UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-24626
-------
COOPERATIVE BANKSHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1886527
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Market Street, Wilmington, North Carolina 28401
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (910) 343-0181
--------------
Former name, former address and former fiscal year, if changed since last report
N/A
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date. 2,847,947 shares at April 30, 2003
----------------------------------
TABLE OF CONTENTS
Page
Part I Financial Information
Item 1 Financial Statements
Consolidated Statements of Financial Condition,
March 31, 2003 and December 31, 2002 3
Consolidated Statements of Operations, for the three
months ended March 31, 2003 and 2002 4
Consolidated Statement of Stockholders' Equity, for
the three months ended March 31, 2003 5
Consolidated Statements of Cash Flows, for the three
months ended March 31, 2003 and 2002 6-7
Notes to Consolidated Financial Statements 8-10
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
Item 3 Market Risk 16-17
Item 4 Controls and Procedures 17
Part II Other Information
Item 1 Legal Proceedings 18
Item 2 Changes in Securities and Use of Proceeds 18
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6 Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications 20-21
Exhibit 99 22
PART 1-FINANCIAL INFORMATION-FINANCIAL STATEMENTS
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2003 December 31, 2002*
-------------- -----------------
(UNAUDITED)
ASSETS
Cash and due from banks, noninterest-bearing $ 13,205,668 $ 11,858,603
Interest-bearing deposits in other banks 3,155,941 --
------------ ------------
Total cash and cash equivalents 16,361,609 11,858,603
Securities:
Available for sale (amortized cost of $39,355,848 in March 2003
and $41,033,409 in December 2002) 40,225,231 42,075,212
Held to maturity (estimated market value of $7,728,406 in March
2003 and $8,009,087 in December 2002) 7,593,362 7,859,955
FHLB stock 3,804,600 4,054,700
Loans held for sale 20,757,817 25,659,935
Loans 404,077,345 393,812,940
Less allowance for loan losses 2,996,843 2,936,795
------------ ------------
Net loans 401,080,502 390,876,145
Other real estate owned 920,643 619,163
Accrued interest receivable 2,192,839 2,239,826
Premises and equipment, net 7,603,824 7,019,219
Other assets 12,037,943 11,946,819
------------ ------------
Total assets $512,578,370 $504,209,577
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $375,020,415 $357,254,096
Short-term borrowings 51,728,252 61,585,827
Escrow deposits 381,491 223,604
Accrued interest payable 278,302 284,568
Accrued expenses and other liabilities 2,262,185 3,320,629
Long-term obligations 43,091,411 43,092,592
------------ ------------
Total liabilities 472,762,056 465,761,316
------------ ------------
Stockholders' equity:
Preferred stock, $1 par value, 3,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $1 par value, 7,000,000 shares authorized,
2,847,947 and 2,835,947 shares issued and outstanding 2,847,947 2,835,947
Additional paid-in capital 2,613,153 2,440,645
Accumulated other comprehensive income 573,793 635,500
Retained earnings 33,781,421 32,536,169
------------ ------------
Total stockholders' equity 39,816,314 38,448,261
------------ ------------
Total liabilities and stockholders' equity $512,578,370 $504,209,577
============ ============
Book value per common share $ 13.98 $ 13.56
============ ============
*Derived from audited consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial
statements.
3
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2003 2002
----------- -----------
INTEREST INCOME:
Loans $ 6,525,593 $ 6,595,546
Securities 603,090 695,887
Other 9,806 12,293
Dividends on FHLB stock 45,575 58,909
----------- -----------
Total interest income 7,184,064 7,362,635
----------- -----------
INTEREST EXPENSE:
Deposits 2,038,260 2,845,342
Borrowed funds 891,943 912,653
----------- -----------
Total interest expense 2,930,203 3,757,995
----------- -----------
NET INTEREST INCOME 4,253,861 3,604,640
Provision for loan losses 200,000 280,000
----------- -----------
Net interest income after provision for loan losses 4,053,861 3,324,640
----------- -----------
NONINTEREST INCOME:
Gain on sale of loans 1,026,756 18,279
Net gain on sale of securities - 116,766
Service charges and fees on loans 138,331 201,382
Deposit-related fees 256,871 248,235
Gain on sale of real estate - 464,977
Bank-owned life insurance earnings 97,074 99,837
Other income, net 52,625 60,116
----------- -----------
Total noninterest income 1,571,657 1,209,592
----------- -----------
NONINTEREST EXPENSE:
Compensation and fringe benefits 2,274,258 1,435,853
Occupancy and equipment 647,931 518,210
Professional and examination fees 101,247 130,581
Advertising 120,555 70,503
Real estate owned 17,890 6,542
Other 456,886 388,381
----------- -----------
Total noninterest expenses 3,618,767 2,550,070
----------- -----------
Income before income taxes 2,006,751 1,984,162
Income tax expense 619,101 695,660
----------- -----------
NET INCOME $ 1,387,650 $ 1,288,502
----------- -----------
NET INCOME PER SHARE:
Basic $ 0.49 $ 0.45
=========== ===========
Diluted $ 0.48 $ 0.45
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 2,844,678 2,835,447
=========== ===========
Diluted 2,887,096 2,843,398
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
4
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK CAPITAL INCOME EARNINGS EQUITY
----------- ------------ ------------- ------------ ------------
Balance, December 31, 2002 $ 2,835,947 $ 2,440,645 $ 635,500 $ 32,536,169 $ 38,448,261
Exercise of stock options 12,000 158,500 -- -- 170,500
Tax benefit of stock option
exercise -- 14,008 -- -- 14,008
Other comprehensive
loss, net of taxes -- -- (61,707) -- (61,707)
Net income -- -- -- 1,387,650 1,387,650
Cash dividends ($.05 per share) -- -- -- (142,398) (142,398)
----------- ------------ --------- ------------ ------------
Balance, March 31, 2003 $ 2,847,947 $ 2,613,153 $ 573,793 $ 33,781,421 $ 39,816,314
=========== ============ ========= ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net income $ 1,387,650 $ 1,288,502
Adjustments to reconcile net income to net cash
provided by operating activities:
Net accretion, amortization, and depreciation 318,037 198,350
Net gain on sale securities -- (116,766)
Net gain on sale of loans (1,026,756) (18,279)
Provision (benefit) from deferred income taxes (43,329) 140,620
Gain on sale of premises and equipment -- (464,977)
Loss on sales of foreclosed real estate 534 --
Valuation losses on foreclosed real estate 107,880 --
Provision for loan losses 200,000 280,000
Originations of loans held for sale (56,336,726) (1,513,000)
Proceeds from sales of loans held for sale 62,230,202 1,518,418
Changes in assets and liabilities:
Accrued interest receivable 46,987 233,706
Prepaid expenses and other assets 62,917 (505,728)
Accrued interest payable (6,266) 39,492
Accrued expenses and other liabilities (1,058,443) 461,318
------------ ------------
Net cash provided by operating activities 5,882,687 1,541,656
------------ ------------
INVESTING ACTIVITIES:
Purchases of securities available for sale -- (13,438,870)
Proceeds from sale of securities available for sale -- 12,115,938
Repayments of mortgage-backed securities available for sale 1,619,390 1,016,356
Repayments of mortgage-backed securities held to maturity 226,074 --
Loan originations, net of principal repayments (10,848,421) (2,435,646)
Proceeds from disposals of foreclosed real estate 74,390 68,096
Net expenditures on foreclosed real estate (4,822) --
Purchases of FHLB stock (350,000) --
Proceeds from sale of FHLB stock 600,100 --
Purchases of premises and equipment (803,952) (344,937)
Proceeds from sale of premises and equipment -- 499,070
------------ ------------
Net cash used in investing activities (9,487,241) (2,519,993)
------------ ------------
FINANCING ACTIVITIES:
Net increase in deposits 17,766,319 12,252,491
Net repayments on short-term borrowings (9,857,575) (8,800,965)
Repayments on long-term obligations (1,181) (1,117)
Proceeds from issuance of common stock 184,508 --
Dividends paid (142,398) (141,772)
Net change in escrow deposits 157,887 256,028
------------ ------------
Net cash provided by financing activities 8,107,560 3,564,665
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 4,503,006 2,586,328
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 11,858,603 12,295,578
------------ ------------
END OF PERIOD $ 16,361,609 $ 14,881,906
============ ============
(Continued)
6
COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
THREE MONTHS ENDED
MARCH 31,
2003 2002
----------- -----------
Cash paid for:
Interest $ 2,936,469 $ 3,718,503
Income taxes 207,652 92,763
Summary of noncash investing and financing activities:
Transfer from loans to foreclosed real estate 479,462 500,957
Unrealized loss on securities available for sale,
net of taxes (61,707) (622,522)
Reclassifications between Long-term obligations
and short-term borrowings - 5,000,000
The accompanying notes are an integral part of the consolidated financial
statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies: The significant accounting policies followed by
--------------------
Cooperative Bankshares, Inc. (the "Company") for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting. These unaudited consolidated financial statements have
been prepared in accordance with Rule 10-01 of Regulation S-X, and, in
management's opinion, all adjustments of a normal recurring nature
necessary for a fair presentation have been included. The accompanying
consolidated financial statements do not purport to contain all the
necessary financial disclosures that might otherwise be necessary in the
circumstances and should be read in conjunction with the consolidated
financial statements and notes thereto in the Company's annual report for
the year ended December 31, 2002 (the "Annual Report"). The results of
operations for the three-month period ended March 31, 2003 are not
necessarily indicative of the results to be expected for the full year.
2. Basis of Presentation: The accompanying unaudited consolidated financial
---------------------
statements include the accounts of Cooperative Bankshares, Inc.,
Cooperative Bank (the Bank) and its wholly owned subsidiaries, Lumina
Mortgage Company, Inc. (Lumina) & CS&L Holdings, Inc. (Holdings), and
Holdings' majority owned subsidiary, CS&L Real Estate Trust, Inc. (REIT).
All significant intercompany items have been eliminated. Certain items for
prior periods have been reclassified to conform to the current period
presentation. These reclassifications have no effect on the net income or
stockholders' equity as previously reported.
3. Earnings Per Share: Earnings per share (EPS) are calculated by dividing net
------------------
income by the weighted average number of common shares outstanding (basic
EPS) and the sum of the weighted average number of common shares
outstanding and potential common stock (diluted EPS). Potential common
stock consists of stock options issued and outstanding. In determining the
number of potential common stock, the treasury stock method was applied.
This method assumes that the number of shares issuable upon exercise of the
stock options is reduced by the number of common shares assumed purchased
at market prices with the proceeds from the assumed exercise of the common
stock options plus any tax benefits received as a result of the assumed
exercise. The following table provides a reconciliation of income available
to common stockholders and the average number of shares outstanding for the
periods below:
THREE MONTHS ENDED
MARCH 31,
2003 2002
---------- ----------
Net income (numerator) $1,387,650 $1,288,502
Shares for basic EPS (denominator) 2,844,678 2,835,447
Dilutive effect of stock options 42,418 7,951
---------- ----------
Shares for diluted EPS (denominator) 2,887,096 2,843,398
========== ==========
For the periods ended March 31, 2003 and 2002, there were 4,204 and 14,204
options outstanding respectively that were antidilutive since the exercise
price exceeds the average market price. The options have been omitted from
the calculation of the dilutive effect of stock options.
8
4. Comprehensive Income: Comprehensive income includes net income and all
---------------------
other changes to the Company's equity, with the exception of transactions
with shareholders ("other comprehensive income"). The Company's only
components of other comprehensive income relate to unrealized gains and
losses on available for sale securities. The following table sets forth the
components of other comprehensive income and total comprehensive income for
the three months ended March 31:
THREE MONTHS ENDED
MARCH 31,
2003 2002
------------ -----------
Net income $ 1,387,650 $ 1,288,502
Other comprehensive income (loss):
Reclassification to realized gains - 116,766
Unrealized loss arising during the period (172,420) (1,137,295)
Income tax benefit 110,713 398,007
------------ -----------
Other comprehensive loss (61,707) (622,522)
------------ -----------
Comprehensive income $ 1,325,943 $ 665,980
------------ -----------
5. Stock-Based Compensation: On January 1, 1996 the Company adopted SFAS No.
-------------------------
123, "Accounting for Stock-Based Compensation". As permitted by SFAS No.
123, the Company has chosen to continue to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations. The
option exercise price is the market price of the common stock on the date
the option is granted. Accordingly, no compensation cost has been
recognized for options granted under the Option Plan. Had compensation cost
for the Company's Option Plan been determined based on the fair value at
the grant dates for awards under the option plan consistent with the method
of SFAS No. 123, the Company's net income and net income per share would
have been reduced to the pro forma amounts indicated below.
Three Months Ended
March 31,
2003 2002
----------- -----------
Net income, as reported $ 1,387,650 $ 1,288,502
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects - (60,543)
----------- -----------
Proforma net income $ 1,387,650 $ 1,227,959
=========== ===========
Earnings per share:
Basic-as reported $ 0.49 $ 0.45
=========== ===========
Basic-proforma $ 0.49 $ 0.43
=========== ===========
Diluted-as reported $ 0.48 $ 0.45
=========== ===========
Diluted-proforma $ 0.48 $ 0.43
=========== ===========
9
6. New Accounting Prouncements: On January 1, 2003, the Company adopted SFAS
----------------------------
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity." The
adoption of SFAS No. 146 did not have a material effect on the Company's
consolidated financial statements.
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of
FASB Interpretation No. 34." This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after
December 31, 2002 and are not expected to have a material effect on the
Company's consolidated financial statements. The disclosure requirements
are effective for financial statements of interim and annual periods ending
after December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51". This
Interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable interests
in variable interest entities obtained after January 31, 2003. For public
enterprises with a variable interest in a variable interest equity created
before February 1, 2003, the interpretation applies to that enterprise no
later than the beginning of the first interim or annual reporting period
beginning after June 15, 2003. The application of this Interpretation is
not expected to have a material effect on the Company's consolidated
financial statements. The Interpretation requires certain disclosures in
financial statements issued after January 31, 2003 if it is reasonably
possible that the Company will consolidate or disclose information about
variable interest entities when the Interpretation becomes effective.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Cooperative Bankshares, Inc. (the "Company") is a registered bank holding
company incorporated in North Carolina in 1994. The Company is the parent
company of Cooperative Bank (the "Bank"); a North Carolina chartered commercial
bank. Cooperative Bank, headquartered in Wilmington, North Carolina, was
chartered in 1898. The Bank provides financial services through 17 financial
centers in Eastern North Carolina. One of the Bank's subsidiaries, Lumina
Mortgage Company, Inc. ("Lumina") is a mortgage banking firm originating and
selling residential mortgage loans through offices in Wilmington, North
Carolina; North Myrtle Beach, South Carolina; and Virginia Beach, Virginia. The
Bank's other subsidiary, CS&L Holdings, Inc. ("Holdings") is a holding company
for CS&L Real Estate Trust, Inc. (the "REIT"), which is a real estate investment
trust.
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, which are insured up
to the applicable limits of the Federal Deposit Insurance Corporation ("FDIC").
It offers an array of loan products: overdraft protection, commercial, consumer,
agricultural, real estate, residential mortgage and home equity loans. Also
offered are safe deposit boxes and automated banking services through ATMs and
Access24 Phone Banking. In addition, the Bank offers discount brokerage
services, annuity sales and mutual funds through a third party arrangement with
UVEST Investment Services. Lumina delivers a wide range of mortgage loan
products to its market area.
MISSION STATEMENT
It is the mission of the Company to provide the maximum in safety and security
for our depositors, an equitable rate of return for our stockholders, excellent
service for our customers, and to do so while operating in a fiscally sound and
conservative manner, with fair pricing of our products and services, good
working conditions, outstanding training and opportunities for our staff, along
with a high level of corporate citizenship.
10
MANAGEMENT STRATEGY
Cooperative Bank's lending activities have traditionally concentrated on the
origination of loans for the purpose of constructing, financing or refinancing
residential properties. In recent years however, the Bank has emphasized
origination of nonresidential real estate loans and secured and unsecured
consumer and business loans. As of March 31, 2003, approximately $276 million,
or 68%, of the Bank's loan portfolio, which excludes loans held for sale,
consisted of loans secured by residential properties. This compared to
approximately $268 million, or 69% at December 31, 2002. The Bank originates
adjustable rate and fixed rate loans. As of March 31, 2003, adjustable rate and
fixed rate loans totaled approximately 64.5% and 35.5%, respectively, of the
Bank's total loan portfolio.
The Bank has chosen to sell a larger percentage of its fixed rate mortgage loan
originations in the secondary market and through brokered arrangements. This
enables the Bank to reinvest these funds in commercial loans, while increasing
fee income. This is part of the continuing effort to restructure the balance
sheet and operations to be more reflective of a commercial bank. The Bank is
building additional branches in Wilmington, North Carolina and Morehead City,
North Carolina.
INTEREST RATE SENSITIVITY ANALYSIS
Interest rate sensitivity refers to the change in interest spread resulting from
changes in interest rates. To the extent that interest income and interest
expense do not respond equally to changes in interest rates, or that all rates
do not change uniformly, earnings will be affected. Interest rate sensitivity,
at a point in time, can be analyzed using a static gap analysis that measures
the match in balances subject to repricing between interest-earning assets and
interest-bearing liabilities. Gap is considered positive when the amount of
interest rate sensitive assets exceed the amount of interest rate sensitive
liabilities. Gap is considered negative when the amount of interest rate
sensitive liabilities exceed the amount of interest rate sensitive assets. At
March 31, 2003, Cooperative had a one-year positive gap position of 2.1%. During
a period of falling interest rates, a positive gap would tend to adversely
affect net interest income, while a negative gap would tend to result in an
increase in net interest income. During a period of rising interest rates, a
positive gap would tend to result in an increase in net interest income while a
negative gap would tend to adversely affect net interest income. It is important
to note that certain shortcomings are inherent in static gap analysis. Although
certain assets and liabilities may have similar maturities or periods of
repricing, they may react in different degrees to changes in market interest
rates. For example, a part of the Company's adjustable-rate mortgage loans are
indexed to the National Monthly Median Cost of Funds to SAIF-insured
institutions. This index is considered a lagging index that may lag behind
changes in market rates. The one-year or less interest-bearing liabilities also
include checking, savings, and money market deposit accounts. Experience has
shown that the Company sees relatively modest repricing of these transaction
accounts. Management takes this into consideration in determining acceptable
levels of interest rate risk.
When Lumina gives a rate lock commitment to a customer, there is a concurrent
"lock in" for the loan with a secondary market investor under a best efforts
delivery mechanism. Therefore, interest rate risk is mitigated because any
commitments to fund a loan available for sale is concurrently hedged by a
commitment from an investor to purchase the loan under the same terms. Loans are
usually sold within 60 days after closing.
11
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Bank enters into agreements that obligate it to make future payments under
contracts, such as debt and lease agreements. In addition, the Bank commits to
lend funds in the future such as credit lines and loan commitments. Below is a
table of such contractual obligations and commitments at March 31, 2003 (in
thousands).
Payments Due by Period
---------------------------------------------------------
Less
than 1 1-3 4-5 Over 5
Contractual Obligations Total year years years years
---------------------------------------------------------
Borrowed Funds $ 94,820 $ 51,728 $ 10,000 $ 10,000 $ 23,092
Lease Obligations 2,956 313 441 254 1,948
Deposits 375,020 315,982 58,856 182 -
---------------------------------------------------------
Total Contractual Cash Obligations $472,796 $368,023 $ 69,297 $ 10,436 $ 25,040
=========================================================
Amount of Commitment Expiration
Per Period
---------------------------------------------------------
Total Less
Amounts than 1 1-3 4-5 Over 5
Other Commitments Committed year years years years
---------------------------------------------------------
Undisbursed portion of home equity
collateralized primarily by junior liens
on 1-4 family properties $ 15,176 $ 1,339 $ 1,285 $ 619 $ 11,933
Other commitments and credit lines 13,214 5,413 5,038 58 2,705
Undisbursed portion of construction loans 33,797 33,797 -- -- --
Available for sale mortgage loan commitments 6,397 6,397 -- -- --
Fixed-rate mortgage loan commitments 3,335 3,335 -- -- --
Adjustable-rate mortgage loan
commitments 1,483 1,483 -- -- --
---------------------------------------------------------
Total Commitments $ 73,402 $ 51,764 $ 6,323 $ 677 $ 14,638
=========================================================
LIQUIDITY
The Company's goal is to maintain adequate liquidity to meet potential funding
needs of loan and deposit customers, pay operating expenses, and meet regulatory
liquidity requirements. Maturing securities, principal repayments of loans and
securities, deposits, income from operations and borrowings are the main sources
of liquidity. The Bank has been granted a line of credit by the Federal Home
Loan Bank of Atlanta ("FHLB") in an amount of up to 25% of the Bank's total
assets. At March 31, 2003, the Bank's borrowed funds from the FHLB equaled 14.8%
of its total assets. Scheduled loan repayments are a relatively predictable
source of funds, unlike deposits and loan prepayments that are significantly
influenced by general interest rates, economic conditions and competition.
At March 31, 2003, the estimated market value of liquid assets (cash, cash
equivalents, marketable securities and loans held for sale) was approximately
$85.1 million, which represents 18.1% of deposits and borrowed funds as compared
to $87.6 million or 19.0% of deposits and borrowed funds at December 31, 2002.
The decrease in liquid assets was primarily due to a decrease in loans held for
sale.
The Company's primary uses of liquidity are to fund loans and to make
investments. At March 31, 2003, outstanding off-balance sheet commitments to
extend credit totaled $39.6 million, and the undisbursed portion of
12
construction loans was $33.8 million. Management considers current liquidity
levels adequate to meet the Company's cash flow requirements.
CAPITAL
Stockholders' equity at March 31, 2003, was $39.8 million, up 3.6% from $38.4
million at December 31, 2002. Stockholders' equity at March 31, 2003, includes
an unrealized gain net of tax, of $573,793 as compared to an unrealized gain net
of tax at December 31, 2002, of $635,500 on securities available for sale marked
to estimated fair market value.
Under the capital regulations of the FDIC, the Bank must satisfy minimum
leverage ratio requirements and risk-based capital requirements. Banks
supervised by the FDIC must maintain a minimum leverage ratio of core (Tier I)
capital to average adjusted assets ranging from 3% to 5%. At March 31, 2002, the
Bank's ratio of Tier I capital was 7.72%. The FDIC's risk-based capital rules
require banks supervised by the FDIC to maintain risk-based capital to
risk-weighted assets of at least 8.00%. Risk-based capital for the Bank is
defined as Tier I capital plus the balance of allowance for loan losses. At
March 31, 2003, the Bank had a ratio of qualifying total capital to
risk-weighted assets of 11.11%.
The Company, as a bank holding company, is also subject, on a consolidated
basis, to the capital adequacy guidelines of the Board of Governors of the
Federal Reserve (the "Federal Reserve Board"). The capital requirements of the
Federal Reserve Board are similar to those of the FDIC governing the Bank.
The Company currently exceeds all of its capital requirements. Management
expects the Company to continue to exceed these capital requirements without
altering current operations or strategies.
On March 14, 2003, the Company's Board of Directors approved a quarterly cash
dividend of $.05 per share. The dividend was paid on April 16, 2003 to
stockholders of record as of April 1, 2003. Any future payment of dividends is
dependent on the financial condition and capital needs of the Company,
requirements of regulatory agencies, and economic conditions in the marketplace.
CRITICAL ACCOUNTING POLICY
The Bank's most significant critical accounting policy is the determination of
its allowance for loan losses. A critical accounting policy is one that is both
very important to the portrayal of the Bank's financial condition and results,
and requires management's most difficult, subjective or complex judgments. What
makes these judgments inherently difficult, subjective and/or complex is the
need to make estimates about the effects of matters that are inherently
uncertain. For further information on the allowance for loan losses, see the
"Financial Condition" in Management's Discussion and Analysis and Note 3 of
"Notes to Consolidated Financial Statements" included in the Annual Report.
FINANCIAL CONDITION AT MARCH 31, 2003, COMPARED TO DECEMBER 31, 2002
The Company's total assets increased 1.7% to $512.6 million at March 31, 2003,
as compared to $504.2 million at December 31, 2002. The major change in the
assets is an increase of $4.5 million (38.0%) in cash and cash equivalents,
which was caused by an increase in deposits of $17.8 million (5.0%). The
increase in deposits was mainly in the six month certificates, due to the
customers' desire to stay short in the current rate environment, and
non-interest-bearing checking accounts due to the emphasis of the Bank on
obtaining business accounts. The Bank also attracted an additional $8.3 million
in internet deposits because the rates were competitive with the Bank's local
markets. Internet deposits are usually obtained from other financial
institutions with terms primarily of one or two years. The rise in deposits and
income from operations enabled the Bank to fund an increase in loans of $10.3
million (2.6%) as well as repay $5 million of borrowed funds from the FHLB.
Borrowed funds, collateralized through an agreement with the FHLB for advances,
are secured by the Bank's investment in FHLB stock and qualifying first mortgage
loans. There was a decrease of $4.9 million in loans held for sale, which was
primarily funded by a short-term borrowing at another financial institution.
This loan was reduced $5.1 million since December 31, 2002 and is collateralized
by the loans held for sale. Securities available for sale decreased $1.8 million
(4.4%) during the first three months of 2003 due to payments of mortgage backed
securities. The increase of $584,605 in premises and equipment, during this same
period, is primarily due to the building of two new branches. A reduction in
accounts payable caused the decrease of $1.1 million in accrued expenses and
other liabilities from December 31, 2002 to March 31, 2003.
13
The Company's non-performing assets (loans 90 days or more delinquent and
foreclosed real estate) were $1.3 million, or 0.26% of assets, at March 31,
2003, compared to $1.2 million, or 0.24% of assets, at December 31, 2002.
Foreclosed real estate increased to $920,643 at March 31, 2003, from $619,163 at
December 31, 2002, but only four properties make up this balance. The Company
assumes an aggressive position in collecting delinquent loans and disposing of
foreclosed assets to minimize balances of non-performing assets and continues to
evaluate the loan and real estate portfolios to provide loss reserves as
considered necessary. For further information see "Comparison of Operating
Results - Provision and Reserve for Loan Losses".
COMPARISON OF OPERATING RESULTS
OVERVIEW
The net income of the Company depends primarily upon net interest income. Net
interest income is the difference between the interest earned on loans, the
securities portfolios and interest-earning deposits and the cost of funds,
consisting principally of the interest paid on deposits and borrowings. The
Company's operations are materially affected by general economic conditions, the
monetary and fiscal policies of the Federal government, and the policies of
regulatory authorities. Yields and costs have declined because of the actions
the Federal Reserve took over the last 2 years to reduce interest rates in hopes
of spurring the economy.
NET INCOME
Net income for the three-month period ended March 31, 2003, of $1.4 million
represents a 7.7% increase as compared to the same period last year. The
increase in net income for the period ended March 31, 2003 can be attributed to
increases in net interest income of $649,221 and non-interest income of
$362,065, as well as decreases in the provision for loan losses and income tax
expense of $80,000 and $76,559 respectively. These changes were partially offset
by an increase in non-interest expense of $1.1 million during the same period.
INTEREST INCOME
For the three-month period ended March 31, 2003, interest income decreased 2.4%
as compared to the same period a year ago. The average balance of
interest-earning assets increased 9.7% but the average yield decreased 75 basis
points as compared to the same period a year ago. The yield on average
interest-earning assets decreased to 6.05% as compared to 6.80% for the same
period a year ago. The increase in the average balance of interest-earning
assets had a positive effect on interest income while the reduction in yield had
a negative impact on interest income.
INTEREST EXPENSE
Interest expense decreased 22.0% for the three-month period ended March 31,
2003, as compared to the same period a year ago. This decrease was due to the
average cost of interest-bearing liabilities decreasing 104 basis points as
compared to the same period a year ago. The average balance of interest-bearing
liabilities increased 8.2% as compared to the same period a year ago. The cost
of interest-bearing liabilities decreased to 2.67% as compared to 3.71% for the
same period last year.
NET INTEREST INCOME
Net interest income for the three-month period ended March 31, 2003, as compared
to the same period a year ago, increased 18.0%. The increase was due to a larger
decrease in the cost of liabilities versus the yield on assets, which can be
attributed to the fact that deposits continue to reprice at lower yields caused
by the Federal Reserve's rate reductions. See "Average Yield/Cost Analysis"
table for further information on interest income and interest expense.
14
AVERAGE YIELD/COST ANALYSIS
The following table contains information relating to the Company's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such annualized yields and costs are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. The average loan portfolio
balances include nonaccrual loans.
For the quarter ended
March 31, 2003 March 31, 2002
-------------------------------- -------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- -------- ------- -------- -------- -------
Interest-earning assets:
Interest-bearing deposits in
other banks $ 3,554 $ 10 1.13% $ 2,810 $ 12 1.71%
Securities:
Available for sale 40,339 493 4.89% 43,398 607 5.59%
Held to maturity 7,783 109 5.60% 5,000 89 7.12%
FHLB stock 4,124 46 4.46% 4,155 59 5.68%
Loan portfolio 418,860 6,526 6.23% 377,481 6,596 6.99%
-------- ------ -------- ------
Total interest-earning assets 474,660 7,184 6.05% 432,844 7,363 6.80%
Non-interest earning assets 26,266 23,648
-------- --------
Total assets $500,926 $456,492
======== ========
Interest-bearing liabilities:
Deposits 344,844 2,038 2.36% 326,812 2,845 3.48%
Borrowed funds 93,473 892 3.82% 78,427 913 4.66%
-------- ------ -------- ------
Total interest-bearing liabilities 438,317 $2,930 2.67% 405,239 $3,758 3.71%
------ ------
Non-interest bearing liabilities 23,772 16,859
-------- --------
Total liabilities 462,089 422,098
Stockholders' equity 38,837 34,394
-------- --------
Total liabilities and stockholders'
equity $500,926 $456,492
======== ========
Net interest income $4,254 $3,605
====== ======
Interest rate spread 3.38% 3.09%
====== ======
Net yield on interest-earning assets 3.58% 3.33%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 108.3% 106.8%
====== ======
15
PROVISION AND RESERVE FOR LOAN LOSSES
During the three-month period ended March 31, 2003 the Bank had net charge-offs
against the allowance for loan losses of $139,952 compared to $213,165 for the
same period in 2002. This decrease was primarily due to one larger credit being
charged off during the first quarter of 2002. The Bank added $200,000 to the
allowance for loan losses for the current three-month period increasing the
balance to $3.0 million at March 31, 2003. Management considers the current
level of the allowance to be appropriate based on loan composition, the current
level of delinquencies and other non-performing assets, overall economic
conditions and other factors. Future increases to the allowance may be
necessary, however, due to changes in loan composition or loan volume, changes
in economic or market area conditions and other factors. Additionally, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the recognition of adjustments to the allowance for loan losses based on
their judgments of information available to them at the time of their
examination.
NONINTEREST INCOME
Noninterest income increased by 29.9% for the three-month period ended March 31,
2003, as compared to the same period a year ago. The change in noninterest
income can be attributed to gain on sale of loans increasing over $1 million
primarily as a result of the purchase of Lumina. The Bank has also started to
sell a larger percentage of its fixed rate mortgage loan originations in the
secondary market instead of through brokered arrangements. This change causes an
increase in gain on sale of loans and a reduction to service charges and fees on
loans. During the first quarter of 2002 the Bank sold a parking lot for
$500,000, resulting in the gain on sale of real estate, and the gain of $116,766
on sale of securities was due to selling bonds and purchasing mortgage backed
securities to give the Bank greater cash flow. No similar transactions occurred
during the three months ended March 31, 2003.
NONINTEREST EXPENSE
For the three-month period ended March 31, 2003, noninterest expense increased
41.9% as compared to the same period last year. Compensation and related costs
increased 58.4%. Higher personnel costs associated with the purchase of Lumina
accounted for the majority of the increase. Also, in January 2003, the Company
granted 117 shares of preferred stock in the REIT to officers, directors, and
Bank employees with at least one month of service and certain other parties.
Each individual that was granted the preferred stock received one share that had
a $500 value, for an aggregate increase to compensation expense of $58,500. In
addition, the increase was due to increases in costs of benefits, staffing
levels and normal increases in salaries. Occupancy and equipment expense
increased $129,721 primarily because of the Lumina purchase and an increase in
depreciation expense due to upgrades in hardware and software systems purchased
in 2002. The increase in advertising and other noninterest expenses of $50,052
and $68,505 respectively, was mainly due to the purchase of Lumina.
INCOME TAXES
The effective tax rate for the three-month periods ended March 31, 2003 and
2002, was 30.9% and 35.1% respectively. The decrease resulted from the formation
of Holdings and the REIT in December 2002.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information contained herein, the discussion contains
forward-looking statements that involve risks and uncertainties. Economic
circumstances, the Company's operations, and the Company's actual results could
differ significantly from those discussed in the forward-looking statements.
Some of the factors that could cause or contribute to such differences are
discussed herein, but also include changes in the economy and interest rates in
the nation, changes in the Company's regulatory environment and the Company's
market area.
ITEM 3 - MARKET RISK
The Company's primary market risk is interest rate risk. Interest rate risk is
the result of differing maturities or repricing intervals of interest earning
assets and interest bearing liabilities and the fact that rates on these
financial instruments do not change uniformly. These conditions may impact the
earnings generated by the Company's interest earning assets or the cost of its
interest bearing liabilities, thus directly impacting the Company's overall
earnings. The Company's management actively monitors and manages interest rate
risk. One way this is accomplished is through the development of and adherence
to the Company's asset/liability policy. This policy sets
16
forth management's strategy for matching the risk characteristics of the
Company's interest earning assets and liabilities so as to mitigate the effect
of changes in the rate environment. The Company's market risk profile has not
changed significantly since December 31, 2002.
ITEM 4 - CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the Company's disclosure controls and procedures (as such term is defined in
Rule 13a-14(c) under the Exchange Act) as of a date within 90 days of the date
of filing of this Form 10-Q. Based upon such evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of the evaluation described above.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not applicable
(b) Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99 - CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated January 28, 2003
to report fiscal year 2002 earnings, a Current Report on Form 8-K
dated March 31, 2003 to report a change in auditor and a Current
Report on Form 8-K/A dated March 31, 2003 to amend the Form 8-K
reporting the change in auditor.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated May 14, 2003 Cooperative Bankshares, Inc.
/s/ Frederick Willetts, III
---------------------------------------------
Frederick Willetts, III
President/Chief Executive Officer
Dated: May 14, 2003 /s/ Todd L. Sammons
---------------------------------------------
Todd L. Sammons
Senior Vice President/Chief Financial Officer
19
CERTIFICATION
I, Frederick Willetts, III, President and Chief Executive Officer of Cooperative
Bankshares, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cooperative Bankshares,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board or directors (or persons fulfilling the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Frederick Willetts, III
--------------------------------------
Frederick Willetts, III
President and Chief Executive Officer
20
CERTIFICATION
I, Todd L. Sammons, Senior Vice President and Chief Financial Officer of
Cooperative Bankshares, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cooperative Bankshares,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board or directors (or persons fulfilling the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Todd L. Sammons
-------------------------------------------------
Todd L. Sammons
Senior Vice President and Chief Financial Officer
21