Bankshares, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Cooperative
Bankshares, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) Presented in this annual 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 of directors (or persons performing 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
annual 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: March 12, 2003
/s/ Todd L. Sammons
-------------------------------------------------
Senior Vice President and Chief Financial Officer