FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission file number 01-17377
COMMONWEALTH BANKSHARES, INC.
(Exact name of small business issuer as specified in its charter)
VIRGINIA 54-1460991
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
403 Boush Street
Norfolk, Virginia 23510
(Address of Principal executive offices) (Zip Code)
(757) 446-6900
Issuer's telephone number
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report.)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter periods 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common Stock, $2.50 Par Value -- 947,501 shares as of September 30, 1996
<PAGE>
INDEX
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
NORFOLK, VIRGINIA
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- September 30, 1996 and
December 31, 1995.
Condensed consolidated statements of income -- Three months ended
September 30, 1996 and 1995; nine months ended September 30, 1996
and 1995.
Condensed consolidated statements of cash flows -- Nine months ended
September 30, 1996 and 1995.
Notes to condensed consolidated financial statements -- September 30,
1996.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on 8-K
SIGNATURES
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
September 30 December 31
1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks 2,601 5,135
Federal funds sold 5,961 5,132
Securities:
Available for sale 9,437 5,968
Held to maturity 13,496 11,290
TOTAL SECURITIES 22,933 17,258
Loans:
Commercial 39,657 36,156
Residential mortgage 17,601 18,668
Installment loans to individuals 4,186 3,970
Other 2,502 2,809
GROSS LOANS 63,946 61,603
Unearned income (178) (230)
Allowance for loan losses (1,059) (1,256)
NET LOANS 62,709 60,117
Premises and equipment 2,470 2,341
Real estate acquired in settlement of loans 4,064 3,467
Other assets 1,536 1,587
$102,274 $95,037
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing 10,265 13,147
Interest bearing 77,716 69,109
TOTAL DEPOSITS 87,981 82,256
Federal funds purchased and securities sold
under agreement to repurchase 3,325 2,290
Long-term debt 609 684
Other liabilities 1,071 1,036
TOTAL LIABILITIES 92,986 86,266
SHAREHOLDERS' EQUITY
Common stock, par value $2.50 a share
Authorized -- 1,500,000 shares
Issued and outstanding 947,501 in 1996
and 894,103 in 1995 2,369 2,235
Additional paid-in capital 4,106 3,716
Retained earnings 2,856 2,812
Net unrealized gain (loss) on
securities available for sale (43) 8
9,288 8,771
$102,274 $95,037
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1996 1995 1996 1995
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees 1,529 1,452 4,551 4,204
Securities 324 241 828 677
Other 112 90 334 177
TOTAL INTEREST INCOME 1,965 1,783 5,713 5,058
Interest expense:
Deposits 1,025 932 2,977 2,555
Federal funds purchased and securities
sold under agreement to repurchase 52 33 117 79
Other 9 10 28 29
TOTAL INTEREST EXPENSE 1,086 975 3,122 2,663
NET INTEREST INCOME 879 808 2,591 2,395
Provision for loan losses 0 17 35 52
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 879 791 2,556 2,343
Other income:
Service charges on deposit accounts 105 115 340 326
Other service charges and fees 14 20 45 37
Loss on sale of securities avail. for sale (2) 0 (9) (1)
Gain (loss) on sale of real estate (10) 0 (3) 2
Other income 77 55 208 182
184 190 581 546
Other Expenses:
Salaries and employee benefits 382 329 1,143 1,006
Net occupancy 82 76 214 214
Furniture and equipment expenses 98 103 291 295
Other expenses 272 183 687 621
834 691 2,335 2,136
INCOME BEFORE INCOME TAXES 229 290 802 753
Applicable income taxes 67 86 232 219
NET INCOME $162 $204 $570 $534
Net income per share (Note B) $0.17 $0.23 $0.61 $0.57
Dividends per share 0 0 0 0
Average shares outstanding 947,501 947,501 (1) 947,501 947,501 (1)
<FN>
(1) Restated to reflect 1996 stock dividend
</TABLE>
<PAGE>
<TABLE>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Nine months ended
September 30
1996 1995
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income 570 534
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Provision for loan losses 35 52
Depreciation and amortization 225 160
Loss on sale of securities available for sale 9 1
Loss (Gain) on sale of real estate acquired in
settlement of loans 3 (2)
Increase in interest receivable (153) (90)
Increase in interest payable 54 103
Loss on disposal of fixed assets 0 2
Other 100 (62)
NET CASH PROVIDED BY OPERATING ACTIVITIES 843 698
INVESTING ACTIVITIES
Net increase in short term investments (829) (4,376)
Purchase of securities held to maturity (8,577) (3,695)
Maturity of securities available for sale 1,300 1,000
Maturity of securities held to maturity 1,018 296
Sale of securities available for sale 498 0
Proceeds from sale of real estate acquired in
settlement of loans 195 434
Purchase of assets relating to real estate acquired
in settlement of loans (681) (17)
Decrease from net change in loans (2,627) (5,710)
Purchases of premised and equipment (355) (406)
NET CASH USED BY INVESTING ACTIVITIES (10,058) (12,474)
FINANCING ACTIVITIES
Decrease from net change in demand deposits and
savings accounts (2,435) (1,998)
Increase from net change in certificate of deposit 8,160 10,413
Principal payments on long-term debt (75) (27)
Increase from net change in short-term liabilities 1,034 2,217
Cash paid for fractional shares (3) (2)
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,681 10,603
NET DECREASE IN CASH AND DUE FROM BANKS (2,534) (1,173)
Cash and due from banks at January 1 5,135 4,765
CASH AND DUE FROM BANKS AT SEPTEMBER 30 $2,601 $3,596
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 1996
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1995.
NOTE B -- EARNINGS PER SHARE
Earnings per common share is calculated by dividing net income by the average
number of common shares outstanding during the period. Average shares
outstanding for 1995 and calculation of income per share is restated to reflect
a 6% stock dividend paid on April 30, 1996.
<PAGE>
PART I
ITEM 2. Management's discussion and analysis of financial conditions and
results of operations.
EARNINGS SUMMARY
Net income for the quarter ended September 30, 1996 totalled $162,000, as
compared with $204,000 in the third quarter of 1995. On a per share basis,
third quarter 1996 income was .17 cents compared with .23 cents for 1995.
Earnings performance was principally affected by an insurance rebate from the
FDIC of $31.5 thousand during the third quarter of 1995 which did not reoccur
during the third quarter of 1996. Additionally, earnings were impacted by
expenses associated with the opening of the Bank's sixth branch office located
at 1870 Kempsville Road in Virginia Beach. Without these influences, net income
for the third quarter ended September 30, 1996 would have equaled $238.8
thousand compared with $175.5 thousand for the third quarter of 1995, an
increase of $63.3 thousand or 35.8% Net income for the nine months ended
September 30, 1996 totalled $570,000, as compared to $534,000 for the nine
months ended September 30, 1995. On a per share basis, net income equalled .61
cents for 1996 compared to .57 cents for 1995. These and other changes in
earnings are discussed in more detail below.
NET INTEREST INCOME
Interest income was $1,965,000 for the quarter ended September 30, 1996, a 10.2%
increase over the $1,783,000 for the quarter ended September 30, 1995. For the
nine months ended September 30, 1996 interest income was $5,713,000 an increase
of $5,058 or 13.0% over the same period of 1995. This increase in interest
income was the result of an increase of $3,162,000 in total loans outstanding
for the period of September 30, 1995 through September 30, 1996 and an increase
in the yield on loans as a result of higher loan rates.
Interest expense of $1,086,000 for the quarter ended September 30, 19956
represents a 11.4% increase when compared to the same period of 1995. For the
nine months ended September 30, 1996, interest expense increased to $3,122,000
or a 17.2% increase when compared to the same period of 1995. The increase in
interest expense resulted from an increase of $8,242,000 or 10.3% in interest
deposits for the period September 30, 1995 to September 30, 1996.
Net interest income was $879,000 for the quarter ended September 30, 1996, an
increase of 8.8% from the comparable period in 1995. For the nine months ended
September 30, 1996, net interest income increased to $2,591,000 compared to
$2,395,000 for the nine months ended September 30, 1995 or a 8.2% increase.
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $35,000 for the first nine months of 1996 as
compared to $52,000 in the first nine months of 1995. Loan losses for the nine
months ended September 30, 1996 totalled $238,000 and recoveries for the same
period equalled $6,000. For the nine month period ended September 30, 1995 loan
losses were $12,000 and recoveries equalled $7,000. The lower provision for
1996 was the result of improvements in the loan portfolio.
OTHER INCOME
Other income for the quarter ended September 30, 1996 was $184,000, a decrease
of $6,000 from the $190,000 reported for the three months ended September 30,
1995. For the nine months ended September 30, 1996, other income was $581,000
as compared to $546,000 for the nine months ended September 30, 1995 or a 6.4%
increase.
The 1996 results were boosted by a $13,000 increase in the net income associated
with the Bank's Other Real Estate Owned.
OTHER EXPENSES
Other expenses for the quarter ended September 30, 1996 totalled $834,000 as
compared to the third quarter of 1995 of $691,000. For the nine months ended
September 30, 1996 other expenses increased to $2,335,000 or 9.3% from the
$2,136,000 recorded for the same period of 1995. Other expenses were impacted
by expenses associated with the opening of the Bank's sixth branch in the
Kempsville section of Virginia Beach.
INTEREST SENSITIVITY AND LIQUIDITY
Management attempts to match rate sensitive assets to rate sensitive
liabilities, by planning and controlling the mix and maturities of these assets
and liabilities. The purpose of this asset/liability management is to create
and maintain a proper relationship between rate sensitive assets and liabilities
and also to provide adequate liquidity.
Liquidity is the ability to meet customers' demand for funds. These
requirements are met by the sale or maturity or existing assets, loan payments
and increases in deposits.
<PAGE>
NONPERFORMING ASSETS
The Bank's nonperforming assets consissted of the following:
<TABLE>
September 30, 1996 December 31, 1995
<CAPTION>
<S> <C> <C>
Loans past due 90 days or
more and still accruing 80,000 198,000
Nonaccrual loans 1,851,000 1,655,000
Other real estate owned 4,064,000 3,467,000
Total nonperforming $5,995,000 $5,320,000
</TABLE>
Many of the nonperforming loans are being amortized on a monthly basis and
$2,934,000 of the properties listed in "Other Real Estate Owned" is represented
by properties that are leased and producing income for the Corporation.
Of the $4,064,000 in "Other Real Estate Owned" as of September 30, 1996
$2,000,000 ir 49.2% is represented by 2712 North Mall Drive. This property is
fully leased with an annual income to the Corporation of $160,311. This does
not include rental income for the 16% of the building occupied by Bank of the
Commonwealth as a branch. $2,447,000 of the "Other Real Estate Owned" is under
contract and is expected to close during the fourth quarter of 1996.
CAPITAL POSITION
The Corporation's Shareholders' Equity increased to $9,288,000 from $8,771,000
or 5.9% from December 31, 1995 to September 30, 1996. The Corporation's capital
to assets ratio was 9.1% as of September 30, 1996.
Bank Holding Companies are required to meet a 7.25% risk-based capital standard.
The Corporation's risk based capital was 14.7% as of September 30, 1996.
REGULATORY EXAMINATION
The Bureau of Financial Institutions, State Corporation Commission of Virginia
conducted an examination of the Bank as of June 30, 1996. The Examiner's report
has been received and the Bank has taken appropriate actions to address the
comments contained in the report.
<PAGE>
STOCK DIVIDEND
The Board of Directors, at their March 1996 meeting voted to declare a six
percent stock dividend payable on April 30, 1996 on the Company's common shares
for stockholders of record as of March 31, 1996. Fractional shares were in
cash, based on the book value of a whole share at December 31, 1995 of $9.82.
SUMMARY
As of September 30, 1996 62.2% of the Bank's loan porfolio consists of
commercial loans which are considered to provide higher yields and also
generally carry a greater risk. It should be noted that 74.1% of these
commercial loans are collateralized with real estate, and accordingly do not
represent an unfavorable risk. As September 30, 1996, 73.7% of the Bank's total
loan portfolio consists of loans collateralized with real estate.
The Bank's committment is to maintain the Corporation's strengths in the markets
it serves during difficult economic cycles, and to act resourcefully when
confronted with new challenges.
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The company did not file any reports on Form 8-K during the three
months ended September 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Commonwealth Bankshares, Inc.
(Registrant)
Date: E. J. Woodard, Jr., CLBB
Chairman of the Board,
President & Chief Executive Officer
Date: John H. Gayle
Senior Vice President and Cashier
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,601
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,961
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,437
<INVESTMENTS-CARRYING> 13,496
<INVESTMENTS-MARKET> 22,933
<LOANS> 63,768
<ALLOWANCE> 1,059
<TOTAL-ASSETS> 102,274
<DEPOSITS> 87,981
<SHORT-TERM> 3,325
<LIABILITIES-OTHER> 1,071
<LONG-TERM> 609
0
0
<COMMON> 2,369
<OTHER-SE> 6,919
<TOTAL-LIABILITIES-AND-EQUITY> 102,274
<INTEREST-LOAN> 4,551
<INTEREST-INVEST> 828
<INTEREST-OTHER> 334
<INTEREST-TOTAL> 5,713
<INTEREST-DEPOSIT> 2,977
<INTEREST-EXPENSE> 28
<INTEREST-INCOME-NET> 2,591
<LOAN-LOSSES> 35
<SECURITIES-GAINS> (9)
<EXPENSE-OTHER> 2,335
<INCOME-PRETAX> 802
<INCOME-PRE-EXTRAORDINARY> 802
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 570
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.61
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,256
<CHARGE-OFFS> 238
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 1,059
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
