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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File Number: 0-24626
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COOPERATIVE BANKSHARES, INC.
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(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
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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 18, 2000, 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 $25,513,398 (2,401,261
shares at $10.625 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 18, 2000 there were issued and outstanding
2,745,166 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, 1999. (Parts I and II)
2. Portions of Proxy Statement for the 2000 Annual Meeting of
Stockholders. (Part III)
PART I
ITEM 1. BUSINESS
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GENERAL
THE COMPANY. Cooperative Bankshares, Inc. (the "Company")
is a registered 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, 1999, Cooperative Bank had total assets of
$410.1 million, deposits of $304.8 million and stockholders'
equity of $29.3 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 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.
RECENT RESULTS
During the March 31, 2000 quarter, the Company recorded a
gain of $582,000 on the sale of a branch. The Company also sold
a total of $6.3 million of low-yielding securities at a loss of
$287,000, redeploying those funds into higher yielding assets.
Also, following a detailed review of the Bank's loan
portfolio undertaken during the first quarter of 2000, the Bank
authorized a loan loss provision of approximately $665,000 for
the quarter. The decision to significantly increase the Bank's
loan loss reserves was considered appropriate in light of the
dramatic expansion in commercial real estate loan portfolio over
the past twelve months and was not in response to any significant
increases in non-performing assets. The Bank has emphasized the
origination of these loans in response to significant demand in
the Bank's market areas and management believes that they enhance
the Bank's profitability and interest rate sensitivity. These
loans do, however, pose risks that are not involved in loans
secured by single family residences. See "Lending Activities --
Loans Secured by Nonresidential Real Estate." After considering
these risks, the Bank authorized this adjustment to the loan loss
allowance.
The result of these transactions will be to reduce
anticipated net income for the March 31, 2000 quarter by
approximately 65%.
1
RECENT REGULATORY AND LEGISLATIVE CHANGES
On November 12, 1999, the Gramm-Leach-Bliley Act was signed
into law. The Act calls for the modernization of the banking
system and could have far-reaching effects on the financial
services industry and the Company's and the Bank's operations.
For additional information on the provisions of this legislation,
see "Regulation -- Recently Enacted Legislation and Regulatory
Changes."
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 76,000, is also reliant upon summer tourism but is
diversified into the chemicals, shipping, aircraft engines, and
fiber optics industries. Wilmington also serves as a regional
retail center, a regional medical center and is home of the
University of North Carolina at Wilmington. The inland
communities served by the Bank (concentrated in Bladen,
Brunswick, Columbus, Duplin, Hyde, Martin, Beaufort and Pender
Counties) are largely service areas for the agricultural
activities in eastern North Carolina.
LENDING ACTIVITIES
GENERAL. Cooperative Bank's lending activities consist of
the origination of conventional mortgage loans for the purpose
of constructing, financing or refinancing residential
properties. As of December 31, 1999, $303.2 million, or 83.1%,
of the Bank's loan portfolio consisted of loans collateralized
by residential properties. The Bank also originates
nonresidential real estate loans, home equity lines of credit,
business and consumer loans. While continuing to place 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, 1999, adjustable rate loans totaled
63.3%, and fixed rate loans totaled 36.7%, of the Bank's total
loan portfolio.
2
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,
----------------------------------------------------------
1999 1998 1997
--------------- ------------------ -----------------
Amount % Amount % Amount %
------ ------ ------ ------ ------- -----
Mortgage loans secured by real estate:
1-4 family residential properties. . . $204,208 61.00% $235,644 73.34% $232,977 81.26%
Multi-family (5 or more) residential
properties . . . . . . . . . . . . . 5,523 1.65 5,575 1.74 4,835 1.69
Nonresidential property. . . . . . . . 2,215 .66 3,697 1.15 4,891 1.71
1-4 family residential properties
under construction . . . . . . . . . 23,689 7.08 25,244 7.86 24,908 8.69
Multi-family (5 or more) residential
property under construction. . . . . -- -- -- -- -- --
Nonresidential properties under
construction . . . . . . . . . . . . -- -- -- -- 469 .16
Installment loans secured by real estate:
1-4 family residential properties (1). 28,021 8.37 18,737 5.83 12,134 4.23
Multi-family (5 or more) residential
properties . . . . . . . . . . . . . 8,771 2.62 7,649 2.38 1,442 .50
Nonresidential property. . . . . . . . 28,045 8.38 12,940 4.03 4,526 1.58
1-4 family residential properties
under construction . . . . . . . . . 22,832 6.82 8,810 2.74 2,327 .81
Multi-family (5 or more) residential
property under construction. . . . . 10,166 3.04 1,128 .35 2,996 1.05
Nonresidential properties under
construction . . . . . . . . . . . . 15,104 4.51 11,735 3.65 7,868 2.74
Consumer loans, secured and unsecured. . 5,446 1.63 5,073 1.58 4,397 1.53
Business loans, secured and unsecured. . 9,763 2.91 4,021 1.25 2,586 .90
Business and consumer loans, secured and
unsecured under construction . . . . . 930 .28 964 .30 1,213 .42
-------- ------ -------- ------ -------- ------
Total loans . . . . . . . . . . . 364,713 108.95 341,217 106.20 307,569 107.27
-------- ------ -------- ------ -------- ------
Less:
Undisbursed portion of construction
loans . . . . . . . . . . . . . . 27,481 8.21 17,499 5.45 18,729 6.53
Discounts and other. . . . . . . . . . 1,182 .35 1,216 .38 1,274 .44
Loan loss reserve. . . . . . . . . . . 1,306 .39 1,178 .37 874 .30
-------- ------ -------- ------ -------- ------
Net loans. . . . . . . . . . . . . $334,744 100.00% $321,324 100.00% $286,692 100.00%
======== ====== ======== ====== ======== ======
(1) Includes residential 1-4 family home equity loans.
3
RESIDENTIAL REAL ESTATE LOANS. The Bank originates one-
to four- family residential mortgage loans collateralized by
property located in its market area. While a majority of the
Bank's residential real estate loans are collateralized by
owner-occupied primary residences, the Bank's portfolio also
includes some second home and investor properties. The Bank
also originates residential lot loans collateralized by vacant
lots located in approved subdivisions.
The Bank's loan originations are generally for a term of
15 to 30 years, amortized on a monthly basis, with principal and
interest due each month. Residential real estate loans often
remain outstanding for significantly shorter periods than their
contractual terms. Borrowers may refinance or prepay loans at
their option.
The Bank has offered adjustable rate mortgage loans
("ARMs") since 1979 and presently offers one year ARMs with
rate adjustments tied to prime or the weekly average yield on
U.S. Treasury Securities adjusted to a constant maturity of one
year. The Bank offers introductory interest rates on ARMs which
are not 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% 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, 1999, the Bank had $24.5
million of such loans, representing 9.2% 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 $56.7 million, or 15.5%, of the Bank's
total loan portfolio at December 31, 1999. 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 converted to a permanent loan and assumed by the
ultimate purchaser, the Bank underwrites the creditworthiness of
the
4
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, 1999 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, 1999 (the
"Annual Report").
Due During the
Year Ended
December 31,
1999
--------------
(In thousands)
Real estate - construction
Residential. . . . . . . . . . . . $56,687
Nonresidential . . . . . . . . . . 15,104
Business and Industrial. . . . . . 930
-------
Total . . . . . . . . . . . . . $72,721
=======
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Loans
secured by nonresidential real estate constituted approximately
$45.4 million, or 12.4% of the Bank's total loans at December
31, 1999. The Bank is emphasizing the origination of these
loans because of their profitability, since they generally carry
a higher interest rate than single family residential mortgage
loans. The Bank originates both construction loans and
permanent loans on nonresidential properties. Nonresidential
real estate loans are generally made in amounts up to 80% of the
lesser of appraised value or purchase price of the property and
have generally been made in amounts under $2.0 million. The
Bank's permanent nonresidential real estate loans are secured by
improved property such as office buildings, retail centers,
warehouses, and other types of buildings located in the Bank's
primary market area. Nonresidential real estate loans are
either fixed
5
or variable rate. The variable rate loans have interest rates
tied to prime or the weekly average yield on U.S. Treasury
Securities adjusted to a constant maturity of one year.
Loans secured by nonresidential properties are generally
larger and involve greater risks than residential mortgage
loans. Because payments on loans secured by nonresidential
properties are often dependent on successful operation or
management of the properties, repayment of such loans may be
subject to a greater extent to adverse conditions in the real
estate market or the economy. The Bank seeks to minimize these
risks in a variety of ways, including limiting the size of its
nonresidential real estate loans, generally restricting such
loans to its primary market area and attempting to employ
conservative underwriting criteria.
CONSUMER LENDING. At December 31, 1999, the Bank's
consumer loan portfolio totaled approximately $5.4 million,
representing 1.5% of the Bank's total loans receivable. The
Bank also offers home equity loans, which are made for terms of
up to 15 years at adjustable interest rates. As of December 31,
1999, the Bank's home equity loan portfolio totaled
approximately $9.8 million, representing 2.7% of its total loans
receivable.
Consumer loans entail greater risk than do residential
mortgage loans, particularly in the case of consumer loans which
are unsecured or collateralized by rapidly depreciable assets
such as automobiles. In such cases, any repossessed collateral
for a defaulted consumer loan may not provide an adequate source
of repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. The
remaining deficiency often does not warrant further substantial
collection efforts against the borrower. In addition, consumer
loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans. Such
loans may also give rise to claims and defenses by a consumer
loan borrower against an assignee of such loans such as the
Bank, and a borrower may be able to assert against such assignee
claims and defenses which it has against the seller of the
underlying collateral.
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,
1999, these loans totaled approximately $10.7 million.
Management of Cooperative Bank believes that these loans are
attractive to the Bank in light of the typically higher interest
rate yields associated with them and the opportunity they
present for expanding the Bank's relationships with existing
customers and developing broader relationships with new
customers. Accordingly, the Bank plans to 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
seeks 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
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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.
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 three 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 conventional residential
mortgage loans under terms, conditions and documentation which
permit sale to the FHLMC, FNMA or private investors in the
secondary market. The Bank has 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 1/4% per annum of the
unpaid balance of each loan. As of December 31, 1999, the Bank
was servicing approximately 1,578 loans for others aggregating
approximately $84.1 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, credit report and underwriting fee
is collected at the time of application. Management estimates
that historically, less than 20% of such commitments expire
unfunded. At December 31, 1999, the Bank had outstanding loan
origination commitments of approximately $21.5 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 market
conditions, which in turn respond to the demand for and
availability of money.
The Bank also recognizes other fees and service charges on
loans. Other fees and service charges consist of late fees,
fees collected with a change in borrower or other loan
modifications.
DELINQUENCIES. The Bank's collection procedures provide
that when a loan is 30 days past due, the borrower is contacted
by mail, and payment is requested. If the delinquency
continues, subsequent efforts are made to contact the borrower.
If the loan continues in a delinquent status for 60 days or
more, the Bank generally initiates legal proceedings. At
December 31, 1999, the Bank owned approximately $225,000, 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, 1999, the
Bank had two loans in non-accrual status with an aggregate
principal balance of $267,000.
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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, 1999, the Bank
had eight loans in the process of foreclosure and/or bankruptcy
with a principal balance of approximately $742,000.
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,
--------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Non-accruing loans:
Residential real estate. . . . . . . $ 192 $ -- $ --
Business . . . . . . . . . . . . . . 75 -- --
Accruing loans which are contractually
past due 90 days or more:
Real Estate:
Residential. . . . . . . . . . . . 892 1,606 332
Nonresidential . . . . . . . . . . -- 66 25
Consumer . . . . . . . . . . . . . . 22 39 --
Business . . . . . . . . . . . . . . 20 54 --
------ ------ -----
Total . . . . . . . . . . . . . $1,201 $1,765 $ 357
====== ====== =====
Percentage of total loans. . . . . . . .33% .52% .12%
====== ====== =====
Other non-performing assets (1). . . . $ 245 $2,439 $ 251
====== ====== =====
Total non-performing assets. . . . . . $1,446 $4,204 $ 608
====== ====== =====
Total non-performing assets
to total assets. . . . . . . . . . . .35% 1.08% .16%
====== ====== =====
(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.
8
The following table analyzes activity in the Bank's
allowance for possible loan losses for the periods indicated.
Year Ended December 31,
--------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Balance at beginning of period . . $1,178 $ 874 $ 807
Provision for possible
loan losses. . . . . . . . . . . 210 330 153
Loans charged-off - net. . . . . . 82 26 86
------ ------ -----
Balance at end of period . . . . . . $1,306 $1,178 $ 874
====== ====== =====
Ratio of net charge-offs to
average loans outstanding
during the period. . . . . . . . . .03% .01% .03%
====== ====== =====
Ratio of loan loss reserve to
total loans. . . . . . . . . . . . .36% .35% .28%
====== ====== =====
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,
--------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Interest-bearing deposits. . . . . . . . .$ 9,522 $ 4,251 $12,312
Securities:
Available for sale - at estimated
market value . . . . . . . . . . . . . 20,672 21,163 21,004
Held to maturity . . . . . . . . . . . . 18,025 13,034 21,044
Mortgage-backed and related securities:
Available for sale - at estimated
market value . . . . . . . . . . . . . 6,564 10,551 12,856
------- ------- -------
Total. . . . . . . . . . . . . . . .$54,783 $48,999 $67,216
======= ======= =======
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
9
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, 1999, the Bank held
mortgage-backed securities, classified as available for sale,
with an amortized cost of approximately $6.8 million which
represented 1.6% of the Bank's total assets. At that date, the
estimated aggregate market value and carrying value of the
mortgage-backed securities was $6.6 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.
10
The following table sets forth the scheduled maturities,
carrying values, market values and average yields for the Bank's
investment portfolio at December 31, 1999.
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. . . $ 9,522 5.40% $ -- -- % $ -- -- %
U.S. government and
agency securities:
Available for sale . . . . . 4,942 5.13 15,730 6.04 -- --
Held to maturity . . . . . . -- -- 8,025 4.62 10,000 6.63
Mortgage-backed and related
securities:
Available for sale . . . . . -- -- -- -- -- --
Held to maturity . . . . . . -- -- -- -- -- --
------- ------- -------
Total. . . . . . . . . . $14,464 5.30% $23,755 5.56% $10,000 6.63%
======= ======= =======
More than Ten Years Total Investment Portfolio
------------------- -----------------------------
Carrying Average Carrying Market Average
Value Yield Value Value Yield
-------- ------- -------- ------- --------
(Dollars in thousands)
Interest-bearing deposits. . . $ -- -- % $ 9,522 $ 9,522 5.40%
U.S. government and
agency securities:
Available for sale . . . . . -- -- 20,672 20,672 5.82
Held to maturity . . . . . . -- -- 18,025 17,114 5.74
Mortgage-backed and related
securities:
Available for sale . . . . . 6,564 6.44 6,564 6,564 6.44
Held to maturity . . . . . . -- -- -- -- --
------- ------- -------
Total. . . . . . . . . . $ 6,564 6.44% $54,783 $53,872 5.79%
======= ======= =======
11
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;
however, the Bank has begun attracting deposits over the
Internet and considers this a viable alternative to borrowed
funds. For further information regarding the Bank's deposits,
see "Management's Discussion and Analysis" and Note 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, 1999. All reverse repurchase agreements are
contracted with registered broker-dealers. The dollar rolls
used by the Bank closely
12
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.
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,
---------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Maximum amount of short-term borrowings
outstanding at any month end:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . $ -- $ -- $ --
FHLB advances. . . . . . . . . . . . . . . . 75,106 55,141 50,141
Maximum amount of short-term borrowings
outstanding at end of period:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . -- -- --
FHLB advances. . . . . . . . . . . . . . . . 75,106 55,109 50,141
Approximate average short-term borrowings
outstanding with respect to:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . -- -- --
FHLB advances. . . . . . . . . . . . . . . . 57,036 51,506 39,797
Approximate weighted average rate paid on:
Securities sold under agreements to
repurchase . . . . . . . . . . . . . . . . -- -- --
FHLB advances. . . . . . . . . . . . . . . . 6.28% 6.33% 6.49%
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, 1999, the Bank had 123 full-time employees
and eight part-time employees. The employees are not
represented by a collective bargaining unit. The Bank believes
its relationship with its employees to be good.
13
EXECUTIVE OFFICERS
At December 31, 1999, the executive officers of the Bank
who were not also directors were as follows:
Age at
Name December 31, 1999 Position
- ---- ----------------- --------
Daniel W. Eller 57 Senior Vice President and Corporate
Secretary
Edward E. Maready 58 Senior Vice President and Treasurer,
Principal Financial and Accounting
Officer
Eric R. Gray 57 Senior Vice President of Mortgage
Lending
O.C. Burrell, Jr. 51 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 was 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.
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. Mr.
Gray serves as a member of the Project Impact Committee for New
Hanover County.
O. C. BURRELL, JR. was employed in May 1993 as Senior Vice
President of Retail Banking. Mr. Burrell was elected Executive
Vice President and Chief Operating Officer in 1997. Mr. Burrell
has been in the banking industry since 1970 and has served in
leadership capacities in various civic and professional
organizations. He is active in the Wilmington Rotary Club and
serves as treasurer and director of the Child Development Center
and is a member of the Retail Lending Committee of the North
Carolina Bankers Association.
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
14
"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.
RECENTLY ENACTED LEGISLATION. On November 12, 1999, the
Gramm-Leach-Bliley ("G-L-B") Act was signed into law. The G-L-B
Act authorizes affiliations between banking, securities and
insurance firms and authorizes bank holding companies and
national banks to engage in a variety of new financial
activities. Among the new activities that will be permitted to
bank holding companies are securities and insurance brokerage,
securities underwriting, insurance underwriting and merchant
banking. The Federal Reserve Board, in consultation with the
Department of Treasury, may approve additional financial
activities. National bank subsidiaries will be permitted to
engage in similar financial activities but only on an agency
basis unless they are one of the 50 largest banks in the
country. National bank subsidiaries will be prohibited from
insurance underwriting, real estate development and merchant
banking. The G-L-B Act, however, prohibits future acquisitions
of existing unitary savings and loan holding companies, like the
Company, by firms that are engaged in commercial activities and
prohibits the formation of new unitary holding companies.
The G-L-B Act also imposes new requirements on financial
institutions with respect to customer privacy. The G-L-B Act
generally prohibits disclosure of customer information to
non-affiliated third parties unless the customer has been given
the opportunity to object and has not objected to such
disclosure. Financial institutions are further required to
disclose their privacy policies to customers annually. Financial
institutions, however, will be required to comply with state law
if it is more protective of customer privacy than the G-L-B Act.
The G-L-B Act directs the federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury, the
Securities and Exchange Commission and the Federal Trade
Commission, after consultation with the National Association of
Insurance Commissioners, to promulgate implementing regulations
within six months of enactment. The privacy provisions will
become effective six months thereafter.
The G-L-B Act contains significant revisions to the
Federal Home Loan Bank System. The G-L-B Act imposes new
capital requirements on the Federal Home Loan Banks and
authorizes them to issue two classes of stock with differing
dividend rates and redemption requirements. The G-L-B Act
deletes the current requirement that the Federal Home Loan Banks
annually contribute $300 million to pay interest on certain
government obligations in favor of a 20% of net earnings
formula. The G-L-B Act expands the permissible uses of Federal
Home Loan Bank advances by community financial institutions
(under $500 million in assets) to include funding loans to small
businesses, small farms and small agri-businesses. The G-L-B
Act makes membership in the Federal Home Loan Bank System
voluntary for federal savings institutions.
The G-L-B Act contains a variety of other provisions
including a prohibition against ATM surcharges unless the
customer has first been provided notice of the imposition and
amount of the fee. The G-L-B Act reduces the frequency of
Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository
institutions that make payments to non-governmental entities in
connection with the Community Reinvestment Act. The G-L-B Act
also eliminates the SAIF special reserve and authorizes a
federal savings institution that converts to a national or state
bank charter to continue to use the term "federal" in its name
and to retain any interstate branches.
The Company is unable to predict the impact of the G-L-B
Act on its and the Institutions's operations and competitive
environment at this time. Although the G-L-B Act reduces the
range of companies with which the Company may affiliate, it may
facilitate affiliations with companies in the financial services
industry.
15
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.
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.
16
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 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
17
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.
The Bank was in compliance with both the FDIC capital
requirements and the North Carolina net worth requirement at
December 31, 1999.
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, 1999.
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
18
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 CAMELS
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 CAMELS 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 a less-than-satisfactory rating for
any CAMELSrating category. The Bank is currently classified as
"well capitalized" under these regulations.
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%.
19
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 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
20
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 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, 1999 of $3.8 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, 1999, the Bank met its
reserve requirements.
UNIFORM LENDING STANDARDS. Under FDIC regulations 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
21
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.
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
22
law, regulations and prudent operating policies. The
Administrator may make such examination jointly with examiners
of the FDIC.
TAXATION
The Bank is subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Code") in the same
general manner as other corporations.
Legislation that was effective for tax years beginning
after December 31, 1995 required savings institutions to
recapture into taxable income over a six taxable year period the
portion of the tax loan reserve that exceeds the pre-1988 tax
loan loss reserve. 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 income tax of 7.00% 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.
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.
23
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, 1999.
Year Net Book Square
Location Opened Value Footage Title Deposits
- -------- ------ --------- ------- ----- --------
(In thousands) (In thousands)
201 Market St., Wilmington, NC 1959 $ 2,122 27,976 Owned $ 35,290
24 N. Second St., Wilmington, NC (1) 1980 -- 4,176 Owned(1) --
827 New Bridge St., Jacksonville, NC 1954 211 4,213 Owned 18,154
205 E. Main St., Wallace, NC 1954 171 2,880 Owned 44,358
922 E. Arendell St., Morehead City, NC 1958 72 1,984 Owned 17,984
232 W. Broad Street, Elizabethtown, NC 1961 988 3,400 Owned 23,451
4 E. Fifth St., Tabor City, NC 1980 194 3,880 Owned 25,658
3605 Oleander Dr., Wilmington, NC 1970 77 1,296 Owned(2) 25,333
2405 S. College Rd., Wilmington, NC 1974 231 2,000 Owned 28,792
1501 Live Oak St., Beaufort, NC 1975 37 1,685 Owned(3) 10,627
400 Western Blvd., Jacksonville, NC 1982 450 2,050 Owned 13,994
132 W. 2nd St., Washington, NC 1983 117 7,298 Owned(4) 19,162
Railroad St., Robersonville, NC 1983 69 2,500 Owned(4) 7,698
2007 Croatan Ave., Kill Devil Hills, NC 1983 134 2,337 Owned(4) 7,333
1296 John Small Ave., Washington, NC 1987 225 1,920 Owned 8,675
Corner By-pass, Business 264,
Belhaven, NC 1989 379 1,482 Owned 9,450
821 Ocean Trail, Corolla, NC 1993 14 565 Leased(5) --
7028 Market Street, Wilmington, NC 1995 754 1,925 Owned 8,875
------- --------
$ 6,245 $304,834
======= ========
______________
(1) Operations center for the Bank. Net book value included in 201 Market Street.
(2) Building is owned, but land is leased. Current lease terminates June 2000.
(3) Building is owned, but land is leased. Current lease terminates December 31, 2004.
(4) Acquired through merger.
(5) Loan production office. Month to month rental.
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,
1999.
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.
24
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 2000 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.
25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
- -------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated
herein by reference to the sections captioned
"Voting Securities and Principal Holders Thereof" in
the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated
herein by reference to the sections captioned
"Proposal I -- Election of Directors" in the Proxy
Statement.
(c) Changes in Control
Management of the 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, 1999 and 1998
3. Consolidated Statements of Income for the Years
Ended December 31, 1999, 1998 and 1997
4. Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1999, 1998 and
1997
5. Consolidated Statements of Cash Flows for the
Year Ended December 31, 1999, 1998, and 1997
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) On October 21, 1999, the Company filed a Current
Report on Form 8-K announcing that it was commencing an open-
market stock repurchase program.
26
(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, 1999
21 Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
________
* Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (Reg. No. 33-79206).
** Incorporated by reference to the Registrant's Form 10-K for
the fiscal year ended December 31, 1997.
27
SIGNATURES
Pursuant to the requirements of Section 13 of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Cooperative Bankshares, Inc.
Date: March 16, 2000 By:/s/ Frederick Willetts, III
-------------------------------
Frederick Willetts, III
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Frederick Willetts, III Date: March 16, 2000
-------------------------------
Frederick Willetts, III
President, Chief Executive Officer
and Director
(Principal Executive Officer
and Director)
By: /s/ Edward E. Maready Date: March 16, 2000
-------------------------------
Edward E. Maready
Senior Vice President and Treasurer
(Principal Financial and
Accounting Officer)
By: /s/ James D. Hundley, M.D. Date: March 16, 2000
-------------------------------
James D. Hundley, M.D.
(Director)
By: /s/ O. Richard Wright, Jr. Date: March 16, 2000
-------------------------------
O. Richard Wright, Jr.
(Director)
By: /s/ Paul G. Burton Date: March 16, 2000
-------------------------------
Paul G. Burton
(Director)
By: /s/ H. Thompson King, III Date: March 16, 2000
-------------------------------
H. Thompson King, III
(Director)
By: /s/ F. Peter Fensel, Jr. Date: March 16, 2000
-------------------------------
F. Peter Fensel, Jr.
(Director)
By: /s/ R. Allen Rippy Date: March 16, 2000
-------------------------------
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, 1999
21 Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
___________
* Incorporated by reference to the Registrant's Registration
Statement on Form S-4 (Reg. No. 33-79206).
** Incorporated by reference to the Registrant's Form 10-K for
the fiscal year ended December 31, 1997.