UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2003
OR
/ / 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
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Securities registered pursuant to Section 12(b) of the Act: None
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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 or 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. 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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The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $55,626,101 based on the closing sales price of the
Common Stock as listed on the Nasdaq National Market as of the last day of the
registrant's most recently completed second fiscal quarter. 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, 2004, there were issued and 2,860,764 outstanding shares of the
registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 2003. (Parts II and IV)
2. Portions of the Proxy Statement for the 2004 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 and its subsidiaries. Accordingly, the information set forth in this
report, including financial statements and related data, relates primarily to
Cooperative Bank and its subsidiaries.
COOPERATIVE BANK: Chartered in 1898, the Bank's headquarters is located in
Wilmington, North Carolina. With the opening of a new branch office in
Southport, North Carolina, Cooperative operates 21 offices throughout the
coastal and inland communities of Eastern North Carolina. These offices extend
from Corolla, located on the Outer Banks of North Carolina, to Tabor City,
located on the South Carolina border. The Bank opened two new financial centers
in Wilmington, North Carolina, one in May 2003 and another in December 2003 and
a new branch office in Morehead City, North Carolina in July 2003. 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, 2003, the Company had total assets of $502.3 million, deposits of
$367.1 million and stockholders' equity of $43.1 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. The Bank began offering Online Banking and Bill Payment in July 2003.
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, North Carolina-based mortgage banking firm with offices in
Wilmington, North Carolina, North Myrtle Beach, South Carolina and Virginia
Beach, Virginia. The purchase price was approximately $740,000 in cash and two
additional payments of $400,000 each, one which was paid on July 31, 2003 and
the second which is payable on July 31, 2004. 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, 2003, 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
the liquidity and facilitate future capital needs of the Bank. At December 31,
2003, the REIT held a participation interest in approximately $124.6 million in
mortgage loans of the Bank. At December 31, 2003, all of the outstanding shares
of the REIT's common stock and 85% of its 7% preferred stock was held by
Holdings. The remaining shares of 7% preferred stock in the REIT were granted to
approximately 113 officers, directors and certain other parties pursuant to the
Bank's REIT Bonus Plan. There must be at least 100 stockholders of REIT stock.
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 that give our
offices the opportunity to make purchase, refinance and reverse mortgage loans.
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, 2003, approximately $267 million, or
66%, of the Bank's loan portfolio, which excludes loans held for sale, 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, 2003, adjustable-rate and fixed-rate loans
totaled approximately 69% and 31%, 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, 2003.
At December 31,
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2003 2002 2001 2000 1999
----------------- ------------------- ---------------- --------------- ---------------
(Dollars in thousands)
Amount % Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ --- ------ ---
Real estate:
Construction and land development $ 57,598 14.34% $ 51,431 13.16% $ 62,142 16.64% $ 37,542 10.80% $ 1,497 0.45%
Mortgage:
1-4 family residential 206,476 51.46 204,395 52.29 209,622 56.13 234,383 67.45 253,857 75.83
Multi-family residential 13,357 3.33 17,044 4.36 15,626 4.18 17,081 4.92 17,166 5.13
Commercial 91,627 22.84 87,257 22.32 55,664 14.90 31,300 9.01 38,765 11.58
Equity line 16,006 3.99 14,541 3.72 13,131 3.52 11,954 3.44 9,772 2.92
Other 359 0.09 363 0.09 254 0.07 174 0.05 78 0.02
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 385,423 96.05 375,031 95.95 356,439 95.44 332,434 95.67 321,135 95.93
Commercial, industrial and agricultural 14,599 3.64 13,717 3.51 13,430 3.60 10,970 3.16 10,653 3.18
Consumer 6,069 1.52 6,396 1.64 7,285 1.95 7,236 2.08 5,443 1.63
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total gross loans 406,091 101.21 395,144 101.09 377,154 100.99 350,640 100.91 337,231 100.74
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Less:
Unearned discounts and net deferred fees 1,402 0.35 1,331 0.34 1,173 0.31 994 0.29 1,182 0.35
Allowance for loan losses 3,447 0.86 2,937 0.75 2,523 0.68 2,160 0.62 1,306 0.39
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Net loans $401,242 100.00% $390,876 100.00% $373,458 100.00% $347,486 100.00% $334,743 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
4
The following table sets forth as of December 31, 2003, 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
-------- ----------------- ------- ---------
(In thousands)
Real Estate:
Construction and land
development $ 30,836 $ 13,368 $ 13,394 $ 57,598
Mortgage
1-4 family residential 13,575 17,708 175,193 206,476
Multi-family residential 3,663 5,097 4,597 13,357
Commercial 13,592 65,408 12,627 91,627
Equity line 3,391 435 12,180 16,006
Other 57 302 -- 359
Commercial, Industrial and
Agricultural 6,925 6,636 1,038 14,599
Consumer 3,029 2,764 276 6,069
-------- -------- -------- ---------
Total $ 75,068 $111,718 $219,305 $ 406,091
======== ======== ======== =========
The next table shows at December 31, 2003, the dollar amount of all the
Bank's loans due after December 31, 2004 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 $ 53,329 $ 51,227 $ 104,556
Floating or adjustable rates 58,389 168,078 226,467
--------- ---------- ----------
Total $ 111,718 $ 219,305 $ 331,023
========= ========== ==========
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 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 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 the ARM at the fully indexed
rate. While the proportion of fixed and adjustable-rate loan originations in the
Bank's portfolio largely depend 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. The Bank offers 1/1, 3/1 and 5/1 ARM products. These loans
adjust annually after the end of the first one, three or five-year period. A
"Low Doc" program is available for the nonconforming loans.
5
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 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, 2003, the Bank had $13.4 million of such loans, representing
3.3% 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 $57.6
million, or 14.3%, of the Bank's total loan portfolio at December 31, 2003. 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.
6
The Bank also originates 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 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, 2003
regarding the dollar amount of construction loans secured by real estate and
real estate mortgage loans in the Bank's portfolio. 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, 2003 (the "Annual Report").
(In thousands)
Real estate - construction:
1-4 family residential $ 14,100
Multi-family residential 17,474
Commercial 26,024
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Total $ 57,598
===========
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE: Loans secured by
nonresidential real estate constituted approximately $92.0 million, or 22.9% of
the Bank's total loan portfolio at December 31, 2003. 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, 2003, the Bank's consumer loan portfolio
totaled approximately $6.1 million, representing 1.5% of the Bank's total loans
receivable portfolio. 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, 2003,
the Bank's home equity loan portfolio totaled approximately $16.0 million,
representing 4.0% of its total loan portfolio.
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, 2003, these loans
totaled approximately $14.6 million or 3.6% of the Bank's total loan portfolio.
Management of Cooperative Bank believes that these loans are attractive to the
Bank because 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 repayments 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 repayments
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 many loan products available for purchasing or
refinancing mortgage loans. These products include, but are not limited to
conventional, jumbo, FHA, VA, 100% Rural Development financing, nonconforming
(B/C), lot loans, construction permanent, and no-income verification loans, as
well as other niche products.
The primary risk associated with these loans is the investor lock expiring
in a rising rate environment. This would cause the loan to lose value and could
cause a loss when the loan is subsequently sold in the secondary market.
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 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
8
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 1/4% per annum of the unpaid balance of each loan. As
of December 31, 2003, the Bank was servicing approximately 782 loans for others
aggregating approximately $44.9 million.
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, 2003, Cooperative Bank had outstanding loan commitments of
approximately $6.8 million and Lumina had approximately $3.0 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, 2003, the Bank had
accruing loans which were contractually past due 90 or more days totaling
$147,000.
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, 2003, the Bank had one loan in
non-accrual status with an aggregate principal balance of $120,000, which is
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, 2003,
the Bank owned no property acquired as the result of foreclosure or by deed in
lieu of foreclosure and
9
classified as "real estate owned." At December 31, 2003, the Bank had 19 loans
in the process of foreclosure and/or bankruptcy with an aggregate principal
balance of approximately $890,000. Loans in bankruptcy paying as agreed are not
included in nonperforming 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.
The following table sets forth information with respect to the Bank's
nonperforming 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,
--------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(Dollars in thousands)
Non accruing loans $ 120 $ 335 $ 505 $ 333 $ 267
Accruing loans which are contractually
past due 90 days or more 147 249 2,563 358 934
--------- --------- --------- --------- --------
Total $ 267 $ 584 $ 3,068 $ 691 $ 1,201
========= ========= ========= ========= ========
Percentage of total loans (1) .07% .15% .81% .20% .36%
========= ========= ========= ========= ========
Other nonperforming assets (2) $ -- $ 619 $ 759 $ 234 $ 245
========= ========= ========= ========= ========
Total nonperforming assets $ 267 $ 1,203 $ 3,827 $ 925 $ 1,446
========= ========= ========= ========= ========
Total nonperforming assets to total assets .05% .24% .84% .22% .35%
========= ========= ========= ========= ========
- ---------------
(1) Total loans do not include loans held for sale.
(2) Other nonperforming 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, 2003, gross interest income of
approximately $9,000 would have been recorded on nonaccrual loans had such loans
been current throughout the period. No interest income from such loans was
included in income for the year ended December 31, 2003.
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. The Bank increased the unallocated
allowance at December 31, 2003 because of the possibility of additional loan
losses due to the property damage that occurred on the North Carolina coast from
Hurricane Isabel in October 2003.
10
The following table analyzes activity in the Bank's allowance for loan
losses for the periods indicated.
Year Ended December 31,
----------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance at beginning of period $ 2,937 $ 2,523 $ 2,160 $ 1,306 $ 1,178
Provision for loan losses 740 740 460 970 210
Gross loans charged-off (237) (360) (106) (146) (94)
Gross recoveries 7 34 9 30 12
--------- -------- -------- -------- --------
Balance at end of period $ 3,447 $ 2,937 $ 2,523 $ 2,160 $ 1,306
========= ======== ======== ======== ========
Ratio of net charge-offs to average
loans outstanding during the period .06% .08% .03% .03% .03%
========= ======== ======== ======== ========
Ratio of loan loss reserve to total loans .84% .70% .67% .62% .39%
========= ======== ======== ======== ========
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,
------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------- ------------------ ------------------- ------------------ ------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ----- ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Real estate :
Construction and land development $ 499 14% $ 511 13% $ 672 16% $ 428 10% 15 1%
Mortgage:
1-4 family residential 814 51 854 52 698 56 499 67 530 74
Multi-family residential 160 3 145 4 143 4 213 5 163 5
Commercial 1,146 22 911 22 589 15 526 9 380 12
Equity line 150 4 135 4 132 3 65 3 15 3
Other 3 -- 3 -- 2 -- 2 1 1 --
------ --- ------ --- ------ --- ------ --- ------ ---
Total real estate loans 2,772 94% 2,559 95% 2,236 94% 1,733 95% 1,104 95%
Commercial, industrial &
agricultural 138 4 137 3 214 4 166 3 152 3
Consumer 58 2 58 2 70 2 77 2 50 2
Unallocated 479 -- 183 -- 3 -- 184 -- -- --
------ --- ------ --- ------ --- ------ --- ------ ---
Total gross loans $3,447 100% $2,937 100% $2,523 100% $2,160 100% 1,306 100%
====== === ====== === ====== === ====== === ====== ===
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,
-------------------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Securities held to maturity:
U.S. Government and agency securities $ -- $ 5,000 $ 5,000
Mortgage-backed securities 3,806 2,860 --
---------- ------- --------
Total securities held to maturity $ 3,806 $ 7,860 $ 5,000
Securities available for sale:
U.S. Government and agency securities $ 25,506 $19,663 $ 25,758
Mortgage-backed securities 11,489 14,806 11,123
Marketable equity securities 5,050 5,074 5,099
Corporate bond 1,568 2,532 990
---------- ------- --------
Total securities available for sale $ 43,613 $42,075 $ 42,970
Total investment securities portfolio $ 47,419 $49,935 $ 47,970
========== ======= ========
13
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, 2003.
After One After Five More than Total Investment
One Year or Less Through Five Years Through Ten Years Ten Years Portfolio
----------------- ------------------- ------------------ ---------------- ----------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Fair Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Securities held to maturity:
U.S. government and agency
securities $ -- -- $ -- -- $ -- -- $ -- -- $ -- $ -- --
Mortgage-backed securities -- -- -- -- -- -- 3,806 5.51% 3,806 3,890 5.51%
----- ----- ------- ---- ------- ---- -------- ----- ------- ------- ----
Total Securities $ -- -- $ -- -- $ -- -- $ 3,806 5.51% $ 3,806 $ 3,890 5.51%
Securities available for sale:
U.S. government and agency
securities $ 202 2.81% $15,240 4.08% $10,064 4.21% $ -- -- $25,506 $25,506 4.12%
Mortgage-backed securities -- -- -- -- -- -- 11,489 4.74% 11,489 11,489 4.74%
Marketable equity securities -- -- -- -- -- -- 5,050 6.14% 5,050 5,050 6.14%
Corporate bond -- -- 1,568 5.73% -- -- -- -- 1,568 1,568 5.73%
----- ----- ------- ---- ------- ---- ------- ---- ------- ------- ----
Total securities available
for sale $ 202 2.81% $16,808 4.22% $10,064 4.21% $16,539 5.16% $43,613 $43,613 4.58%
Total investment
securities portfolio $ 202 2.81% $16,808 4.22% $10,064 4.21% $20,345 5.23% $47,419 $47,503 4.65%
===== ===== ======= ==== ======= ==== ======= ==== ======= ======= ====
14
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.
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,
2003.
Certificates
Maturity Period of Deposit
--------------- ------------
(In thousands)
Three months or less $ 33,644
Over three through six months 23,753
Over six months through twelve
months 22,980
Over twelve months 11,457
---------------
Total $ 91,834
===============
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 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 is currently being renegotiated, but the financial
institution continues to supply sufficient funds for loans originated by Lumina.
For further information regarding the Bank's borrowings, see Note 6 of
Notes to Consolidated Financial Statements in the Annual Report.
15
COMPETITION
Cooperative Bank encounters strong competition both in the attraction of
deposits and in the making of real estate and other loans. The Bank's 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 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 they charge, and the
efficiency and quality of services they provide 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, 2003, the Bank had 149 full-time employees and 7 part-time
employees. Lumina had 38 full time employees and 1 part-time employee at
December 31, 2003. None of the employees are represented by a collective
bargaining unit. Both companies believe their relationship with the employees is
good.
EXECUTIVE OFFICERS
At December 31, 2003, the executive officers of the Bank who were not also
directors were as follows:
Age at
Name December 31, 2003 Position
- ---- ----------------- --------
O.C. Burrell, Jr. 55 Executive Vice President and Chief Operating Officer
Todd L. Sammons, CPA 42 Senior Vice President and Chief Financial Officer
Dickson B. Bridger 44 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 a member
of the executive committee and a director of the Child Development Center. He is
also a director of the Wilmington Symphony 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 Church Council and several
committees at Pine Valley United Methodist Church and is an active member of
Winter Park Optimist.
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 West
Rotary and serves as an Elder of the Little Chapel on the Boardwalk church at
Wrightsville Beach, North Carolina.
16
REGULATION
REGULATION OF THE COMPANY
GENERAL: The Company is registered as a public company with the Securities
and Exchange Commission (the "SEC"), its common stock is quoted on The Nasdaq
Stock Market, Inc. ("Nasdaq") and it is registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended (the "BHCA") 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 state commercial bank holding company, the Company is subject to
supervision by the Commissioner under North Carolina law. As a public company,
the Company is required to file annual, quarterly and current reports with the
SEC. 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 BHCA.
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.
ACQUISITIONS: Under the BHCA, 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 BHCA 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 BHCA, any company must obtain approval of the Federal Reserve
Board prior to acquiring control of the Company or the Bank. For purposes of the
BHCA, "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 BHCA), 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 vote 25% or more of any voting securities
or to direct the management or policies of a bank holding company or an insured
bank.
DIVIDENDS: 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
17
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.
STOCK REPURCHASES: 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.
SARBANES-OXLEY ACT OF 2002: On July 30, 2002, the Sarbanes-Oxley Act of
2002 ("SOX") was signed into law. SOX contains provisions addressing corporate
and accounting fraud which both amended the Securities Exchange Act of 1934, as
amended (the "Act") and directed the SEC to promulgate rules. SOX provided for
the establishment of a new Public Company Accounting Oversight Board ("PCAOB"),
to enforce auditing, quality control and independence standards for firms that
audit public reporting companies and will be funded by fees from all public
reporting companies. It is unlawful for any person that is not a registered
public accounting firm ("RPAF") to audit a public 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 SEC has prescribed rules requiring inclusion of an internal control
report and assessment by management in the annual report to shareholders. SOX
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, SOX
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. SOX requires chief executive officers and chief
financial 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.
SOX also increases the oversight and authority of audit committees of
publicly traded companies. SOX imposed higher standards for auditor independence
and restricts provisions of consulting services by auditing firms to companies
they audit. Any non-audit services (subject to a 5% de minimis exception) being
provided to an audit client require pre-approval by the Company's audit
committee members. Audit committee members must be independent and are barred
from accepting consulting, advisory or other compensatory fees from the issuer.
In addition, all public reporting companies must disclose whether at least one
member of the committee is an audit committee "financial expert" (as such terms
is defined by the SEC rules) and if not, why not. Audit committees of Company's
listed on the Nasdaq must be composed of three directors who meet the definition
of "independent" set forth both in NASD Rule 4200(a)(15) and Section 10A(m) and
Rule 10A-3 of the Act, and whose audit committee has a written charter
containing specific elements set forth in these same NASD and SEC rules and
sections. A Company with stock quoted on the Nasdaq that fails to be in
compliance with these audit committee requirements, as well as additional Nasdaq
requirements, will be delisted.
Due to SOX, longer prison terms will 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.
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.
18
REGULATION OF THE BANK
GENERAL: As a North Carolina chartered commercial bank with deposits
insured by the Savings Association Insurance Fund ("SAIF") administered by the
FDIC, 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 the 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 FDIC describing its
activities and financial condition. The Bank is also subject to certain reserve
requirements promulgated by 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.
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 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.
19
The Bank was in compliance with both the FDIC capital requirements and the
North Carolina net worth requirement at December 31, 2003. 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
the 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, an
institution'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).
20
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.
21
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 and Regulation W
promulgated thereunder. 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 nonaffiliate. 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, 2003 of
approximately $4.2 million.
FEDERAL RESERVE BOARD REGULATION: Pursuant to regulations of the Federal
Reserve Board, all FDIC-insured depository institutions must maintain average
daily reserves of 3% on the first $6.0 million to $42.1 million of transaction
accounts, plus 10% on the remainder. 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, 2003, 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.
PATRIOT ACT: The Patriot Act is intended to strengthen U.S. law
enforcement's and the intelligence communities' abilities to work cohesively to
combat terrorism on a variety of fronts. The potential impact of the Patriot Act
on financial institutions of all kinds is significant and wide ranging. The
Patriot Act contains sweeping anti-money laundering and financial transparency
laws and imposes various regulations including standards for verifying client
identification at account opening, and rules to promote cooperation among
financial institutions, regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.
22
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 North Carolina or
(iii) appraised valuation of property in North Carolina. The filing of
consolidated returns is not permitted under North Carolina law. Lumina is
subject to an annual corporate income tax in North Carolina, South Carolina and
Virginia at a rate of 6.90%, 5.00% and 6.00% respectively.
23
ITEM 2. PROPERTIES
- -------------------
The Bank operated 21 offices throughout the coastal and inland communities
of eastern North Carolina at December 31, 2003. The Bank has a total of 6
offices that are subject to leases. The land is leased for 3 of these offices on
which the Bank has built its own buildings. Two offices are 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
- --------------------------
Although the Company and Bank, from time to time, are involved in various
legal proceedings in the normal course of business, there are no material legal
proceedings to which the Company or the Bank or any subsidiary is a party to
which any of their property is subject.
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, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
- -------------------------------------------------------------------------------
The information contained under the section captioned "Corporate
Information" in the Annual Report, filed as Exhibit 13 hereto, is incorporated
herein 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
and 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 Report of Independent Accountants, Consolidated Financial Statements
and Notes to Consolidated 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
- ------------------------------------------------------------------------
The information contained in the section captioned "Relationship With
Public Accountants" in the Company's definitive Proxy Statement for the
Company's 2004 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
24
ITEM 9A. CONTROLS AND PROCEDURES
- ---------------------------------
As of the end of the period covered by this report, management of the
Company carried out an evaluation, under the supervision and with the
participation of the Company's principal executive officer and principal
financial officer, of the effectiveness of the Company's disclosure controls and
procedures. Based on this evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and procedures are effective in ensuring that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. It should be noted that the design of the
Company's disclosure controls and procedures is based in part upon certain
reasonable assumptions about the likelihood of future events, and there can be
no reasonable assurance that any design of disclosure controls and procedures
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote, but the Company's principal executive and
financial officers have concluded that the Company's disclosure controls and
procedures are, in fact, effective at a reasonable assurance level.
There have been no changes in the Company's internal control over financial
reporting (to the extent that elements of internal control over financial
reporting are subsumed within disclosure controls and procedures) identified in
connection with the evaluation described in the above paragraph that occurred
during the Company's last fiscal quarter, that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
For information concerning the Board of Directors, the identification of
the Audit Committee and the audit committee financial expert, the information
contained under the section captioned "Proposal I -- Election of Directors" in
the Proxy Statement is incorporated herein by reference.
The information contained under the caption "Executive Officers" under Part
I of this Form 10-K is incorporated herein by reference.
Information regarding delinquent Form 3, 4 and 5 filers is incorporated
herein by reference to the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.
The Company has adopted a Code of Ethics that applies to the Company's
directors, officers and employees, including its principal executive officer,
principal financial officer and principal accounting officer and it is posted on
our website at www.coop-bank.com.
The Company intends to satisfy the disclosure requirements under Item 10 of
Form 8-K regarding an amendment to, or a waiver from, a provision of its Code of
Ethics by posting such information on its internet website at www.coop-bank.com.
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.
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
- ----------------------------------------------------------------------------
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Information required by this item is incorporated herein by reference
to the section 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 section 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.
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth certain information as of December 31,
2003 with respect to the Company's equity compensation plans.
(a) (b) (c)
Weighted-average Number of securities remaining
Number of securities to exercise available for future issuance under
be issued upon exercise price of outstanding equity compensation
of outstanding options, options, warrants plans (excluding securities
warrants & rights and rights reflected in column (a))
----------------------- -------------------- -----------------------------------
Equity compensation plans
approved by security holders 128,443 $11.01 135,062
Equity compensation plans not
approved by security holders -- -- --
------- ------ -------
Total 128,443 $11.01 135,062
======= ====== =======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Transactions with Management" in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- ------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Audit and Other Fees Paid to the Independent Public
Accountant" in the Proxy Statement.
26
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) LIST OF DOCUMENTS FILED AS A PART OF THIS REPORT.
------------------------------------------------
(1) Financial Statements. The following consolidated
--------------------- financial statements are incorporated
by reference from Item 8 hereof:
Report of Independent Auditors
Consolidated Statements of Financial Condition as of December
31, 2003 and 2002
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002, and 2001
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. All schedules for which
------------------------------ provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are omitted, except for the report below,
because of the absence of conditions under which they are
required or because the required information is included in
the consolidated financial statements and related thereto.
The report of KPMG LLP with respect to the consolidated
financial condition, operations, comprehensive income, stockholders' equity and
cash flows for the years ended December 31, 2002 and 2001.
(3) Exhibits. The following is a list of exhibits filed as part of
--------- this Annual Report on Form 10-K or incorporated
herein by reference and is also the Exhibit Index.
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
10.11***** Executive Indexed Retirement Agreements between Cooperative Bank and Frederick Willetts, III and
O. C. Burrell, Jr.
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 Fiscal Year Ended December 31, 2003
21 Subsidiaries
23.1 Consent of Dixon Hughes PLLC
23.2 Consent of KPMG LLP
27
NO. DESCRIPTION
--- -----------
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32 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, 1997.
**** Incorporated by reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 2000.
*****Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 2001.
(b) REPORTS ON FORM 8-K. The Company filed the following Current Report on
--------------------
Form 8-K during the last quarter covered by this report.
Date of Report Item(s) Reported Financial Statement Filed
-------------- ---------------- -------------------------
October 23, 2003 7, 12 N/A
(c) EXHIBITS. The exhibits required by Item 601 of Regulation S-K are
---------
either filed as part of this Annual Report on Form 10-K or incorporated by
reference herein.
(d) FINANCIAL STATEMENTS AND SCHEDULES EXCLUDED FROM ANNUAL REPORT. There
----------------------------------------------------------------
are no other financial statements and financial statement schedules which were
excluded from the Annual Report pursuant to Rule 14a-3(b) which are required to
be included herein.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 17, 2004 By: /s/Frederick Willetts, III
-----------------------------------------
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 17, 2004
-------------------------------------------------
Frederick Willetts, III
President, Chief Executive Officer and Chairman
(Principal Executive Officer and Director)
By: /s/Todd L. Sammons Date: March 17, 2004
-------------------------------------------------
Todd L. Sammons
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/Paul G. Burton Date: March 17, 2004
-------------------------------------------------
Paul G. Burton
(Director)
By: /s/Russell M. Carter Date: March 17, 2004
-------------------------------------------------
Russell M. Carter
(Director)
By: /s/F. Peter Fensel, Jr. Date: March 17, 2004
-------------------------------------------------
F. Peter Fensel, Jr.
(Director)
By: /s/James D. Hundley Date: March 17, 2004
-------------------------------------------------
James D. Hundley
(Director)
By: /s/H. Thompson King, III Date: March 17, 2004
-------------------------------------------------
H. Thompson King, III
(Director)
By: /s/R. Allen Rippy Date: March 17, 2004
-------------------------------------------------
R. Allen Rippy
(Director)
By: /s/O. Richard Wright, Jr. Date: March 17, 2004
-------------------------------------------------
O. Richard Wright, Jr.
(Director)