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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997 Commission File
Number: 0-24626
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
For the Transition Period from __________ to __________
COOPERATIVE BANKSHARES, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1886527
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Market Street, Wilmington, North Carolina 28401
- ---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(910) 343-0181
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. YES X NO .
------ ------
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. [ ]
As of February 10, 1998, the aggregate market value of the voting
stock held by non-affiliates of the registrant, based on the
closing sales price of the registrant's common stock as quoted on
the National Association of Securities Dealers, Inc. Automated
Quotation National Market was $50,869,376 (2,481,433 shares at
$20.50 per share). For purposes of this calculation, directors,
executive officers and beneficial owners of more than 5% of the
registrant's outstanding voting stock are treated as affiliates.
As of February 10, 1998 there were issued and outstanding
2,984,396 shares of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year
Ended December 31, 1997. (Parts I and II)
2. Portions of Proxy Statement for the 1998 Annual Meeting of
Stockholders. (Part III)
PART I
ITEM 1. BUSINESS
- -----------------
GENERAL
THE COMPANY. Cooperative Bankshares, Inc. (the "Company") is
a registered savings bank holding company incorporated in North
Carolina in 1994. The Company was formed for the purpose of
serving as the holding company for Cooperative Bank for Savings,
Inc., SSB ("Cooperative Bank" or the "Bank"), a North Carolina
chartered savings bank. The Company's primary activities consist
of holding the stock of Cooperative Bank and operating the
business of the Bank. Accordingly, the information set forth in
this report, including financial statements and related data,
relates primarily to Cooperative Bank.
COOPERATIVE BANK. Cooperative Bank was organized as a North
Carolina-chartered building and loan association in 1898. The
Bank has been a member of the Federal Home Loan Bank System since
1933 and its deposits have been federally insured since 1940. In
August 1991, the Bank converted to a North Carolina-chartered
stock savings and loan association and on October 1, 1992, the
Bank converted from a North Carolina-chartered savings and
loan association to a North Carolina-chartered stock savings
bank. The Bank's deposit accounts are insured up to applicable
limits by the Federal Deposit Insurance Corporation ("FDIC"). At
December 31, 1997, Cooperative Bank had total assets of $369.1
million, deposits of $288.7 million and stockholders' equity of
$28.3 million.
The Bank is chartered under the laws of the state of North
Carolina to engage in general banking business. Cooperative Bank
offers a wide range of retail banking services including deposit
services, banking cards and alternative investments products.
These funds are used for the extension of credit through home
loans, commercial loans and other installment credit such as home
equity, auto and boat loans and check reserve.
Cooperative Bank conducts its operations through its main
office in Wilmington, North Carolina and 16 offices throughout
eastern North Carolina. The Bank's executive offices are located
at 201 Market Street, Wilmington, North Carolina 28401 and its
telephone number is (910) 343-0181. The Bank considers its
primary market for deposits and lending activities to be the
communities of eastern North Carolina, extending from the
Virginia to the South Carolina borders.
Since opening its first branch office in 1954, the Bank has
pursued a strategy of steady, moderate growth through the
promotion of banking services in eastern North Carolina. In
1983, the Bank acquired Seaboard Savings and Loan Association, a
state-chartered stock savings association with assets of
approximately $60 million and with four offices located in
northeastern North Carolina, and thereby extended its market area
to the northern border of North Carolina.
MARKET AREA
Cooperative Bank considers its primary market area to be the
communities of eastern North Carolina extending from the Virginia
to the 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 65,000, is also reliant upon summer tourism but is
diversified into the chemicals, shipping, aircraft engines,
nuclear fuels, and fiber optics industries. Wilmington also
serves as a regional retail center. The inland communities
served by the Bank (concentrated in Bladen, Brunswick, Columbus,
Duplin, Hyde, Martin, Beaufort and Pender Counties) are largely
service areas for the agricultural activities in eastern North
Carolina.
1
LENDING ACTIVITIES
GENERAL. Cooperative Bank's lending activities are
concentrated on the origination of conventional mortgage
loans for the purpose of constructing, financing or refinancing
one- to four family residential properties. As of December 31,
1997, $272.3 million, or 88.5%, of the Bank's loan portfolio
consisted of loans collateralized by one-to-four family
residential properties. At that date, approximately 91.6% of the
Bank's total loan portfolio consisted of loans collateralized by
residential real estate. To a lesser extent, the Bank originates
multi-family and nonresidential real estate loans, home equity
lines of credit loans and consumer loans. While continuing to
place primary emphasis on residential mortgage loans, the Bank
continues to be active in its nonresidential real estate lending,
involving loans secured by small commercial properties with
balances generally ranging from $100,000 to $1,000,000. See " --
Loans Secured by Nonresidential Real Estate." The Bank's primary
emphasis is to originate adjustable rate loans with the fixed
rate loan as an option. As of December 31, 1997, before the loan
loss reserve, adjustable rate loans totaled $208.3 million, or
67.7%, and fixed rate loans totaled $99.3 million, or 32.3%, of
the Bank's total net loan portfolio.
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.
At December 31,
---------------------------------------------------
1997 1996 1997
--------------- --------------- ----------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ ----
Mortgage loans secured by real estate:
1-4 family residential properties. . . . . $232,977 81.26% $226,765 86.12% $203,577 87.00%
Multi-family (5 or more) residential
properties. . . . . . . . . . . . . . . 4,835 1.69 4,959 1.88 5,185 2.21
Nonresidential property. . . . . . . . . . 4,891 1.71 5,205 1.98 7,145 3.05
1-4 family residential properties under
construction . . . . . . . . . . . . . . 24,908 8.69 23,152 8.79 17,684 7.56
Multi-family (5 or more) residential
property under construction. . . . . . . -- -- 267 .10 -- --
Nonresidential properties under
construction . . . . . . . . . . . . . . 469 .16 752 .29 698 .30
Installment loans secured by real estate:
1-4 family residential properties (1). . . 12,134 4.23 8,820 3.35% 5,368 2.29
Multi-family (5 or more) residential
properties . . . . . . . . . . . . . . . 1,442 .50 212 .08 -- --
Nonresidential property. . . . . . . . . . 4,526 1.58 475 .18 -- --
1-4 family residential properties under
construction . . . . . . . . . . . . . . 2,327 .81 -- -- -- --
Multi-family (5 or more) residential
property under construction. . . . . . . 2,996 1.05 2,400 .91 -- --
Nonresidential properties under
construction . . . . . . . . . . . . . . 7,868 2.74 -- -- -- --
Consumer loans, secured and unsecured. . . . 4,397 1.53 3,564 1.35 3,351 1.43
Business loans, secured and unsecured. . . . 2,586 .90 510 .19 -- --
Business and consumer loans, secured and
unsecured under construction . . . . . . . 1,213 .42 525 .20 -- --
-------- ------ -------- ------ -------- ------
Total loans . . . . . . . . . . . . . 307,569 107.27 277,606 105.42 243,008 103.84
-------- ------ -------- ------ -------- ------
Less:
Undisbursed portion of construction
loans. . . . . . . . . . . . . . . . . . 18,729 6.53 12,205 4.63 6,958 2.97
Discounts and other. . . . . . . . . . . . 1,274 .44 1,281 .49 1,305 .56
Loan loss reserve. . . . . . . . . . . . . 874 .30 807 .30 737 .31
-------- ------ -------- ------ -------- ------
Net loans. . . . . . . . . . . . . . . $286,692 100.00% $263,313 100.00% $234,008 100.00%
======== ====== ======== ====== ======== ======
___________
(1) Includes residential 1-4 family home equity loans.
2
RESIDENTIAL REAL ESTATE LOANS. The Bank's primary lending
activity consists of the origination of one-to four
family residential mortgage loans collateralized by property
located in its market area. While a majority of the Bank's
residential real estate loans are collateralized by
owner-occupied primary residences, the Bank's portfolio also
includes some second home and investor properties. The Bank
also originates residential lot loans collateralized by vacant
lots located in approved subdivisions.
The Bank's loan originations are generally for a term of 15
to 30 years, amortized on a monthly basis, with principal and
interest due each month. Residential real estate loans often
remain outstanding for significantly shorter periods than their
contractual terms. Borrowers may refinance or prepay loans at
their option.
The Bank has offered adjustable rate mortgage loans ("ARMs")
since 1979 and presently offers one year ARMs with rate
adjustments tied to prime or the weekly average yield on U.S.
Treasury Securities adjusted to a constant maturity of one year.
The Bank offers introductory interest rates on ARMs which are
not 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 an ARM at the fully indexed rate. While
the proportion of fixed and adjustable rate loan originations in
the Bank's portfolio largely depends on the level of interest
rates, the Bank has strongly emphasized ARMs in recent years and
has been relatively successful in maintaining the level of one
year ARM originations even during periods of declining interest
rates. In addition to the one year ARM, the Bank offers 3/1
and 5/1 ARM products. These loans adjust annually after the end
of the first three or five year period. A non-conforming fixed
rate loan is offered at a rate that is 1/2% higher than the
conforming fixed rate loan. A "Low Doc" program is available
for the non-conforming loans.
Cooperative Bank also originates 15 to 30 year fixed rate
mortgage loans on one- to four-family units. The Bank generally
charges a higher interest rate on such loans if the property is
not owner-occupied. The majority of 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. The Bank has sold fixed rate loans in the secondary
market from time to time when such sales were consistent with
the Bank's liquidity and asset/liability goals.
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, 1997, the Bank had
$9.3 million of such loans, representing 3.0% 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 and condominiums. Construction loans
amounted to approximately $39.8 million, or 12.9%, of the Bank's
total loan portfolio at December 31, 1997. 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. Substantially all of the Bank's
construction loans are structured to be converted to permanent
loans at the end of the construction phase. At the time the
loan is
3
converted to a permanent loan and assumed by the ultimate
purchaser, the Bank underwrites the creditworthiness of the
ultimate purchaser prior to approving the assumption, when the
original borrower is released from liability. Construction/
permanent loans have either fixed or adjustable rates and have
terms of up to 30 years. Occasionally, the Bank 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.
Construction loans afford the Bank the opportunity to
increase the interest rate sensitivity of its loan portfolio.
The Bank's risk of loss on a construction loan 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.
The Bank's underwriting criteria are designed to evaluate
and minimize the risks of each construction loan. Among other
things, the Bank considers the reputation of the borrower and
the contractor, the amount of the borrower's equity in the
project, independent valuations and reviews of cost estimates,
pre-construction sale and leasing information, and cash flow
projections of the borrower. In addition, the Bank reviews the
builder's current financial reports, tax returns, credit reports
and, if the builder has not previously borrowed from Cooperative
Bank, credit references. The Bank only makes construction loans
within its primary market area.
The Bank has in the past originated loans for the
acquisition and development of unimproved property to be
used for residential purposes. Land development lending is
generally considered to involve a higher level of credit 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, 1997 regarding the dollar amount of construction
loans secured by real estate and real estate mortgage loans
maturing in the Bank's portfolio based on their contractual
terms to maturity. The majority of these loans have provisions
to convert to permanent loans upon completion of construction.
For further information, see Note 5 of Notes to Consolidated
Financial Statements included in the Company's Annual Report to
Stockholders for the Fiscal Year Ended December 31, 1997 (the
"Annual Report").
Due During the
Year Ended
December 31,
1998
---------------
(In thousands)
Real estate - construction
Residential. . . . . . . . . . . . $30,231
Nonresidential . . . . . . . . . . 8,337
Business and Industrial. . . . . . 1,213
-------
Total . . . . . . . . . . . . . $39,781
=======
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Loans secured
by nonresidential real estate constituted approximately $17.8
million, or 5.8%. of the Bank's total loans at December 31,
1997. The Bank originates both construction loans and permanent
loans on nonresidential properties. Nonresidential real estate
loans are generally made in amounts up to 75% 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.
4
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, 1997, the Bank's consumer
loan portfolio totaled approximately $4.4 million, representing
1.4% of the Bank's total loans receivable. Approximately $1.8
million was secured by the borrower's savings deposits. Other
consumer loans including automobile, home improvement, boat and
personal loans totaled approximately $2.6 million as of
December 31, 1997. 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, 1997, the Bank's home equity
loan portfolio totaled approximately $8.1 million, representing
2.6% of its total loans receivable.
Consumer loans entail greater risk than do residential
mortgage loans, particularly in the case of consumer loans
which are unsecured or collateralized by rapidly depreciable
assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan
balance as a result of the greater likelihood of damage, loss or
depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the
borrower. In addition, consumer loan collections are dependent
on the borrower's continuing financial stability, and thus are
more likely to be adversely affected by job loss, divorce,
illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Such loans may also give
rise to claims and defenses by a consumer loan borrower against
an assignee of such loans such as the Bank, and a
borrower may be able to assert against such assignee claims and
defenses which it has against the seller of the
underlying collateral.
NON-REAL ESTATE BUSINESS LENDING. In late 1996, the Bank
initiated a program for originating 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,
1997, these loans totaled approximately $3.8 million.
Management of Cooperative Bank believes that these loans are
attractive to the Bank in light of the typically higher interest
rate yields associated with them and the opportunity they
present for expanding the Bank's relationships with existing
customers and developing broader relationships with new
customers. Accordingly, the Bank plans to actively pursue this
type of lending in the future in an effort to maintain a
profitable spread between the Bank's average loan yield and its
cost of funds.
Unlike residential mortgage loans, which generally are made
on the basis of the borrower's ability to make repayment from
his or her employment and other income and which are
collateralized by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher
risk and typically are made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially
dependent on the success of the business itself. Further, the
collateral securing the loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the
success of the business. The management of Cooperative Bank
will seek to minimize these risks as the Bank's commercial
business loan portfolio grows by attempting to employ
conservative underwriting criteria.
LOAN SOLICITATION AND PROCESSING. Loan originations are
derived from a number of sources, including "walk-in" customers
at the Bank's offices and solicitations by Cooperative Bank
employees. The Bank also has agreements with third party
solicitors who provide loan applications to the Bank.
Loan applications are accepted at all full-service branches,
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 evaluation is acceptable.
5
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. Loans exceeding $700,000 up to
$1,000,000 can be approved by two members of the loan committee.
Any loan exceeding $1,000,000 is approved by the Bank's 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 loans under terms,
conditions and documentation which permit sale to the FHLMC,
FNMA or private investors in the secondary market. The Bank has
from time to time sold fixed rate, long term mortgage loans in
the secondary market to meet liquidity requirements or as part
of the asset/liability management program. In connection with
such sales, the Bank generally retains the servicing of the
loans (i.e., collection of principal and interest payments), for
which it generally receives a fee payable monthly of up to 3/8%
per annum of the unpaid balance of each loan. As of December
31, 1997, the Bank was servicing approximately 1,561 loans for
others aggregating approximately $65 million.
The Bank does not generally purchase loans, and purchased no
loans during the last three fiscal years.
LOAN COMMITMENTS. The Bank issues loan origination
commitments to qualified borrowers primarily for the
construction and purchase of residential real estate. Such
commitments are made on specified terms and conditions and
are typically for terms of up to 30 days. A non-refundable
appraisal, flood certificate and credit report fee is collected
at the time of application. Management estimates that
historically, less than 20% of such commitments expire unfunded.
At December 31, 1997, the Bank had outstanding loan origination
commitments of approximately $14.7 million. For further
information, see Note 5 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 or "points" for originating loans. Origination
fees generally are calculated as a percentage of the principal
amount of the mortgage loan and are charged to the borrower for
creation of the loan account. 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.
Loan origination 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 conditions
in mortgage markets, 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, 1997, the Bank owned approximately $251,000, net of
valuation reserves, of property acquired as the result of
foreclosure or by deed in lieu of foreclosure and classified as
"real estate owned."
NON-PERFORMING ASSETS AND ASSET CLASSIFICATION. Loans are
reviewed on a regular basis and are placed on a non-accrual
status when, in the opinion of management, the collection of
additional interest is doubtful. As of December 31, 1997, the
Bank had no loans in non-accrual status.
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 its fair value. Any required
write-down of the loan to its fair market value is charged to
the allowance for loan losses. At December 31, 1997, the Bank
had 12 loans in the process of foreclosure and/or
bankruptcy with a principal balance of approximately $300,963.
6
The following table sets forth information with respect to
the Bank's non-performing assets for the periods
indicated. During the periods shown, the Bank had no
restructured loans within the meaning of Statement of Financial
Accounting Standards ("SFAS") No. 15.
At December 31,
-----------------------------
1997 1996 1995
------ ------ ------
(Dollars in thousands)
Non-accruing loans:
Residential real estate. . . . . . . . . $ -- $ 787 $ 242
Accruing loans which are contractually
past due 90 days or more:
Real Estate:
Residential. . . . . . . . . . . . . . $ 332 $ 657 198
Nonresidential . . . . . . . . . . . . 25 8 3
----- ------ ------
Total . . . . . . . . . . . . . . . $ 357 $1,452 $ 443
===== ====== ======
Percentage of total loans. . . . . . . . . .12% .52% .18%
===== ====== ======
Other non-performing assets (1). . . . . . $ 251 $ 42 $ 329
===== ====== ======
Total non-performing assets. . . . . . . . $ 608 $1,494 $ 772
===== ====== ======
Total non-performing assets to total
assets . . . . . . . . . . . . . . . . . .16% .44% .25%
===== ====== ======
__________
(1) Other non-performing assets represents property acquired by the Bank
through foreclosure or repossession. This property is carried at fair
value less estimated costs of sale.
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 1d of
Notes to Consolidated Financial Statements in the Annual Report.
Allowance for Loan Losses. In establishing the appropriate
levels for the provision and the allowance for possible loan
losses, management considers a variety of factors, in addition
to the fact that an inherent risk of loss always exists in the
lending process. Consideration is given to, among other things,
the current and future impact of 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. Consideration is
also given to examinations performed by regulatory authorities
and the Bank's independent certified public accountants.
The following table analyzes activity in the Bank's
allowance for possible loan losses for the periods indicated.
Year Ended December 31,
-----------------------------
1997 1996 1995
------ ------ ------
(Dollars in thousands)
Balance at beginning of period . . . . . . . $ 807 $ 737 $ 737
Provision for possible loan losses . . . . . 153 156 3
Loans charged-off. . . . . . . . . . . . . . 86 86 3
----- ----- -----
Balance at end of period . . . . . . . . . . $ 874 $ 807 $ 737
===== ===== =====
Ratio of net charge-offs to average
loans outstanding during the period. . . . .03% .03% .001%
===== ===== =====
Ratio of loan loss reserve to total loans. . .28% .29% .31%
===== ===== =====
7
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.
INVESTMENT ACTIVITIES
The Bank is required under applicable regulations to
maintain liquid assets equal to at least 10% of its total
assets. For purposes of this requirement, liquid assets consist
of cash and readily marketable investments. Cooperative
Bank has generally maintained a liquidity portfolio in excess of
regulatory requirements. Liquidity levels may be increased or
decreased depending upon the yields on investment alternatives
and upon management's judgment as to the attractiveness of the
yields then available in relation to other opportunities and its
expectation of the level of yield that will be available in the
future, as well as management's projections as to the short term
demand for funds to be used in the Bank's loan origination and
other activities.
The following table sets forth the carrying value of the
Bank's investment portfolio at the dates indicated. For
additional information regarding the Bank's investments, see
Notes 2 and 3 of Notes to Consolidated Financial Statements in
the Annual Report.
At December 31,
-----------------------------
1997 1996 1995
------ ------ ------
(Dollars in thousands)
Interest-bearing deposits. . . . . . . . . $12,312 $ 9,084 $ 8,203
Securities:
Available for sale - at estimated
market value . . . . . . . . . . . . . 21,004 5,946 --
Held to maturity . . . . . . . . . . . . 21,044 21,054 21,063
Mortgage-backed and related securities:
Available for sale - at estimated
market value . . . . . . . . . . . . . 12,856 28,825 30,907
------- ------- -------
Total. . . . . . . . . . . . . . . . $67,216 $64,909 $60,173
======= ======= =======
From time to time, the Bank purchases mortgage-backed and
related securities guaranteed by the FHLMC, the Government
National Mortgage Association ("GNMA") or the FNMA. FHLMC and
FNMA mortgage-backed securities are participation certificates
issued and guaranteed by the FHLMC or the FNMA which represent
interests in pools of conventional mortgages originated by
savings institutions. GNMA mortgage-backed securities are
participation certificates issued and guaranteed by the GNMA
which represent interests in pools of mortgages insured by the
Federal Housing Administration or partially guaranteed by the
Veterans Administration. GNMA obligations are backed by the
full faith and credit of the United States. At December 31,
1997, the Bank held mortgage-backed securities, classified
as available for sale, with an amortized cost of approximately
$12.9 million, which represented 3.5% of the Bank's total
assets. At that date, the estimated aggregate market value and
carrying value of the mortgage-backed securities was $12.9
million. Mortgage-backed securities increase the quality of the
Bank's assets by virtue of the insurance and guarantees that
back them, their greater degree of liquidity over individual
mortgage loans, and their capacity to be used to collateralize
borrowings or other obligations of the Bank. However, a portion
of the Bank's mortgage-backed securities are long term, fixed
rate instruments and, in a rising interest rate environment, the
market value of such securities will decline. For further
information regarding the Bank's mortgage-backed securities
portfolio, see "Management's Discussion & Analysis" and Note 3
of Notes to Consolidated Financial Statements in the Annual
Report.
8
The following table sets forth the scheduled maturities,
carrying values, market values and average yields for the Bank's
investment portfolio at December
31, 1997.
One Year or Less One to Five Years Five to Ten Years
----------------- ----------------- -----------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- -------
(Dollars in thousands)
Interest-bearing deposits. . . $12,312 5.35% $ -- -- % $ -- -- %
U.S. government and
agency securities:
Available for sale . . . . . 4,997 5.86 16,007 6.07 -- --
Held to maturity . . . . . . -- -- -- -- 16,044 5.19
Mortgage-backed and related
securities:
Available for sale . . . . . -- -- 2,153 6.52 -- --
Held to maturity . . . . . . -- -- -- -- -- --
------- ------- -------
Total. . . . . . . . . . $17,309 5.50% $18,160 6.12% $16,044 5.19%
======= ======= =======
More than Ten Years Total Investment Portfolio
------------------- -----------------------------
Carrying Average Carrying Market Average
Value Yield Value Value Yield
-------- ------- -------- ------- --------
(Dollars in thousands)
Interest-bearing deposits. . . $ -- -- % $12,312 $12,312 5.35%
U.S. government and
agency securities:
Available for sale . . . . . -- -- 21,004 21,004 6.02
Held to maturity . . . . . . 5,000 6.21 21,004 20,348 5.43
Mortgage-backed and related
securities:
Available for sale . . . . . 10,703 6.35 12,856 12,856 6.38
Held to maturity . . . . . . -- -- -- -- --
------- ------- -------
Total. . . . . . . . . . $15,703 6.31% $67,216 $66,520 5.78
======= ======= =======
9
Subsidiary Activities
As a North Carolina-chartered savings bank, the Bank is
authorized to invest up to 10% of its assets in subsidiary or
service corporations engaged in activities that are permissible
to subsidiaries of federal savings associations. Currently,
subsidiaries of state-chartered savings banks generally may not
engage as principal in any activity that is not permissible for
a subsidiary of a national bank unless the FDIC determines that
the activities do not pose a significant risk to the appropriate
insurance fund and the bank complies with all applicable capital
requirements.
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 on a
short term basis 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, nor
does it actively solicit funds outside of its primary market
area. For further information regarding the Bank's deposits,
see "Management's Discussion and Anaysis" and Note 7 of Notes to
Consolidated Financial Statements in the Annual Report.
BORROWINGS. Deposits are the primary source of funds for
Cooperative Bank's lending and investment activities and for its
general business purposes. If the need arises, the Bank may
obtain advances from the FHLB of Atlanta to supplement its
supply of loanable funds and to meet deposit withdrawal
requirements. Advances from the FHLB are typically secured by
the Bank's stock in the FHLB and a lien on a portion of the
Bank's first mortgage loans. The Bank has utilized FHLB
advances in recent periods in order to meet a larger than
typical loan demand in the Bank's market area.
The FHLB of Atlanta functions as a central reserve bank
providing credit for the Bank and other member savings
associations and 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.
From time to time the Bank has borrowed funds under reverse
repurchase agreements and dollar rolls. Under a reverse
repurchase agreement, the Bank sells securities (generally
government securities, mortgage-backed certificates and FHLMC
participation certificates) and agrees to repurchase them (or
substantially identical securities) at a specified price at a
later date. Reverse repurchase agreements are generally for
terms of one week to one month, are subject to renewal, and are
deemed to be borrowings collateralized by the securities sold.
Generally, the cost of borrowed funds using reverse repurchase
agreements is less expensive than other borrowings with
comparable terms. Cooperative Bank had no reverse repurchase
agreements or dollar rolls outstanding during the fiscal year
ended December 31, 1997. All reverse repurchase agreements are
contracted with registered broker-dealers. The dollar rolls
used by the Bank closely resemble reverse repurchase agreements,
except that with dollar rolls, the Bank agrees to repurchase
securities similar to the securities sold, rather than the same
securities, as with reverse repurchase agreements.
10
For further information regarding the Bank's borrowings, see
Note 8 of Notes to Consolidated Financial Statements in the
Annual Report.
The following tables set forth certain information regarding
short term borrowings by the Bank at the end of and during the
periods indicated:
During the Year Ended December 31,
----------------------------------
1997 1996 1995
------ ------ ------
(In thousands)
Maximum amount of short-term borrowings
outstanding at any month end:
Securities sold under agreements
to repurchase . . . . . . . . . . . . . $ -- $ -- $ 9,000
FHLB advances . . . . . . . . . . . . . . 50,141 35,145 27,000
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements
to repurchase . . . . . . . . . . . . . -- -- 1,446
FHLB advances . . . . . . . . . . . . . . 39,797 14,839 9,468
Approximate weighted average rate paid on:
Securities sold under agreements
to repurchase . . . . . . . . . . . . . -- -- 5.65%
FHLB advances. . . . . . . . . . . . 6.49% 6.47% 6.25%
MARKET RISK
The Company's primary market risk is interest rate risk.
Interest rate risk is the result of differing maturities
or repricing intervals of interest earning assets and interest
bearing liabilities and the fact that rates on these financial
instruments do not change uniformly. These conditions may
impact the earnings generated by the Company's interest
bearing assets or the cost of its interest bearing liabilities,
thus directly impacting the Company's overall earnings. The
Company's management actively monitors and manages interest rate
risk. One way this is accomplished is through the development
of and adherence to the Company's asset/liability policy. This
policy sets forth management's strategy for matching the risk
characteristics of the Company's interest bearing assets and
liabilities so as to mitigate the effect of changes in the rate
environment. For additional discussion of interest rate risk,
see "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Interest Rate Sensitivity Analysis" in
the Annual Report.
One way to measure the Company's potential exposure to
interest rate risk is to estimate the effect of a change in
rates on the Company's Economic Value of Equity ("EVE"). The
following table sets forth information relating to the Company's
EVE and the estimated changes under various interest rate change
scenarios.
Change in Economic Estimated Estimated
Interest Rates Value Equity $ Change % Change
- --------------- ------------ --------- ---------
400 basis point rise $16,482,000 $(17,610,000) 52%
300 basis point rise 21,890,000 (12,202,000) 36%
200 basis point rise 26,910,000 (7,182,000) 21%
100 basis point rise 30,746,000 (3,346,000) 10%
Base Scenario 34,092,000 0
100 basis point decline 35,257,000 1,165,000 3%
200 basis point decline 37,767,000 3,675,000 11%
300 basis point decline 37,790,000 3,698,000 11%
400 basis point decline 40,259,000 6,167,000 18%
11
The Company's EVE under the base or 0% change scenario is
defined as the current estimated market value of all assets less
the estimated value of all liabilities. These estimated values
and the changes under the rate scenarios presented were computed
with the assistance of a third party vendor using information
supplied by the Company's management.
COMPETITION
Cooperative Bank encounters strong competition both in the
attraction of deposits and in the making of real estate and
other loans. Its most direct competition for deposits has
historically come from financial institutions in its market
area. Competition for deposits is also realized from brokerage
firms and credit unions. The Bank competes 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 competes for loans primarily through the interest rates
and loan fees it charges, and the efficiency and quality of
services it provides borrowers. Factors which affect
competition include the general and local economic conditions,
current interest rate levels and volatility in the mortgage
markets.
EMPLOYEES
At December 31, 1997, the Bank had 114 full-time employees
and six part-time employees. The employees are not represented
by a collective bargaining unit. The Bank believes its
relationship with its employees to be good.
EXECUTIVE OFFICERS
At December 31, 1997, the executive officers of the Bank
who were not also directors were as follows:
Age at
Name December 31, 1997 Position
- ---- ----------------- --------
Daniel W. Eller 55 Senior Vice President and Corporate
Secretary
Edward E. Maready 56 Senior Vice President and Treasurer,
Principal Financial and Accounting
Officer
Eric R. Gray 55 Senior Vice President of Mortgage
Lending
O.C. Burrell, Jr. 49 Executive Vice President and Chief
Operating Officer
DANIEL W. ELLER was employed by the Bank in 1979 and served
as the Administrative Vice President until 1993, at which time
he was appointed Senior Vice President and Corporate Secretary.
He is a member of the Board of the Lower Cape Fear Water & Sewer
Authority and has served on the boards of the Southeastern
Economic Development Commission, Downtown Area Revitalization
Effort (DARE), New Hanover County Recreation Advisory
Committee, Cape Fear Area United Way, and past president of
Crimestoppers of New Hanover County. He also is past
president of the Wilmington Civitan Club and past chairman of
the Board of Child Development Center.
EDWARD E. MAREADY was employed by the Bank in 1977. He
served as Controller and Treasurer from 1977 until 1993. In
1993, Mr. Maready was appointed Senior Vice President and
Treasurer. He is a member of the Financial Managers' Society,
Inc. and serves as a member of various civic committees.
12
ERIC R. GRAY was employed by the Bank in 1971. He served as
Vice President of Mortgage Lending from 1984 until 1993, at
which time he was elected Senior Vice President of Mortgage
Lending. He is past director of the Mortgage Banker's
Association of Wilmington, North Carolina, current member and
past president and director of the Wilmington East Rotary Club,
and current member of the Single Family FNMA/FHLMC of MBAC.
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 director of the Child Development Center and a
member of the Consumer Lending Committee of the North Carolina
Bankers Association.
REGULATION
GENERAL. As a North Carolina savings bank with deposits
insured by the SAIF, Cooperative Bank is subject to extensive
regulation by the Administrator of the North Carolina Savings
Banks Division (the "Administrator") and the FDIC. The Company
is also subject to extensive regulation under federal and state
law. The lending activities and other investments of
Cooperative Bank must comply with various federal regulatory
requirements. The Administrator and the FDIC periodically
examine Cooperative Bank for compliance with various regulatory
requirements. The Bank must file reports with the Administrator
and the FDIC describing its activities and financial condition.
The Bank is also subject to certain reserve requirements
promulgated by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). This supervision and
regulation is intended primarily for the protection of
depositors. Certain of these regulatory requirements are
referred to below or appear elsewhere herein.
The following is a brief summary of certain statutes, rules
and regulations affecting the Company and the Bank. A number of
other statutes and regulations have an impact on their
operations. The following summary of applicable statutes and
regulations does not purport to be complete and is qualified in
its entirety by reference to such statutes and regulations.
BANK HOLDING COMPANY REGULATION. The Company is registered
as a bank holding company under the Bank Holding Company Act of
1956, as amended (the "Holding Company Act") and, as such, is
subject to supervision and regulation by the Federal Reserve
Board. As a bank holding company, the Company is required to
furnish to the Federal Reserve Board annual and quarterly
reports of its operations at the end of each period and to
furnish such additional information as the Federal Reserve Board
may require pursuant to the Holding Company Act. The Company is
also subject to regular examination by the Federal Reserve
Board. In addition, as a savings institution holding company,
the Company is subject to supervision by the Administrator under
North Carolina law.
Under the Holding Company Act, a bank holding company must
obtain the prior approval of the Federal Reserve Board before
(1) acquiring direct or indirect ownership or control of any
voting shares of any bank or bank holding company if, after such
acquisition, the bank holding company would directly or
indirectly own or control more than 5% of such shares; (2)
acquiring all or substantially all of the assets of another bank
or bank holding company; or (3) merging or consolidating with
another bank holding company. In addition to the above
restrictions under the Holding Company Act, the Company's
investments are limited under North Carolina law to those
investments permitted for North Carolina savings banks. See "
- -- State Law and Regulation."
The Holding Company Act prohibits the Federal Reserve Board
from approving an application by a bank holding company to
acquire voting shares of a bank located outside the state in
which the operations of the holding company's bank subsidiaries
are principally conducted, unless such an acquisition is
specifically authorized by state law. The State of North
Carolina has enacted reciprocal interstate banking statutes that
authorize banks and their holding companies in North Carolina to
be acquired by banks or their holding companies in states that
have also enacted reciprocal banking legislation, and permit
North Carolina banks and their holding companies to acquire
banks in such other states.
13
Under the Holding Company Act, any company must obtain
approval of the Federal Reserve Board prior to acquiring control
of the Company or the Bank. For purposes of the Holding Company
Act, "control" is defined as ownership of more than 25% of any
class of voting securities of the Company or the Bank, the
ability to control the election of a majority of the directors,
or the exercise of a controlling influence over management or
policies of the Company or the Bank.
The Change in Bank Control Act and the regulations of the
Federal Reserve Board thereunder require any person or persons
acting in concert (except for companies required to make
application under the Holding Company Act), to file a written
notice with the Federal Reserve Board before such person or
persons may acquire control of the Company or the Bank. The
Change in Bank Control Act defines "control" as the power,
directly or indirectly, to vote 25% or more of any voting
securities or to direct the management or policies of a bank
holding company or an insured bank.
The Holding Company Act also prohibits, with certain
exceptions, a bank holding company from 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 principal
exceptions to these prohibitions involve certain non-bank
activities which, by statute or by Federal Reserve Board
regulation or order, have been identified as activities closely
related to the business of banking or managing or controlling
banks. The activities of the Company are subject to these legal
and regulatory limitations under the Holding Company Act and the
Federal Reserve Board's regulations thereunder. Notwithstanding
the Federal Reserve Board's prior approval of specific
nonbanking activities, the Federal Reserve Board has the power
to order a holding company or its subsidiaries to terminate any
activity, or to terminate its ownership or control of any
subsidiary, when it has reasonable cause to believe that the
continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness or
stability of any bank subsidiary of that holding company.
The Federal Reserve Board has adopted guidelines regarding
the capital adequacy of bank holding companies, which require
bank holding companies to maintain specified minimum ratios of
capital to total assets and capital to risk-weighted assets.
See " -- Capital Requirements."
The Federal Reserve Board has the power to prohibit
dividends by bank holding companies if their actions constitute
unsafe or unsound practices. The Federal Reserve Board has
issued a policy statement on the payment of cash dividends by
bank holding companies, which expresses the Federal Reserve
Board's view that a bank holding company should pay cash
dividends only to the extent that the company's net income for
the past year is sufficient to cover both the cash dividends and
a rate of earning retention that is consistent with the
company's capital needs, asset quality, and overall financial
condition.
Bank holding companies generally are required to give the
Federal Reserve Board notice of any purchase or redemption of
outstanding equity securities if the gross consideration for the
purchase or redemption, when combined with the net consideration
paid for all such purchases or redemptions during the preceding
12 months, is equal to 10% or more of the Company's consolidated
net worth. The Federal Reserve Board may disapprove such a
purchase or redemption if it determines that the proposal would
violate any law, regulation, Federal Reserve Board order,
directive, or any condition imposed by, or written agreement
with, the Federal Reserve Board. The requirement to receive
prior Federal Reserve Board approval for such purchases or
redemption does not apply to bank holding companies that are
"well-capitalized," received one of the two highest examination
ratings at their last examination and are not the subject
of any unresolved supervisory issues.
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 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
14
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. In addition, the Federal Reserve
Board has indicated that whenever appropriate, and in particular
when a bank holding company is undertaking expansion, seeking to
engage in new activities or otherwise facing unusual or abnormal
rights, it will consider, on a case-by-case basis, the level of
an organization's ratio of tangible Tier 1 capital (after
deducting all intangibles) to total assets in making an overall
assessment of capital. Tier 1 capital is the sum of common
stockholders' equity, noncumulative perpetual preferred
stock (including any related surplus) and minority interests in
consolidated subsidiaries, minus all intangible assets
(other than certain purchased mortgage servicing rights and
purchased credit card receivables), minus identified losses
and minus investments in certain subsidiaries. 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. Core capital
consists primarily of common stockholders' equity, certain
perpetual preferred stock (which must be noncumulative with
respect to banks), and minority interests in the equity accounts
of consolidated subsidiaries; less all intangible assets, except
for certain purchased mortgage servicing rights and purchased
credit card relationships. Supplementary capital elements
include, subject to certain limitations, the allowance for
losses on loans and leases; perpetual preferred stock that does
not qualify as Tier 1 capital and long-term preferred stock with
an original maturity of at least 20 years from issuance; hybrid
capital instruments, including perpetual debt and mandatory
convertible securities; and subordinated debt and
intermediate-term preferred stock.
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. Management of the Bank does not believe that this
interest rate risk component will have an adverse effect on the
Bank's capital.
Under North Carolina law, savings banks must maintain a net
worth of not less than 5% of assets. In computing its
compliance with this requirement, the savings bank must deduct
intangible assets from both net worth and assets.
15
The Bank was in compliance with both the FDIC capital
requirements and the North Carolina net worth requirement at
December 31, 1997.
LIQUIDITY. North Carolina savings banks must maintain cash
and readily marketable investments in an amount not less than
10% of the assets of the savings banks. The Bank was in
compliance with this requirement at December 31, 1997.
PROMPT CORRECTIVE REGULATORY ACTION. The federal banking
regulators are required under applicable law to take prompt
corrective action if an insured depository institution fails to
satisfy certain minimum capital requirements including a
leverage limit, a risk-based capital requirement, and any other
measure of capital deemed appropriate by the federal banking
regulators for measuring the capital adequacy of an insured
depository institution. All institutions, regardless of their
capital levels, are restricted from making any capital
distribution or paying any management fees that would cause the
institution to 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 business. 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. Any company
controlling the institution could also be required to divest the
institution or the institution could be required to divest
subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or
increases in compensation without prior approval and the
institution is prohibited from making payments of principal or
interest on its subordinated debt. If an institution's ratio of
tangible capital to total assets falls below a level established
by the appropriate federal banking regulator, which may not be
less than 2% nor more than 65% of the minimum tangible
capital level otherwise required (the "critical capital level"),
the institution will be subject to conservatorship or
receivership within 90 days unless periodic determinations are
made that forbearance from such action would better protect the
deposit insurance fund.
The federal banking regulators measure a depository
institution's capital adequacy on the basis of the institution's
total risk-based capital ratio (the ratio of its qualifying
total capital to risk-weighted assets), Tier 1 risk-based
capital ratio (the ratio of its Tier 1 capital to risk-weighted
assets) and leverage ratio (the ratio of its Tier 1 capital to
adjusted total assets). Under the regulations, a savings bank
that is not subject to an order or written directive to meet
or maintain a specific capital level will be deemed "well
capitalized" if it also has: (i) a total risk-based capital
ratio of 10% or greater; (ii) a Tier 1 risk-based capital ratio
of 6.0% or greater; and (iii) a leverage ratio of 5.0% or
greater. An "adequately capitalized" institution is an
institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of
8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0%
or greater; and (iii) a leverage ratio of 4.0% or greater (or
3.0% or greater if the institution has a composite 1 CAMEL
rating). An "undercapitalized institution" is an institution
that has (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or
(iii) a leverage ratio of less than 4.0% (or 3.0% if the
institution has a composite 1 CAMEL rating). A "significantly
undercapitalized" institution is defined as an institution that
has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or
(iii) a leverage ratio of less than 3.0%. A "critically
undercapitalized" institution is defined as an institution that
has a ratio of "tangible equity" to total assets of less than
2.0%. For purposes of the prompt corrective action regulations,
tangible equity is equivalent to Tier 1 capital plus outstanding
cumulative perpetual preferred stock (and related surplus) minus
all intangible assets other than certain purchased mortgage
servicing rights. The FDIC may reclassify a well capitalized
institution as adequately capitalized and may require an
adequately capitalized or undercapitalized institution to comply
with the supervisory actions applicable to institutions in the
next lower capital category if the FDIC determines, after
notice and an opportunity for a hearing, that the savings
institution is in an unsafe or unsound condition or that the
institution has received and not corrected less-than-
satisfactory rating for any CAMEL rating category. The Bank is
currently classified as "well capitalized" under these
regulations.
16
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.
Earnings of the Bank appropriated to bad debt reserves and
deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders
without payment of taxes at the then current tax rate by the
Bank on the amount of earnings removed from the reserves for
such distributions. See "Taxation." The Bank intends to make
full use of this favorable tax treatment and does not
contemplate use of any earnings in a manner which would limit
the Bank's bad debt deduction or create federal tax liabilities.
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%; or (iii) a leverage ratio of
less than 4.0%.
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. Based on the data reported to
regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions
are assigned to one of three capital groups -- well capitalized,
adequately capitalized or undercapitalized -- using the same
percentage criteria as in the prompt corrective action
regulations. See "-- Prompt Corrective Regulatory Action."
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.
The FDIC has adopted regulations to clarify the foregoing
restrictions on activities of FDIC-insured state-chartered banks
and their subsidiaries. Under the regulations, the term
activity refers to the authorized conduct of business by an
insured state bank and includes acquiring or retaining any
investment other than an equity investment. 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
17
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.
Subject to limitation by the Administrator, North
Carolina-chartered savings banks may make any loan or
investment or engage in any activity which is permitted to
federally chartered institutions. However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total
assets in business, commercial, corporate and agricultural
loans. In addition to such lending authority, North
Carolina-chartered savings banks are authorized to invest
funds, in excess of loan demand, in certain statutorily
permitted investments, including but not limited to (i)
obligations of the United States, or those guaranteed by it;
(ii) obligations of the State of North Carolina; (iii) bank
demand or time deposits; (iv) stock or obligations of the
federal deposit insurance fund or a FHLB; (v) savings accounts
of any savings institution as approved by the board of
directors; and (vi) stock or obligations of any agency of the
State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal
business is to make education loans.
SAFETY AND SOUNDNESS STANDARDS. The federal banking
regulatory agencies, including the FDIC, have adopted standards
for the safe and sound operation of financial institutions, as
mandated by the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). These regulations require
insured depository institutions to maintain internal controls
and information systems and internal audit systems that are
appropriate for the size, nature and scope of the institution's
business. The rules also require certain basic standards to be
observed in loan documentation, credit underwriting, interest
rate risk exposure, and asset growth. Depository institutions
are also required to maintain safeguards to prevent the payment
of compensation, fees and benefits that are excessive or that
could lead to material financial loss, and to take into account
factors such as comparable compensation practices at
comparable institutions.
The regulations also require a depository institution to
maintain a ratio of classified assets to total capital and
ineligible allowances that is no greater than 1.0, and require
that depository institutions have minimum earnings sufficient to
absorb losses without impairing capital. The FDIC may require
institutions to file safety and soundness plans to cure any
deficiency. The FDIC may issue orders directing an institution
to correct a deficiency or to take or refrain from taking
actions prohibited by Section 39 of FDICIA, and may assess civil
money penalties or take other enforcement action if such an
order is violated.
TRANSACTIONS WITH AFFILIATES. Transactions between savings
banks and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings bank is any
company or entity which controls, is controlled by or is under
common control with the savings bank. Generally, Sections 23A
and 23B (i) limit the extent to which the savings bank or its
subsidiaries may engage in "covered transactions" with any one
affiliate to an amount equal to 10% of such institution's
capital stock and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20%
of such capital stock and surplus and (ii) require that all such
transactions be on terms substantially the same, or at least as
favorable, to the institution or subsidiary as those provided to
a non-affiliate. A bank holding company and its subsidiaries
are considered "affiliates" of the bank under Section 23A and
23B. The term "covered transaction" includes the making of
loans, purchase of assets, issuance of a guarantee and similar
other types of transactions. In addition to the restrictions
imposed by Sections 23A and 23B, the Bank may not (i) lend
or otherwise extend credit to an affiliate, except for any
affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of
any affiliate, except for affiliates which are subsidiaries of
the Bank.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the
FHLB System, which consists of 12 district FHLBs subject to
supervision and regulation by the Federal Housing Finance Board
("FHFB"). The FHLBs provide a central credit facility primarily
for member institutions. As a member of the FHLB of Atlanta,
the Bank is required
18
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, 1997 of $2.7 million. The
FHLB of Atlanta serves as a reserve or central bank for its
member institutions within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes advances to
members in accordance with policies and procedures established
by the FHFB and the Board of Directors of the FHLB
of Atlanta. Long term advances may only be made for the purpose
of providing funds for residential housing finance.
FEDERAL RESERVE BOARD REGULATION. Pursuant to regulations
of the Federal Reserve Board, all FDIC-insured depository
institutions must maintain average daily reserves against their
transaction accounts. Because required reserves must be
maintained in the form of vault cash or in a noninterest bearing
account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's
interest-earning assets. At December 31, 1997, the Bank met its
reserve requirements.
UNIFORM LENDING STANDARDS. Under FDIC regulations which
became effective March 19, 1993, banks must adopt and maintain
written policies that establish appropriate limits and standards
for extensions of credit that are secured by liens or interests
in real estate or are made for the purpose of financing
permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent
underwriting standards, including loan-to-value limits, that are
clear and measurable, loan administration procedures and
documentation, approval and reporting requirements. The real
estate lending policies must reflect consideration of the
Interagency Guidelines for Real Estate Lending Policies (the
"Interagency Guidelines") that have been adopted by the federal
bank regulators.
The Interagency Guidelines, among other things, call upon
depository institutions to establish internal loan-to-
value limits for real estate loans that do not exceed the
following supervisory limits: (i) for loans secured by raw land,
the supervisory loan-to-value limit is 65% of the value of the
collateral; (ii) for land development loans (i.e., loans for
the purpose of improving unimproved property prior to the
erection of structures), the supervisory limit is 75%; (iii) for
loans for the construction of commercial, multifamily or other
nonresidential property, the supervisory limit is 80%;
(iv) for loans for the construction of one-to four-family
properties, the supervisory limit is 85%; and (v) for loans
secured by other improved property (e.g., farmland, completed
commercial property and other income-producing property
including non-owner-occupied one-to four-family property), the
limit is 85%. Although no supervisory loan-to-value limit has
been established for owner-occupied, one-to four-family and home
equity loans, the Interagency Guidelines state that for any such
loan with a loan-to-value ratio that equals or exceeds 90% at
origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily
marketable collateral.
The Interagency Guidelines state that it may be appropriate
in individual cases to originate or purchase loans with
loan-to-value ratios in excess of the supervisory loan-to-value
limits, based on the support provided by other credit factors.
The aggregate amount of loans in excess of the supervisory
loan-to-value limits, however, should not exceed 100% of total
capital and the total of such loans secured by commercial,
agricultural, multifamily and other non-one-to four-family
residential properties should not exceed 30% of total capital.
The supervisory loan-to-value limits do not apply to certain
categories of loans including loans insured or guaranteed by the
U.S. government and its agencies or by financially capable
state, local or municipal governments or agencies, loans backed
by the full faith and credit of a state government, loans that
are to be sold promptly after origination without recourse to a
financially responsible party, loans that are renewed,
refinanced or restructured without the advancement of new funds,
loans that are renewed, refinanced or restructured in connection
with a workout, loans to facilitate sales of real estate
acquired by the institution in the ordinary course of collecting
a debt previously contracted and loans where the real estate is
not the primary collateral.
STATE LAW AND REGULATION. North Carolina law contains
comprehensive provisions for the regulation of a savings bank
business in the State of North Carolina, including the manner of
chartering a savings bank, capital requirements, the composition
and qualifications of boards of directors, the number and manner
of selection of officers, and record keeping requirements.
19
The Bank derives its investment power from these laws and
regulations and must structure its lending policies and
procedures to comply with the various applicable provisions.
Likewise, the investments by the Bank are regulated, including
investments in certain types of specific properties. The manner
of establishing savings accounts and evidencing the same is
prescribed, as are the obligations of the Bank with respect to
withdrawals from savings accounts. As a North Carolina savings
bank, Cooperative Bank is also permitted to make any investment
permitted to a federal savings association.
North Carolina savings banks may conduct operations through
branch offices located in the State of North Carolina. The
North Carolina Savings Banks Commission of the Department of
Commerce conducts hearings on all branch applications, and any
interested person may present evidence and argument.
Any plan adopted by the directors of a savings bank under
which the savings bank would reorganize or merge or consolidate
with another savings bank must be approved by the Administrator.
The plan must also be approved by the members or stockholders
who are entitled to vote, at an annual or special meeting.
The Administrator is required to conduct a periodic
examination of each institution under his jurisdiction. The
examination provides directors with an independent assessment of
the Bank's operations and compliance with applicable law,
regulations and prudent operating policies. The Administrator
may make such examination jointly with examiners of the FDIC.
TAXATION
Savings associations are subject to the provisions of the
Internal Revenue Code of 1986, as amended (the "Code") in the
same general manner as other corporations. Through tax years
beginning before December 31, 1995, savings associations such as
Cooperative Bank which meet certain definitional tests and other
conditions prescribed by the Code benefitted from certain
favorable provisions regarding their deductions from taxable
income for annual additions to their bad debt reserve. For
purposes of the bad debt reserve deduction, loans are separated
into "qualifying real property loans," which generally are loans
secured by interests in real property, and nonqualifying real
property loans, which are all other loans. The bad debt reserve
deduction with respect to nonqualifying loans must be based on
actual loss experience. The amount of the bad debt reserve
deduction with respect to qualifying real property loans may
be based upon actual loss experience (the "experience method")
or a percentage of taxable income determined without regard to
such deduction (the "percentage of taxable income method"). The
Bank generally elected to use the method which resulted in the
greatest deduction for federal income tax purposes in any given
year.
Legislation that is effective for tax years beginning after
December 31, 1995 requires 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. The Bank will no longer be allowed to use the reserve
method for tax loan loss provisions, but would be allowed to use
the experience method of accounting for bad debts used by
commercial banks under Code section 585. There will be no
future effect on net income from the recapture because the taxes
on these bad debt reserves has already been accrued as a
deferred tax liability.
The Bank's federal income tax returns were most recently
audited in 1970.
For additional information regarding federal and state
taxes, see Note 12 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 minimum tax of 7.50% of its federal taxable income as
computed under the Code, subject to certain prescribed
adjustments. The North Carolina corporate income tax will be
reduced to 6.9% for years beginning on or after January 1, 2000.
This reduction is being phased in over a four year period with
the tax rate being reduced to 7.5% for taxable years beginning
on or after January 1, 1997,
20
7.25% for 1998, and 7% for 1999. 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.
ITEM 2. PROPERTIES
- -------------------
The following table sets forth the location of the Bank's
offices, as well as certain additional information
relating to these offices as of December 31, 1997.
Year Net Book Square
Location Opened Value Footage Title Deposits
- -------- ------ -------- ------- ----- --------
(In thousands) (In thousands)
201 Market St., Wilmington, NC 1959 $2,058 27,976 Owned $37,890
24 N. Second St., Wilmington, NC (1) 1980 -- 4,176 Owned(1) --
827 New Bridge St., Jacksonville, NC 1954 5 4,213 Owned(2) 18,491
205 E. Main St., Wallace, NC 1954 124 2,880 Owned 43,069
922 E. Arendell St., Morehead City, NC 1958 56 1,984 Owned 16,435
Broad Street, Elizabethtown, NC 1961 274 2,016 Leased(7) 18,384
4 E. Fifth St., Tabor City, NC 1980 179 3,880 Owned 26,430
3605 Oleander Dr., Wilmington, NC 1970 35 1,296 Owned(3) 23,754
2405 S. College Rd., Wilmington, NC 1974 178 2,000 Owned 28,280
1501 Live Oak St., Beaufort, NC 1975 16 1,685 Owned(4) 8,908
400 Western Blvd., Jacksonville, NC 1982 373 2,050 Owned 9,311
132 W. 2nd St., Washington, NC 1983 76 7,298 Owned(5) 19,448
Railroad St., Robersonville, NC 1983 56 2,500 Owned(5) 8,539
2007 Croatan Ave., Kill Devil
Hills, NC 1983 106 2,337 Owned(5) 7,165
1296 John Small Ave., Washington, NC 1987 204 1,920 Owned 6,552
Corner By-pass, Business 264,
Belhaven, NC 1989 352 1,482 Owned 8,061
821 Ocean Trail, Corolla, NC 1993 14 565 Leased(6) --
7028 Market Street, Wilmington, NC 1995 766 1,925 Owned 7,974
------ --------
$4,872 $288,691
====== ========
____________
(1) Operations center for the Bank. Net book value included in 201 Market Street.
(2) Building is owned, but land is leased. Original lease dated 1958. Current
lease terminates 1998. The Bank has signed a contract to purchase the land and
building on February 28, 1998.
(3) Building is owned, but land is leased. Current lease terminates June 2000.
(4) Building is owned, but land is leased. Current lease terminates December 31,
1999.
(5) Acquired through merger.
(6) Loan production office. Month to month rental.
(7) Building is now leased. New building is under construction with
completion anticipated by summer of 1998.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended
December 31, 1997.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- ----------------------------------------------------------
The information contained under the section captioned
"Corporate Information" in the Annual Report is incorporated by
reference.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information required by this item is incorporated herein
by reference to the tables captioned "Selected
Financial and Other Data" in the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ----------------------------------------------------------
The information contained in the section captioned
"Management's Discussion & Analysis" in the Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements contained in the Annual Report
which are listed under Item 14 herein are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------
None, other than as previously reported.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
(a) Directors of the Registrant
The information contained under the section captioned
"Proposal I -- Election of Directors" in the Proxy Statement for
the 1998 Annual Meeting of Stockholders (the "Proxy Statement")
is incorporated herein by reference.
(b) Principal Officers of the Bank
The information contained under the caption "Executive
Officers" under Part I of this Form 10-K is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the section captioned
"Proposal I -- Election of Directors" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
- -------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated
herein by reference to the sections captioned
"Voting Securities and Principal Holders Thereof" in
the Proxy Statement.
22
(b) Security Ownership of Management
Information required by this item is incorporated
herein by reference to the sections captioned
"Proposal I -- Election of Directors" in the Proxy
Statement.
(c) Changes in Control
Management of the Bank knows of no arrangements,
including any pledge of any person of securities of the
Bank, the operation of which may at a subsequent
date result in a change in control of the Bank.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein
by reference to the sections captioned "Proposal I -- Election
of Directors" and "Voting Securities and Principal Holders
Thereof" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
- --------------------------------------------------------------
(a) Contents. The following financial statements are filed
as part of this Annual Report on Form 10-K.
(1) Consolidated Financial Statements*
1. Report of Independent Accountants
2. Consolidated Statements of Financial
Condition as of December 31, 1997 and 1996
3. Consolidated Statements of Income for the
Years Ended December 31, 1997, 1996 and 1995
4. Consolidated Statements of Stockholders'
Equity for the Years Ended December 31, 1997,
1996 and 1995
5. Consolidated Statements of Cash Flows for the
Year Ended December 31, 1997, 1996, and 1995
6. Notes to Consolidated Financial Statements
___________
* Incorporated by reference to the Annual Report,
attached hereto as Exhibit 13.
(2) Financial Statement Schedules (All financial
statement schedules have been omitted as the
required information is either inapplicable
or included in the Consolidated Financial
Statements or related notes.)
(b) No Current Reports on Form 8-K were filed by the
Company during the final quarter of the fiscal year ended
December 31, 1997.
23
(c) The following exhibits are either filed as part of this
report or are incorporated herein by reference:
No. Description Page
- --- ----------- ----
3.1 Articles of Incorporation *
3.2 Bylaws *
10.1 Cooperative Bank for Savings, Inc. 1990 Stock *
Option Plan
10.2 Employment Agreement with Frederick Willetts, III *
10.3 Termination Agreements with Daniel W. Eller, *
Edward E. Maready, Eric R. Gray, Todd L. Sammons
and O.C. Burrell, Jr.
10.4 Amendments to Severance Agreements with Daniel *
W. Eller, Edward E. Maready, Eric R. Gray, and
Todd L. Sammons
10.5 Indemnity Agreement with Directors and Executive *
Officers
10.6 Severance Agreement with O. C. Burrell
11 Statement re: computation of per share earnings -
Reference is made to the Company's Consolidated
Statements of Operations attached hereto as
Exhibit 13, which are incorporated herein by
reference
13 Annual Report to Stockholders for the year
ended December 31, 1997
21 Subsidiaries
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
___________
* Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (Reg. No. 33-79206).
24
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
Cooperative Bankshares, Inc.
Date: February 27, 1998 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: February 27, 1998
-------------------------------
Frederick Willetts, III
President, Chief Executive Officer
and Director
(Principal Executive Officer
and Director)
By: /s/ Frederick Willetts, Jr. Date: February 27, 1998
-------------------------------
Frederick Willetts, Jr.
Senior Vice President, Chairman
of the Board
By: /s/ Edward E. Maready Date: February 27, 1998
-------------------------------
Edward E. Maready
Senior Vice President and Treasurer
(Principal Financial and
Accounting Officer)
By: /s/ James D. Hundley, M.D. Date: February 27, 1998
-------------------------------
James D. Hundley, M.D.
(Director)
By: /s/ O. Richard Wright, Jr. Date: February 27, 1998
-------------------------------
O. Richard Wright, Jr.
(Director)
By: /s/ Paul G. Burton Date: February 27, 1998
-------------------------------
Paul G. Burton
(Director)
By: /s/ H. Thompson King, III Date: February 27, 1998
-------------------------------
H. Thompson King, III
(Director)
By: /s/ F. Peter Fensel, Jr. Date: February 27, 1998
-------------------------------
F. Peter Fensel, Jr.
(Director)
By: /s/ William H. Wagoner Date: February 27, 1998
-------------------------------
William H. Wagoner
(Director)
By: /s/ R. Allen Rippy Date: February 27, 1998
-------------------------------
R. Allen Rippy
(Director)
INDEX TO EXHIBITS
Exhibit Description Page
- ------- ----------- ----
3.1 Articles of Incorporation *
3.2 Bylaws *
10.1 Cooperative Bank for Savings, Inc. 1990
Stock Option Plan *
10.2 Employment Agreement with Frederick
Willetts, III *
10.3 Termination Agreements with Daniel
W. Eller, Edward E. Maready, Eric R.
Gray, Todd L. Sammons and O.C.
Burrell, Jr. *
10.4 Amendments to Severance Agreements
with Daniel W. Eller, Edward E. Maready,
Eric R. Gray and Todd L. Sammons *
10.5 Indemnity Agreement with Directors
and Executive Officers *
10.6 Severance Agreement with O.C. Burrell
11 Statement re: computation of per share
earnings - Reference is made to the
Company's Consolidated Statements of
Operations attached hereto as Exhibit 13,
which are incorporated herein by reference
13 Annual Report to Stockholders for the year
ended December 31, 1997
21 Subsidiaries
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
___________
* Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (Reg. No. 33-79206).