1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
------------------
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-24626
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COOPERATIVE BANKSHARES, INC.
----------------------------
Exact name of registrant as specified in its charter)
North Carolina 56-1886527
- ------------------------------------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Market Street, Wilmington, North Carolina 28401
- --------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (910) 343-0181
--------------
Former name, former address and former fiscal year, if
changed since last report.
N/A
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
/X/ Yes /_/ No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
/_/ Yes /X/ No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
2,860,764 shares at November 4, 2004
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TABLE OF CONTENTS
Page
Part I Financial Information
Item 1 Financial Statements
Consolidated Statements of Financial Condition, September 30, 2004
and December 31, 2003 3
Consolidated Statements of Operations, for the three and nine months ended
September 30, 2004 and 2003 4
Consolidated Statement of Stockholders' Equity, for the nine months
ended September 30, 2004 5
Consolidated Statements of Cash Flows, for the nine months ended
September 30, 2004 and 2003 6-7
Notes to Consolidated Financial Statements 8-9
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-17
Item 3 Quantitative and Qualitative Disclosures About Market Risk 17
Item 4 Controls and Procedures 17
Part II Other Information
Item 1 Legal Proceedings 18
Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 18
Item 3 Defaults upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6 Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit 31.1 20
Exhibit 31.2 21
Exhibit 32 22
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COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2004 December 31, 2003*
------------------ ------------------
(unaudited)
ASSETS
Cash and due from banks, noninterest-bearing $ 13,476,445 $ 14,400,034
Interest-bearing deposits in other banks 4,823,264 3,993,331
------------- -------------
Total cash and cash equivalents 18,299,709 18,393,365
Securities:
Available for sale (amortized cost of $45,170,362 in September 2004
and $43,180,913 in December 2003) 45,340,879 43,613,112
Held to maturity (estimated market value of $2,926,745 in September
2004 and $3,889,736 in December 2003) 2,893,844 3,806,376
FHLB stock 4,554,200 4,154,400
Loans held for sale 5,623,811 6,375,275
Loans 448,052,870 404,820,362
Less allowance for loan losses 4,155,967 3,447,002
------------- -------------
Net loans 443,896,903 401,373,360
Other real estate owned - -
Accrued interest receivable 2,110,976 1,852,366
Premises and equipment, net 8,370,030 8,665,698
Goodwill 1,461,543 1,461,543
Other assets 12,143,677 12,741,394
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Total assets $ 544,695,572 $ 502,436,889
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 399,462,616 $ 367,202,433
Short-term borrowings 38,419,161 41,416,785
Escrow deposits 226,539 199,433
Accrued interest payable 200,962 180,067
Accrued expenses and other liabilities 2,500,187 2,207,003
Long-term obligations 58,083,976 48,087,770
------------- -------------
Total liabilities 498,893,441 459,293,491
------------- -------------
Stockholders' equity:
Preferred stock, $1 par value, 3,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $1 par value, 7,000,000 shares authorized,
2,860,764 and 2,849,447 shares issued and outstanding 2,860,764 2,849,447
Additional paid-in capital 2,673,233 2,638,044
Accumulated other comprehensive income 112,541 285,251
Retained earnings 40,155,593 37,370,656
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Total stockholders' equity 45,802,131 43,143,398
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Total liabilities and stockholders' equity $ 544,695,572 $ 502,436,889
============= =============
Book value per common share $ 16.01 $ 15.14
============= =============
*Derived from audited consolidated financial statements.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
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COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
----------- ----------- ------------ ------------
INTEREST INCOME:
Loans $ 6,409,154 $ 6,421,021 $ 18,445,865 $ 19,557,143
Securities 557,179 451,502 1,675,783 1,583,490
Other 12,356 14,410 30,123 38,400
Dividends on FHLB stock 37,653 29,554 110,760 112,978
----------- ----------- ------------ ------------
Total interest income 7,016,342 6,916,487 20,262,531 21,292,011
----------- ----------- ------------ ------------
INTEREST EXPENSE:
Deposits 1,635,174 1,756,670 4,613,972 5,698,997
Borrowed funds 713,094 882,897 2,077,488 2,664,796
----------- ----------- ------------ ------------
Total interest expense 2,348,268 2,639,567 6,691,460 8,363,793
----------- ----------- ------------ ------------
NET INTEREST INCOME 4,668,074 4,276,920 13,571,071 12,928,218
Provision for loan losses 225,000 180,000 745,000 560,000
----------- ----------- ------------ ------------
Net interest income after provision for loan losses 4,443,074 4,096,920 12,826,071 12,368,218
----------- ----------- ------------ ------------
NONINTEREST INCOME:
Gain on sale of loans 682,115 1,179,517 1,959,574 3,313,713
Service charges and fees on loans 159,359 123,202 351,457 425,624
Deposit-related fees 418,910 354,046 1,177,449 987,561
Bank-owned life insurance earnings 73,182 91,506 244,195 278,490
Other income, net 61,750 52,940 165,500 146,944
----------- ----------- ------------ ------------
Total noninterest income 1,395,316 1,801,211 3,898,175 5,152,332
----------- ----------- ------------ ------------
NONINTEREST EXPENSE:
Compensation and fringe benefits 2,349,614 2,333,605 7,055,462 7,081,173
Occupancy and equipment 834,037 690,012 2,468,454 1,997,581
Professional and examination fees 87,276 38,058 311,552 251,766
Advertising 140,476 169,590 383,447 435,687
Other 503,713 524,396 1,520,666 1,487,456
----------- ----------- ------------ ------------
Total noninterest expense 3,915,116 3,755,661 11,739,581 11,253,663
----------- ----------- ------------ ------------
Income before income taxes 1,923,274 2,142,470 4,984,665 6,266,887
Income tax expense 636,845 712,063 1,656,183 2,025,591
----------- ----------- ------------ ------------
NET INCOME $ 1,286,429 $ 1,430,407 $ 3,328,482 $ 4,241,296
=========== =========== ============ ============
NET INCOME PER SHARE:
Basic $ 0.45 $ 0.50 $ 1.16 $ 1.49
=========== =========== ============ ============
Diluted $ 0.44 $ 0.49 $ 1.14 $ 1.47
=========== =========== ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 2,860,764 2,848,197 2,859,022 2,846,941
=========== =========== ============ ============
Diluted 2,907,011 2,901,844 2,909,915 2,895,058
=========== =========== ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
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COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
STOCK CAPITAL INCOME (LOSS) EARNINGS EQUITY
--------------- --------------- ---------------- --------------- ---------------
Balance, December 31, 2003 $ 2,849,447 $ 2,638,044 $ 285,251 $ 37,370,656 $ 43,143,398
Exercise of stock options 14,000 104,625 -- -- 118,625
Stock traded to exercise options
(2,683 shares) (2,683) (69,436) (72,119)
Other comprehensive
loss, net of deferred tax benefit -- -- (172,710) -- (172,710)
Net income -- -- -- 3,328,482 3,328,482
Cash dividends ($.19 per share) -- -- -- (543,545) (543,545)
--------------- --------------- ---------------- --------------- ---------------
Balance, September 30, 2004 $ 2,860,764 $ 2,673,233 $ 112,541 $ 40,155,593 $ 45,802,131
=============== =============== ================ =============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
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COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
2004 2003
--------------------- --------------------
OPERATING ACTIVITIES:
Net income $ 3,328,482 $ 4,241,296
Adjustments to reconcile net income to net cash
used in operating activities:
Net accretion, amortization, and depreciation 740,770 1,013,541
Gain on sale of loans (1,959,574) (3,489,333)
Deferred income taxes (308,065) (272,710)
Loss on sale of premises and equipment 3,412 -
Loss (gain) on sales of foreclosed real estate (6,486) 24,527
Valuation losses on foreclosed real estate - 116,543
Provision for loan losses 745,000 560,000
Proceeds from sale of loans 137,240,700 226,985,153
Loan originations held for sale (134,534,052) (211,332,970)
Changes in assets and liabilities:
Accrued interest receivable (258,610) 205,921
Other assets 994,754 (464,081)
Accrued interest payable 20,895 (55,714)
Accrued expenses and other liabilities 693,184 (1,187,701)
--------------------- ---------------------
Net cash provided in operating activities 6,700,410 16,344,472
--------------------- ---------------------
INVESTING ACTIVITIES:
Purchases of securities available for sale (15,500,296) (11,989,375)
Purchases of securities held to maturity - (2,981,944)
Purchase of Lumina Mortgage Company (400,000) (400,000)
Proceeds from maturity of securities available for sale 10,200,000 -
Proceeds from maturity of securities held to maturity - 5,000,000
Repayments of mortgage-backed securities available for sale 3,276,592 8,870,067
Repayments of mortgage-backed securities held to maturity 912,882 1,679,191
Net sales (purchases) of FHLB stock (399,800) 150,200
Loan originations, net of principal repayments (43,288,953) 1,245,586
Proceeds from disposals of foreclosed real estate 40,773 374,471
Additions to other real estate owned (9,487) (8,236)
Purchases of premises and equipment (416,809) (2,140,341)
Proceeds from sale of premises and equipment 2,200 1,691
--------------------- ---------------------
Net cash used in investing activities (45,582,898) (198,690)
--------------------- ---------------------
FINANCING ACTIVITIES:
Net increase in deposits 32,260,183 5,713,132
Net change in short-term borrowings (2,997,624) (16,576,222)
Net change in long-term obligations 9,996,206 (3,592)
Proceeds from issuance of common stock, net 46,506 187,090
Dividends (543,545) (427,267)
Net change in escrow deposits 27,106 119,643
--------------------- ---------------------
Net cash provided (used) by financing activities 38,788,832 (10,987,216)
--------------------- ---------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (93,656) 5,158,566
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 18,393,365 11,858,603
--------------------- ---------------------
END OF PERIOD $ 18,299,709 $ 17,017,169
===================== =====================
(Continued)
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CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
---------------- ------------------
Cash paid for:
Interest $ 6,970,565 $ 8,419,507
Income taxes 1,520,400 2,388,352
Summary of noncash investing and financing activities:
Transfer from loans to foreclosed real estate 325,886 479,462
Loans to facilitate the sale of foreclosed real estate 301,086 72,000
Unrealized loss on securities available for sale,
net of taxes (172,710) (233,095)
Accrual of goodwill for purchase of Lumina Mortgage Company - 800,000
Reclassifications between long-term obligations
and short-term borrowings 10,000,000 15,000,000
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies: The significant accounting policies followed
--------------------
by Cooperative Bankshares, Inc. (the "Company") for interim financial
reporting are consistent with the accounting policies followed for
annual financial reporting. These unaudited consolidated financial
statements have been prepared in accordance with Rule 10-01 of
Regulation S-X, and, in management's opinion, all adjustments of a
normal recurring nature necessary for a fair presentation have been
included. The accompanying consolidated financial statements do not
purport to contain all the necessary financial disclosures that might
otherwise be necessary in the circumstances and should be read in
conjunction with the consolidated financial statements and notes
thereto in the Company's annual report for the year ended December 31,
2003 (the "Annual Report"). The results of operations for the
nine-month period ended September 30, 2004 are not necessarily
indicative of the results to be expected for the full year.
2. Basis of Presentation: The accompanying unaudited consolidated
-----------------------
financial statements include the accounts of Cooperative Bankshares,
Inc., Cooperative Bank (the "Bank") and its wholly owned subsidiaries,
Lumina Mortgage Company, Inc. ("Lumina") and CS&L Holdings, Inc.
("Holdings"), and Holdings' majority owned subsidiary, CS&L Real Estate
Trust, Inc. (the "REIT"). All significant intercompany items have been
eliminated. Certain items for prior periods have been reclassified to
conform to the current period presentation. These reclassifications
have no effect on the net income or stockholders' equity as previously
reported.
3. Earnings per Share: Earnings per share (EPS) are calculated by dividing
------------------
net income by the weighted average number of common shares outstanding
(basic EPS) and the sum of the weighted average number of common shares
outstanding and potential common stock (diluted EPS). Potential common
stock consists of stock options issued and outstanding. In determining
the number of shares of potential common stock, the treasury stock
method was applied. This method assumes that the number of shares
issuable upon exercise of the stock options is reduced by the number of
common shares assumed purchased at market prices with the proceeds from
the assumed exercise of the common stock options plus any tax benefits
received as a result of the assumed exercise. The following table
provides a reconciliation of income available to common stockholders
and the average number of shares outstanding for the periods below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
----------------------------- --------------------------
Net income (numerator) $ 1,286,429 $ 1,430,407 $ 3,328,482 $ 4,241,296
Shares for basic EPS (denominator) 2,860,764 2,848,197 2,859,022 2,846,941
Dilutive effect of stock options 46,247 53,647 50,893 48,117
----------------------------- --------------------------
Shares for diluted EPS (denominator) 2,907,011 2,901,844 2,909,915 2,895,058
============================= ==========================
For the nine months ended September 30, 2004 and 2003, there were 4,000
and 0 options outstanding respectively that were antidilutive since the
exercise price exceeds the average market price. The options have been
omitted from the calculation of the dilutive effect of stock options.
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4. Comprehensive Income: Comprehensive income includes net income and all
--------------------
other changes to the Company's equity, with the exception of
transactions with shareholders ("other comprehensive income"). The
Company's only components of other comprehensive income relate to
unrealized gains and losses on available for sale securities. The
following table sets forth the components of other comprehensive income
and total comprehensive income for the three and nine months ended
September 30:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------------ ----------- ----------- -----------
Net income $ 1,286,429 $ 1,430,407 $ 3,328,482 $ 4,241,296
Other comprehensive income
Realized (gains) losses on available for sale securities - - - -
Unrealized gains (losses) on available for sale securities 491,801 (145,278) (261,682) (432,098)
Income taxes (167,213) 49,395 88,972 199,003
------------ ----------- ----------- -----------
Other comprehensive income (loss) 324,588 (95,883) (172,710) (233,095)
------------ ----------- ----------- -----------
Comprehensive income $ 1,611,017 $ 1,334,524 $ 3,155,772 $ 4,008,201
============ =========== =========== ===========
5. Stock-Based Compensation: On January 1, 1996 the Company adopted SFAS
------------------------
No. 123, "Accounting for Stock-Based Compensation". As permitted by
SFAS No. 123, the Company has chosen to continue to apply APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. The option exercise price is the market price of the
common stock on the date the option is granted. Accordingly, no
compensation cost has been recognized for options granted under the
Option Plan. Had compensation cost for the Company's Option Plan been
determined based on the fair value at the grant dates for awards under
the option plan consistent with the method of SFAS No. 123, the
Company's net income and net income per share would have been reduced
to the pro forma amounts indicated below.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Net income, as reported $ 1,286,429 $ 1,430,407 $ 3,328,482 $ 4,241,296
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects - - (23,054) -
--------------- --------------- --------------- ---------------
Pro forma net income $ 1,286,429 $ 1,430,407 $ 3,305,428 $ 4,241,296
=============== =============== =============== ===============
Earnings per share:
Basic-as reported $ 0.45 $ 0.50 $ 1.16 $ 1.49
=============== =============== =============== ===============
Basic-pro forma $ 0.45 $ 0.50 $ 1.16 $ 1.49
=============== =============== =============== ===============
Diluted-as reported $ 0.44 $ 0.49 $ 1.14 $ 1.47
=============== =============== =============== ===============
Diluted-pro forma $ 0.44 $ 0.49 $ 1.14 $ 1.47
=============== =============== =============== ===============
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Cooperative Bankshares, Inc. (the "Company") is a registered bank holding
company incorporated in North Carolina in 1994. The Company is the parent
company of Cooperative Bank (the "Bank"), a North Carolina chartered commercial
bank. Cooperative Bank, headquartered in Wilmington, North Carolina, was
chartered in 1898. The Bank provides financial services through 21 offices in
Eastern North Carolina. One of the Bank's subsidiaries, Lumina Mortgage Company,
Inc. ("Lumina") is a mortgage banking firm originating and selling residential
mortgage loans through offices in Wilmington, North Carolina, North Myrtle
Beach, South Carolina, and Virginia Beach, Virginia. The Bank's other
subsidiary, CS&L Holdings, Inc. ("Holdings"), is a holding company incorporated
in Virginia for CS&L Real Estate Trust, Inc. (the "REIT"), which is a real
estate investment trust.
Through its offices, the Bank provides a wide range of banking products,
including interest-bearing and noninterest-bearing checking accounts,
certificates of deposit and individual retirement accounts which are insured up
to the applicable limits of the Federal Deposit Insurance Corporation ("FDIC").
It offers an array of loan products: commercial, consumer, agricultural, real
estate, residential mortgage and home equity loans. Also offered are safe
deposit boxes, ATMs and Access24 Phone Banking, as well as, Online Banking and
Bill Payment. In addition, the Bank offers discount brokerage services, annuity
sales and mutual funds through a third party arrangement with UVEST Investment
Services.
The Bank is planning to move the location of two of its Wilmington branches to
more desirable locations in 2005.
Mission Statement
It is the mission of the Company to provide the maximum in safety and security
for our depositors, an equitable rate of return for our stockholders, excellent
service for our customers, and to do so while operating in a fiscally sound and
conservative manner, with fair pricing of our products and services, good
working conditions, outstanding training and opportunities for our staff, along
with a high level of corporate citizenship.
Management Strategy
Cooperative Bank's lending activities have traditionally concentrated on the
origination of loans for the purpose of constructing, financing or refinancing
residential properties. In recent years however, the Bank has emphasized the
origination of nonresidential real estate loans and secured and unsecured
consumer and business loans. As of September 30, 2004, approximately $302
million, or 67%, of the Bank's loan portfolio, which excludes loans held for
sale, consisted of loans secured by residential properties. This compared to
approximately $267 million, or 66% at December 31, 2003. The Bank originates
adjustable rate and fixed rate loans. As of September 30, 2004, adjustable rate
and fixed rate loans totaled approximately 67% and 33%, respectively, of the
Bank's total loan portfolio.
The Bank has chosen to sell a large percentage of its fixed rate mortgage loan
originations in the secondary market and through brokered arrangements. This
enables the Bank to reinvest these funds in commercial loans, while increasing
fee income and reducing interest rate risk.
Interest Rate Sensitivity Analysis
Interest rate sensitivity refers to the change in interest spread resulting from
changes in interest rates. To the extent that interest income and interest
expense do not respond equally to changes in interest rates, or that all rates
do not change uniformly, earnings will be affected. Interest rate sensitivity,
at a point in time, can be analyzed using a static gap analysis that measures
the match in balances subject to repricing between interest-earning assets and
interest-bearing liabilities. Gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. Gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets. At
September 30, 2004, the Bank had a one-year positive gap position of 5.5%.
During a period of rising interest rates, a positive gap would tend to result in
an
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increase in net interest income while a negative gap would tend to adversely
affect net interest income. During a period of falling interest rates, a
positive gap would tend to adversely affect net interest income, while a
negative gap would tend to result in an increase in net interest income. It is
important to note that certain shortcomings are inherent in using a static gap
analysis. Although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes in market
interest rates. For example, a part of the Company's adjustable-rate mortgage
loans are indexed to the National Monthly Median Cost of Funds to SAIF-insured
institutions. This index is considered a lagging index that may lag behind
changes in market rates. The one-year or less interest-bearing liabilities also
include checking, savings, and money market deposit accounts. Experience has
shown that the Company sees relatively modest repricing of these transaction
accounts. Management takes this into consideration in determining acceptable
levels of interest rate risk.
When Lumina gives a rate lock commitment to a customer, there is a concurrent
"lock in" for the loan with a secondary market investor under a best efforts
delivery mechanism. Therefore, interest rate risk is mitigated because any
commitments to fund a loan available for sale are concurrently hedged by a
commitment from an investor to purchase the loan under the same terms. Loans are
usually sold within 60 days after closing.
Liquidity
The Company's goal is to maintain adequate liquidity to meet potential funding
needs of loan and deposit customers, pay operating expenses and meet regulatory
liquidity requirements. Maturing securities, principal repayments of loans and
securities, deposits, income from operations and borrowings are the main sources
of liquidity. The Bank has been granted a line of credit by the Federal Home
Loan Bank of Atlanta ("FHLB") in an amount of up to 25% of the Bank's total
assets. At September 30, 2004, the Bank's borrowed funds from the FHLB equaled
16.7% of its total assets. Scheduled loan repayments are a relatively
predictable source of funds, unlike deposits and loan prepayments that are
significantly influenced by general interest rates, economic conditions and
competition.
At September 30, 2004, the estimated market value of liquid assets (cash, cash
equivalents, marketable securities and loans held for sale) was approximately
$72.2 million, which represents 14.6% of deposits and borrowed funds as compared
to $72.3 million or 15.8% of deposits and borrowed funds at December 31, 2003.
The Company's primary uses of liquidity are to fund loans and to make
investments. Management considers current liquidity levels adequate to meet the
Company's cash flow requirements.
Off-Balance Sheet Arrangements and Contractual Commitments
At September 30, 2004, outstanding off-balance sheet commitments to extend
credit totaled $44.5 million, and the undisbursed portion of construction loans
was $53.3 million. The Bank continued to be obligated to make future payments
under contracts, such as debt and lease agreements, the amounts of which were
consistent with the amounts at December 31, 2003 other than the increase in
borrowed funds of $7.0 million and the increase in deposits of $32.3 million at
September 30, 2004 as compared to December 31, 2003.
Capital
Stockholders' equity at September 30, 2004, was $45.8 million, up 6.2% from
$43.1 million at December 31, 2003. Stockholders' equity at September 30, 2004,
includes an unrealized gain net of tax, of $113,000 as compared to an unrealized
gain net of tax at December 31, 2003, of $285,000 on securities available for
sale marked to estimated fair market value.
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Under the capital regulations of the FDIC, the Bank must satisfy minimum
leverage ratio requirements and risk-based capital requirements. Banks
supervised by the FDIC must maintain a minimum leverage ratio of core (Tier I)
capital to average adjusted assets ranging from 3% to 5%. At September 30, 2004,
the Bank's ratio of Tier I capital was 8.16%. The FDIC's risk-based capital
rules require banks supervised by the FDIC to maintain risk-based capital to
risk-weighted assets of at least 8.00%. Risk-based capital for the Bank is
defined as Tier I capital plus the balance of allowance for loan losses. At
September 30, 2004, the Bank had a ratio of qualifying total capital to
risk-weighted assets of 11.72%.
The Company, as a bank holding company, is also subject, on a consolidated
basis, to the capital adequacy guidelines of the Board of Governors of the
Federal Reserve (the "Federal Reserve Board"). The capital requirements of the
Federal Reserve Board are similar to those of the FDIC governing the Bank. The
Company currently exceeds all of its capital requirements. Management expects
the Company to continue to exceed these capital requirements without altering
current operations or strategies.
On September 20, 2004, the Company's Board of Directors approved a quarterly
cash dividend of $.07 per share. The dividend was paid on October 16, 2004 to
stockholders of record as of October 1, 2004. This brings the total dividend for
the year to $.19 per share. Any future payment of dividends is dependent on the
financial condition and capital needs of the Company, requirements of regulatory
agencies and economic conditions in the marketplace.
Critical Accounting Policy
The Bank's most significant critical accounting policy is the determination of
its allowance for loan losses and goodwill. A critical accounting policy is one
that is both very important to the portrayal of the Company's financial
condition and results, and requires a difficult, subjective or complex judgment
by management. What makes these judgments difficult, subjective and/or complex
is the need to make estimates about the effects of matters that are inherently
uncertain. For further information on the allowance for loan losses, see the
"Critical Accounting Policy" and the "Financial Condition" in Management's
Discussion and Analysis and Note 3 of "Notes to Consolidated Financial
Statements" included in the 2003 Annual Report. For further information on
goodwill, see the "Critical Accounting Policy" in Management's Discussion and
Analysis and Note 13 of "Notes to Consolidated Financial Statements" included in
the 2003 Annual Report.
FINANCIAL CONDITION AT SEPTEMBER 30, 2004, COMPARED TO DECEMBER 31, 2003
The Company's total assets increased 8.4% to $544.7 million at September 30,
2004, as compared to $502.4 million at December 31, 2003. The major change in
the assets is an increase of $43.2 million (10.7%) in loans which was funded by
an increase in deposits of $32.3 million (8.8%) and an increase of $8.0 million
in FHLB advances which is included in long-term obligations. The increase in
loans and deposits can be attributed to opening four new branches since May 2003
and being located in vibrant markets.
The Company's nonperforming assets (loans 90 days or more delinquent and
foreclosed real estate) were $490,000 or .09% of assets, at September 30, 2004,
compared to $267,000, or .05% of assets, at December 31, 2003. The Company
assumes an aggressive position in collecting delinquent loans and disposing of
foreclosed assets to minimize balances of nonperforming assets and continues to
evaluate the loan and real estate portfolios to provide loss reserves as
considered necessary. For further information see "Comparison of Operating
Results - Provision and Allowance for Loan Losses."
COMPARISON OF OPERATING RESULTS
Overview
The net income of the Company depends primarily upon net interest income. Net
interest income is the difference between the interest earned on loans, the
securities portfolio and interest-earning deposits and the cost of funds,
consisting principally of the interest paid on deposits and borrowings. The
Company's operations are materially affected by general economic conditions, the
monetary and fiscal policies of the Federal government, and the policies of
regulatory authorities. Yields and costs have declined because of the actions
the Federal Reserve has
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taken since 2001 to reduce interest rates in hopes of spurring the economy. This
trend may reverse in the future as the Federal Reserve has started to increase
rates since June of 2004.
Net Income
Net income for the three and nine-month periods ended September 30, 2004,
decreased 10.1% to $1.3 million and 21.5% to $3.3 million respectively, as
compared to the same periods last year. The decrease in net income for the three
and nine-month periods ended September 30, 2004, can be attributed to a decrease
in noninterest income of $406,000 and $1.3 million respectively and an increase
in noninterest expense of $159,000 and $486,000 respectively. For further
information see the captions "Noninterest Income" and "Noninterest Expense."
Interest Income
For the three-month period ended September 30, 2004, interest income increased
1.4% as compared to the same period a year ago. The average balance of
interest-earning assets increased 4.9% but the average yield decreased 19 basis
points as compared to the same period a year ago. Interest income decreased 4.8%
for the nine-month period ended September 30, 2004, as compared to the same
period a year ago. The decrease in interest income can be attributed to the
yield on average interest-earning assets decreasing to 5.51% as compared to
5.94% for the same period a year ago. The average balance of interest-earning
assets increased 2.6% for the nine-month period ended September 30, 2004, as
compared to the same period a year ago. The increase in the average balance of
interest-earning assets had a positive effect on interest income while the
reduction in yield had a negative impact on interest income.
Interest Expense
Interest expense decreased 11.0% for the three-month period ended September 30,
2004, as compared to the same period a year ago. This decrease was due to the
average cost of interest-bearing liabilities decreasing 32 basis points as
compared to the same period a year ago. In the nine-month period ended September
30, 2004, interest expense decreased 20.0% as compared to the same period a year
ago. The cost of interest-bearing liabilities decreased to 2.02% for the
nine-month period ended September 30, 2004 as compared to 2.54% for the same
period last year.
Net Interest Income
Net interest income for the three and nine-month periods ended September 30,
2004, as compared to the same period a year ago, increased 9.1% and 5.0%
respectively. The increase was due to interest-earning assets increasing more
than interest-bearing liabilities. In addition, there was a larger decrease in
the cost of liabilities versus the yield on assets. This can be attributed to
the Bank's success in obtaining both low and no cost deposits. See "Average
Yield/Cost Analysis" table for further information on interest income and
interest expense.
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AVERAGE YIELD/COST ANALYSIS
The following tables contain information relating to the Company's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such annualized yields and costs are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented. The average loan portfolio
balances include nonaccrual loans.
For the quarter ended
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
--------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------ ---------- ---------- ------------ ---------- ----------
Interest-earning assets:
Interest-bearing deposits in other banks $ 3,845 $ 12 1.25% $ 5,487 $ 14 1.02%
Securities:
Available for sale 46,125 520 4.51% 40,949 441 4.31%
Held to maturity 2,969 37 4.98% 5,681 11 0.77%
FHLB stock 4,288 38 3.54% 3,614 30 3.32%
Loan portfolio 447,644 6,409 5.73% 425,569 6,421 6.04%
------------ ---------- ------------ ----------
Total interest-earning assets 504,871 7,016 5.56% 481,300 6,917 5.75%
---------- ----------
Non-interest earning assets 27,434 28,449
------------ ------------
Total assets $532,305 $509,749
============ ============
Interest-bearing liabilities:
Deposits 360,823 1,635 1.81% 342,492 1,757 2.05%
Borrowed funds 91,119 713 3.13% 96,694 883 3.65%
------------ ---------- ------------ ----------
Total interest-bearing liabilities 451,942 $2,348 2.08% 439,186 $2,640 2.40%
---------- ----------
Non-interest bearing liabilities 35,141 28,685
------------ ------------
Total liabilities 487,083 467,871
Stockholders' equity 45,222 41,878
------------ ------------
Total liabilities and stockholders' equity $532,305 $509,749
============ ============
Net interest income $4,668 $4,277
========== ==========
Interest rate spread 3.48% 3.35%
========== ==========
Net yield on interest-earning assets 3.70% 3.55%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 111.7% 109.6%
========== ==========
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For the nine months ended
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
----------------------------------------- -----------------------------------------
(DOLLARS IN THOUSANDS) Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------- ------------ ------------ -------------- ------------ ------------
Interest-earning assets:
Interest-bearing deposits in other banks $ 3,897 $ 30 1.03% $ 4,675 $ 38 1.08%
Securities:
Available for sale 46,545 1,548 4.43% 39,668 1,371 4.61%
Held to maturity 3,346 127 5.06% 6,906 213 4.11%
FHLB stock 4,241 111 3.49% 3,845 113 3.92%
Loan portfolio 432,178 18,446 5.69% 422,892 19,557 6.17%
------------- ------------ -------------- ------------
Total interest-earning assets 490,207 $20,262 5.51% 477,986 $21,292 5.94%
------------ ------------
Non-interest earning assets 27,021 27,525
------------- --------------
Total assets $517,228 $505,511
============= ==============
Interest-bearing liabilities:
Deposits 351,052 4,614 1.75% 345,212 5,699 2.20%
Borrowed funds 89,907 2,077 3.08% 93,656 2,665 3.79%
------------- ------------ -------------- ------------
Total interest-bearing liabilities 440,959 $ 6,691 2.02% 438,868 $ 8,364 2.54%
------------ ------------
Non-interest bearing liabilities 32,613 26,173
------------- --------------
Total liabilities 473,572 465,041
Stockholders' equity 43,656 40,470
------------- --------------
Total liabilities and stockholders' equity $517,228 $505,511
============= ==============
Net interest income $13,571 $12,928
============ ============
Interest rate spread 3.49% 3.40%
============ ============
Net yield on interest-earning assets 3.69% 3.61%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 111.2% 108.9%
============ ============
Provision and Allowance for Loan Losses
During the nine-month period ended September 30, 2004 the Bank had net
charge-offs against the allowance for loan losses of $36,000 compared to
$213,000 for the same period in 2003. This decrease was primarily due to one
credit relationship being charged off during the first quarter of 2003. The Bank
added $745,000 to the allowance for loan losses for the current nine-month
period increasing the balance to $4.2 million at September 30, 2004. This brings
the ratio of allowance for loan losses to total loans up to .92% at September
30, 2004 as compared to .84% at December 31, 2003. This percentage continues to
rise because of the increase in retail banking loans in the Bank's
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portfolio. The Bank's loan portfolio increased $43.2 million during the
nine-month period ended September 30, 2004 as compared to a decrease of $1.7
million during the same period a year ago. This, in turn, contributed to the
increase of the provision for loan losses for the nine-month period ended
September 30, 2004 over the same period last year. Management considers the
current level of the allowance to be appropriate based on loan composition, the
current level of delinquencies and other nonperforming assets, overall economic
conditions and other factors. Future increases to the allowance may be
necessary, however, due to changes in loan composition or loan volume, changes
in economic or market area conditions and other factors. Additionally, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the recognition of adjustments to the allowance for loan losses based on
their judgments of information available to them at the time of their
examination.
Noninterest Income
Noninterest income decreased by 24.3% for the nine-month period ended September
30, 2004, as compared to the same period a year ago. The change in noninterest
income can be primarily attributed to the gain on sale of loans and service
charges and fees on loans decreasing $1.4 million and $74,000 respectively.
These changes were primarily caused by a reduction in mortgage banking
activities caused by lower refinancing volumes. Deposit related fees increased
$190,000 mainly due to a new service the Bank offered beginning in April 2003,
for checking accounts with non-sufficient funds and new accounts associated with
the new branches.
In the three-month period ended September 30, 2004, noninterest income decreased
22.5% as compared to the same period last year. The gain on sale of loans
decreased $497,000 for the three-month period ended September 30, 2004, as
compared to the same period a year ago. The reason for the decrease is the same
as stated above for the nine-month period. Service charges and fees on loans and
deposits-related fees increased by $36,000 (29.3%) and $65,000 (18.3%)
respectively for the three-month period ended September 30, 2004, as compared to
the same period a year ago. The increase in service charges and fees on loans
was largely due to an increase in broker loan fees at Lumina Mortgage. The
reason for the increase in deposit-related fees is the same as stated above for
the nine-month period.
Noninterest Expense
For the nine-month period ended September 30, 2004, noninterest expense
increased 4.3% as compared to the same period last year. Occupancy and equipment
and professional and examination fees increased $471,000, and $60,000
respectively. The increase in occupancy and equipment was primarily caused by
the opening of four new branches since May of 2003. The professional and
examination fees increase was due to higher audit and consulting fees.
In the three-month period ended September 30, 2004, noninterest expense
increased 4.2% as compared to the same period last year. This increase can be
attributed to occupancy and equipment and professional and examination fees
increasing $144,000 and $49,000 respectively. The reasons for these changes are
identical to the nine-month period ended September 30, 2004.
Income Taxes
The effective tax rate for the nine-month periods ended September 30, 2004 and
2003, was 33.2% and 32.3% respectively. The lower rate in 2003 was the result of
the formation of Holdings and the REIT in December 2002, which caused an
adjustment to taxes. The effective tax rate for the three-month periods ended
September 30, 2004 and 2003 was 33.1% and 33.2% respectively.
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Note Regarding Forward-Looking Statements
This document, as well as other written communications made from time to time by
Cooperative Bankshares, Inc. and subsidiaries (the "Company") and oral
communications made from time to time by authorized officers of the Company, may
contain statements relating to the future results of the Company (including
certain projections, such as earnings projections, and business trends) that are
considered "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995 (the PSLRA). Such forward-looking statements may
be identified by the use of such words as "believe," "expect," "should,"
"planned," "estimated" and "potential." For these statements, the Company claims
the protection of the safe harbor for forward-looking statements contained in
the PSLRA. The Company's ability to predict future results is inherently
uncertain and cautions you that a number of important factors could cause actual
results to differ materially from those currently anticipated in any
forward-looking statement. These factors include among others, changes in market
interest rates and general and regional economic conditions, changes in
government regulations, changes in accounting principles and the quality or
composition of the loan and investment portfolios and other factors that may be
described in the Company's quarterly reports on Form 10-Q and in its annual
report on Form 10-K, each filed with the Securities and Exchange Commission,
which are available at the Securities and Exchange Commission's Internet website
(www.sec.gov) and to which reference is hereby made.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk is interest rate risk. Interest rate risk is
the result of differing maturities or repricing intervals of interest-earning
assets and interest-bearing liabilities and the fact that rates on these
financial instruments do not change uniformly. These conditions may impact the
earnings generated by the Company's interest-earning assets or the cost of its
interest-bearing liabilities, thus directly impacting the Company's overall
earnings. The Company's management actively monitors and manages interest rate
risk. One way this is accomplished is through the development of, and adherence
to, the Company's asset/liability policy. This policy sets forth management's
strategy for matching the risk characteristics of the Company's interest-earning
assets and interest-bearing liabilities so as to mitigate the effect of changes
in the rate environment. The Company's market risk profile has not changed
significantly since December 31, 2003.
ITEM 4 - CONTROLS AND PROCEDURES
The Company's management, including the Company's principal executive officer
and principal financial officer, has evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act"). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the "SEC") (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (2) is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. In
addition, based on that evaluation, no change in the Company's internal control
over financial reporting occurred during the quarter ended September 30, 2004
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable
(b) Not applicable
(c) Not applicable
Item 3. Defaults Upon Senior Securities
(a) Not applicable
(b) Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
3.1 Articles of Incorporation/1/
3.2 Bylaws, as amended/2/
31.1 Rule 13a-14(a) Certification of the Chief Executive Officer
31.2 Rule 13a-14(a) Certification of the Chief Financial Officer
32 Certificate pursuant to 18 U.S.C. Section 1350
- ----------------------------------
1 Incorporated by reference to the Registrant's Registration Statement on Form
S-4 (Reg. No. 33-79206) filed with the SEC.
2 Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the period ended December 31, 2003, filed with the SEC.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 9, 2004 Cooperative Bankshares, Inc.
/s/ Frederick Willetts, III
---------------------------------
Frederick Willetts, III
President/Chief Executive Officer
Dated: November 9, 2004 /s/ Todd L. Sammons
---------------------------------
Todd L. Sammons
Senior Vice President/Chief
Financial Officer