SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1995
Commission file number 01-17377
Commonwealth Bankshares, Inc.
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of incorporated or organization)
54-1460991
(I.R.S. Employer Identification No.)
403 Boush Street
Norfolk, Virginia 23510
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 446-6900
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
None
Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $2.50 Par Value
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 1996.
Common Stock, $2.50 Par Value - $9,164,556 market value
Market value is based on $10.25 per share. $10.25 being the price paid for
shares traded on March 15, 1996 through Anderson & Strudwick.
The number of shares outstanding of the issuer's classes of common stock as
of March 15, 1996:
Common Stock, $2.50 Par Value - 894,103 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be held
April 30, 1996 are incorporated by reference into Part III.
<PAGE>
Part I
Item 1. Business
The Company and the Bank. The sole business of Commonwealth
Bankshares, Inc. ("the Company") is to serve as a holding company for Bank of
the Commonwealth ("the Bank"). The Company was incorporated as a Virginia
corporation on June 6, 1988, and on November 7, 1988 it acquired all of the
issued and outstanding shares of the Bank's capital stock, other than 53,016
shares (equivalent to 106,032 shares of the Company) as to which objectors to
the Plan of Share Exchange between the Bank and the Company have
exercised their appraisal rights. That acquisition was accomplished through a
Plan of Share Exchange approved by the shareholders of the Bank, pursuant to
which each share of the Bank's common stock, other than those subject to
appraisal rights, was exchanged for 2 shares of the Company's common stock.
Bank of the Commonwealth was formed on August 28, 1970 under the laws
of Virginia. Since the Bank opened for business on April 14, 1971, its main
banking and administrative office has been located in Norfolk. The Bank
opened two branches in Norfolk in 1979 and three branches in Virginia Beach
in 1975, 1982 and 1983.
Principal Market Area. The Bank concentrates its marketing efforts in the
cities of Norfolk, Virginia Beach, Portsmouth and Chesapeake, Virginia. The
Company's present intention is to continue concentrating its banking activities
in its current market, which the Company believes is an attractive area in which
to operate.
Banking Service. Through its network of banking facilities, the Bank
provides a wide range of commercial banking services to individuals and small
and medium-sized businesses. The Bank conducts substantially all of the
business operations of a typical independent, commercial bank, including the
acceptance of checking and savings deposits, and the initiating of commercial,
real estate, personal, home improvement, automobile and other installment and
term loans. The Bank also offers other related services, such as travelers'
checks, safe deposit, lock box, depositor transfer, customer note payment,
collections, notary public, escrow, drive-in facility and other customary
banking services.
Competition
The Bank encounters strong competition for its banking services within its
primary market area. There are thirteen commercial banks actively engaged in
business in the cities of Norfolk, Virginia Beach, Portsmouth and Chesapeake,
Virginia, including six major state-wide banking organizations. The Bank is the
oldest independent bank in its market area. Finance companies, mortgage
companies, credit unions and savings and loan associations also compete with
the Bank for loans and deposits. In addition, in some instances, the Bank must
compete for deposits with money market mutual funds that are marketed
nationally. Most of the Bank's competitors have substantially greater resources
than the Bank.
Employees
As of December 31, 1995, the Bank had 47 full-time and 11 part-time
employees. Management of the Company and the Bank considers its relations
with employees to be excellent. No employees are represented by a union or
any similar group, and the Bank has never experienced any strike or labor
dispute.
<PAGE>
Regulation and Supervision
Commonwealth Bankshares, Inc.
In order to acquire the shares of the Bank and thereby become a bank
holding company within the meaning of the Bank Holding Act, the Company
was required to obtain approval from, and register as a bank holding company
with the Federal Reserve Board (the "Board"), and it is subject to ongoing
regulation, supervision and examination by the Board. As a condition to its
approval, the Board required the Company to agree that it would obtain
approval of the Federal Reserve Bank of Richmond prior to incurring any
indebtedness. The Company is required to file with the Board periodic and
annual reports and other information concerning its own business operations
and those of its subsidiaries. In addition, the Bank Holding Company Act
requires a bank holding company to obtain Board approval before it acquires,
directly or indirectly, ownership or control of any voting shares of a second
or subsequent bank if, after such acquisition, it would own or control more than
5% of such shares, unless it already owns or controls a majority of such voting
shares. Board approval must also be obtained before a bank holding company
acquires all or substantially all of the assets of another bank or merges or
consolidates with another bank holding company. Any acquisition by a bank
holding company of more than 5% of the voting shares, or of all or substantially
all of the assets, of a bank located in another state may not be approved by the
Board unless such acquisition is specifically authorized by the laws of that
second state.
A bank holding company is prohibited under the Bank Holding Company
Act, with limited exceptions, from acquiring or obtaining direct or indirect
ownership or control of more than 5% of the voting shares of any company
which is not a bank, or from engaging in any activities other than those of
banking or of managing or controlling banks or furnishing services to or
performing services for its subsidiaries. An exception to these prohibitions
permits a bank holding company to engage in, or acquire an interest in a
company which engages in, activities which the Board, after due notice and
opportunity for hearing, by regulation or order has determined is so closely
related to banking or of managing or controlling banks as to be proper incident
thereto. A number of such activities have been determined by the Board to be
permissible.
A bank holding company may not, without providing prior notice to the
Board, purchase or redeem its own stock if the gross consideration to be paid,
when added to the net consideration paid by the company for all purchases or
redemptions by the company of its equity securities within the preceding 12
months, will equal 10% or more of the company's consolidated net worth.
The ability of the Company to pay dividends upon the amount of dividends
declared by the Bank. Regulatory restrictions exist with respect to the Bank's
ability to pay dividends. See Note 16 to Consolidated Financial Statements.
The Bank
The Bank, as a member bank of the Federal Reserve System, is subject to
regulation and examination by the Virginia State Corporation Commission and
the Board. In addition, the Bank is subject to the rules and regulations of the
Federal Deposit Insurance Corporation, which currently insures the deposits of
each member bank to a maximum of $100,000 per depositor.
The commercial banking business is affected by the monetary policies
adopted by the Board. Changes in the discount rate on member bank
borrowing, availability of borrowing at the "discount window," open market
operations, the imposition of any changes in reserve requirements against
member banks' deposits and certain borrowing by banks and their affiliates, and
the limitation of interest rates which member banks may pay on deposits are
some of the instruments of monetary policy available to the Board. Taken
together, these controls give the Board a significant influence over the growth
and profitability of all banks. Management of the Bank is unable to predict how
the Board's monetary policies (or the fiscal policies or economic controls
imposed by Federal or state governments) will affect the business and earnings
of the Bank or the Company, or what those policies or controls will be.
The references in this section to various aspects of supervision and
regulation are brief summaries which do not purport to be complete and which
are qualified in their entirety by reference to applicable laws, rules and
regulations.
<PAGE>
<TABLE>
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential
<CAPTION>
Year Ended December 31,
1995 1994 1993
(Dollars in Thousands)
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets
(taxable-equivalent
basis (1) :
Loans (net of unearned
discount (2) $59,459 $5,705 9.66% $52,592 $4,966 9.52% $47,239 $4,717 9.48%
Securities 16,368 912 5.78 14,351 776 5.56 13,418 720 5.37
Federal funds sold 4,173 246 5.89 2,075 90 4.34 5,100 152 2.98
otal interest
earning assets 80,000 6,863 8.68 69,018 5,832 8.55 65,757 5,589 8.58
Non-interest earning
assets:
Cash and due from
banks 3,785 4,034 4,499
Premises and equipment 2,046 1,943 1,869
Other assets 3,428 3,166 3,482
TOTAL $89,259 $78,161 $75,607
<FN>
<F1>
(1) Tax equivalent adjustments (using 34% federal tax rates) have been made
in calculating yields on tax-free loans and investments. Virginia banks are
exempt from state income tax.
<F2>
(2) For the purposes of these computations, nonaccruing loans are included in
the daily average loan amounts outstanding.
</FN>
</TABLE>
<PAGE>
<TABLE>
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential Continued. . .
<CAPTION>
Year Ended December 31,
1995 1994 1993
(Dollars in Thousands)
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES &
SHAREHOLDERS'
EQUITY
Interest bearing liabilities:
Savings and time deposits $67,419 $3,475 5.15% $58,743 $2,579 4.39% $58,260 $2,681 4.60%
Federal funds purchased &
securities sold under
agreements to repurchase 2,368 117 4.94 1,415 48 3.39 1,134 27 2.38
Long term debt 644 40 6.21 662 25 3.78 689 36 5.22
Short term debt -0- -0- -0-
Total interest bearing
liabilities 70,431 3,632 5.16 60,820 2,652 4.36 60,083 2,744 4.57
Non-interest bearing
liabilities
Demand deposits 9,516 9,064 7,831
Other 1,096 1,032 948
Total liabilities 81,043 70,916 68,862
Common shareholders'
equity 8,216 7,245 6,745
TOTAL $89,259 $78,161 $75,607
Net interest earnings $3,231 $3,180 $2,845
Net margin on interest
earning assets on a taxable
equivalent basis 4.14 4.70 4.40
Average interest spread
(taxable equivalent basis) 3.52 4.19 4.01
</TABLE>
<PAGE>
As the largest component of income, net interest income represents the
amount that interest and fees earned on loans and investments exceeds the
interest costs of funds used to support these earning assets. Net interest
income is determined by the relative levels, rates and mix of earning assets and
interest-bearing liabilities. The following table attributes changes in net
interest income either to changes in average volume or to changes in interest
due to both rate and volume has been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the change in
each.
<TABLE>
<CAPTION>
1995 Compared to 1994 1994 Compared to 1993
Increase (Decrease) in: Increase Increase
(decrease) due Net (decrease) due Net
to change in: Increase to change in: Increase
Volume Rate (decrease) Volume Rate (decrease)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Securities . . . . . . . . . . . $ 136 $ 24 $ 112 $ 54 $ 2 $ 56
Federal funds sold . . . . . 156 41 115 (267) 205 (62)
Loans . . . . . . . . . . . . . . 739 81 658 479 (230) 249
1,031 146 885 266 (23) 243
INTEREST EXPENSE
Savings and time
deposits . . . . . . . . . . 896 485 411 22 (124) (102)
Federal funds purchased &
securities sold under
agreement to repurchase 69 28 41 8 13 21
Long term debt . . . . . . 15 16 (1) (1) (10) (11)
Short term debt . . . . . . -0- -0- -0- -0- -0- -0-
980 529 451 29 (121) (92)
Increase (Decrease) in
Net Interest Income . . . $51 $(383) $434 $237 $98 $335
</TABLE>
<PAGE>
Investment Portfolio
The following table shows the book value (carrying value) of the Company's
investment securities at December 31 of the years indicated below.
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
U. S. Government and its Agencies . . . . . $15,076 $13,327 $13,779
State and Municipals . . . . . . . . . . . 2,038 1,412 -0-
Other Securities . . . . . . . . . . . . . -0- -0- -0-
Federal Reserve Stock . . . . . . . . . . 144 144 144
$17,258 $14,883 $13,923
</TABLE>
<TABLE>
The maturity distribution, par value, market value, and yield of the
investment portfolio at December 31, 1995, is presented in the following table.
<CAPTION>
December 31, 1995
Par Value Market Value Yield
(Dollars in thousands)
<S> <C> <C> <C>
Within 3 months . . . . . . . . . $ 250 $ 251 5.41%
After 3 but within 6 months . . . 1,050 1,051 6.71
After 6 but within 12 months. . . 2,150 2,162 5.54
After 1 but within 5 years. . . . 5,636 5,497 5.70
After 5 but within 10 years . . . 5,323 5,190 5.92
After 10 years. . . . . . . . . . 2,637 2,654 6.74
Federal Reserve Bank Stock. . . . 144 144 6.00
$17,190 $16,949 5.96%
</TABLE>
<PAGE>
Loan Portfolio:
<TABLE>
The table below classifies loans, net of unearned income, by major category
and percentage distribution at December 31 for each of the past three years:
<CAPTION>
December 31
1995 1994 1993
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Commercial. . . . . . . . $ 8,890 14.48% $ 9,900 17.85% $ 9,540 19.44%
Commercial mortgage . . . 27,266 44.43 22,056 39.77 18,462 37.61
Residential mortgage. . . 18,668 30.42 16,376 29.52 14,315 29.17
Installment loans to
individuals . . . . . . 3,739 6.09 3,859 6.96 3,761 7.66
Other . . . . . . . . . . 2,810 4.58 3,272 5.90 3,006 6.12
TOTAL $61,373 100.00% $ 55,463 100.00% $49,084 100.00%
</TABLE>
<TABLE>
The following table shows the maturity of loans outstanding as of December 31,
1995. Also provided are the amounts due after one year classified according to
the sensitivity to changes in interest rates. Loans are classified based upon
the period in which the final payment is due.
<CAPTION>
December 31, 1995
Maturing
After One
Within But Within After
One Year Five Years Five Years Total
(In thousands)
<S> <C> <C> <C>
Commercial . . . . . . . . . . $ 5,238 $ 1,902 $ 1,750 $ 8,890
Commercial mortgage . . . . . . 10,207 10,091 6,968 27,266
Residential Mortgage. . . . . . 3,731 8,756 6,181 18,668
Installment loans to
individuals. . . . . . . . . 803 2,655 281 3,739
Other . . . . . . . . . . . . . 1,850 693 267 2,810
TOTAL . . . . . . . . . . . $21,829 $24,097 $15,447 $61,373
Loans maturing after one
year with:
Fixed interest rates. . . . . $ 7,843 $13,679
Variable interest rates . . . 16,254 1,768
TOTAL . . . . . . . . . . . $24,097 $15,447
</TABLE>
<PAGE>
Non-performing Loans:
<TABLE>
Non-performing loans consist of loans accounted for on a non-accrual basis
(as judgementally determined by management based upon anticipated
realization of interest income) and loans which are contractually past due 90
days or more as interest and/or principal payments. The following table
presents information concerning non-performing loans for the periods indicated:
<CAPTION>
December 31,
1995 1994 1993
<S> <C> <C> <C>
(Dollars in thousands)
Non-accrual:
Real estate Loans . . . . . . . . . $1,445 $ 720 $1,324
Installment Loans . . . . . . . . . 62 13 -0-
Credit cards and related plans. . . -0- -0- -0-
Commercial (time and demand) and
all other loans . . . . . . . . . 148 73 85
Lease financing receivables . . . . -0- -0- -0-
$1,655 $ 806 $1,409
Contractually past - due
90 days or more:
Real estate Loans . . . . . . . . 38 22 -0-
Installment Loans . . . . . . . . 21 6 -0-
Credit cards and related plans. . 37 10 19
Commercial (time and demand)
and all other loans . . . . . . 102 68 29
Lease financing receivables . . . -0- -0- -0-
Total Non-performing $1,853 $ 912 $1,457
</TABLE>
It is management's practice to cease accruing interest on loans when
payments are 120 days delinquent. However, management may elect to
continue the accrual of interest when the estimated net realizable value of
collateral is sufficient to cover the principal balance and accrued interest,
and the loan is in the process of collection.
Interest which would have been recorded on non-accrual loans under the
contractual terms is approximately $175,000 and $112,000 in 1995 and 1994,
respectively. Interest actually recorded on these loans was approximately
$59,000 and $27,000 in 1995 and 1994, respectively.
<PAGE>
Summary of Loan Loss Experience:
The allowance for loan losses is increased by the provision for loan losses
and reduced by loans charged off net of recoveries. The allowance for loan
losses is established and maintained at a level judged by management to be
adequate to cover any anticipated loan losses to be incurred in the collection
of outstanding loans. In determining the adequate level of the allowance for
loan losses, management considers the following factors: (a) loan loss
experience; (b) problem loans, including loans judged to exhibit potential
charge-off characteristics, loans on which interest is no longer being accrued,
loans which are past due and loans which have been classified in the most recent
regulatory examination; and (c) anticipated economic conditions and the
potential impact these conditions may have on individual classifications of
borrowers.
<TABLE>
The following table presents the Company's loan loss experience for the past
five years:
<CAPTION>
Year ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Amount of loans outstanding at end
of year (net of unearned income) . . $61,373 $55,463 $49,084 $46,701 $51,086
Average amount of loans outstanding
(net of unearned income) . . . . . . $59,459 $52,592 $47,239 $48,336 $52,463
Balance of allowance for loan losses
at beginning of year . . . . . . . . $1,208 $1,129 $1,035 $1,077 $838
Loans charged off:
Commercial . . . . . . . . . . . . . -0- 18 1 81 194
Real Estate. . . . . . . . . . . . . -0- -0- 89 177 179
Installment. . . . . . . . . . . . . 7 15 15 138 25
Credit Cards and Other Consumer. . . 6 22 14 51 63
Total loans charged off. . . . . . . . 13 55 119 447 461
Recoveries of loans previously
charged off:
Commercial . . . . . . . . . . . . . -0- 9 22 60 14
Real Estate . . . . . . . . . . . . -0- 3 1 68 -0-
Installment. . . . . . . . . . . . . 6 12 16 31 7
Credit Cards and Other Consumer. . . 2 8 7 11 7
Total recoveries . . . . . . . . . . . 8 32 46 170 28
Net loans charged off. . . . . . . . . 5 23 73 277 433
Additions to allowance charged
to expense . . . . . . . . . . . . . 53 102 167 235 672
Balance at end of year . . . . . . . . $1,256 $1,208 $1,129 $1,035 $1,077
Ratio of net charge-offs to average
loans outstanding. . . . . . . . . . .01% 0.4% .16% .57% .83%
</TABLE>
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES:
<TABLE>
The following table provides an allocation of the allowance for loan losses as
of December 31, 1995:
<CAPTION>
Year Ended December 31, 1995
Percent of Loans
on each category
Amount to total loans
<S> <C> <C>
Commercial . . . . . . . . . . . . . . . $ 9,435 14.48%
Commercial Mortgage. . . . . . . . . . . 319,710 44.43
Residential Mortgage . . . . . . . . . . 35,070 30.42
Installment Loans to Individuals . . . . 15,520 6.09
Other. . . . . . . . . . . . . . . . . . 28,974 4.58
Unallocated. . . . . . . . . . . . . . . 847,291 N/A
Total $1,256,000 100.00%
</TABLE>
<PAGE>
Deposits:
<TABLE>
The breakdown of deposits at December 31 for the years indicated is as
follows:
<CAPTION>
December 31,
1995 1994 1993
<S> <C> <C> <C>
(in thousands)
Non-interest bearing demand deposits . . . $13,147 $ 9,080 $11,504
Interest-bearing demand deposits . . . . . 15,483 18,467 18,573
Savings deposits . . . . . . . . . . . . . 4,196 4,585 4,897
Certificates of deposit:
Less than $100,000. . . . . . . . . . . 45,024 35,697 28,825
$100,000 or more. . . . . . . . . . . . 4,406 3,495 5,006
$82,256 $71,324 $68,805
</TABLE>
<TABLE>
The average daily amount of deposits and rates paid on such deposits is
summarized for the periods indicated in the following table:
<CAPTION>
Year Ended December 31,
1995 1994 1993
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand
deposits . . . . . . . . . . $ 9,516 0.00% $ 9,064 0.00% $ 7,831 0.00%
Interest bearing demand
deposits . . . . . . . . . . 16,871 2.98 19,446 2.93% 20,322 3.08%
Savings deposits . . . . . . . 4,512 2.97 4,877 2.97% 4,955 3.20%
Certificates of Deposit:
Less than $100,000 . . . . . 41,847 6.24 30,928 5.62% 27,827 5.77%
$100,000 or more . . . . . . 4,189 5.34 3,492 3.64% 5,155 5.65%
$76,935 $67,807 $66,090
</TABLE>
Remaining maturities of certificates $100,000 or more at December 31, 1995
as follows (in thousands):
Maturity
3 months or less . . . . . . . . . $1,846
Over 3 through 12 months . . . . . 857
Over 12 months . . . . . . . . . . 1,703
$4,406
<PAGE>
Interest Rate Sensitivity Analysis:
<TABLE>
The following table provides the maturities of investment securities, loans,
and deposits as of December 31, 1995, and measures the interest rate
sensitivity gap for each range of maturity indicated:
<CAPTION>
December 31, 1995
Maturing
Non-
Interest
Earning/
After Bearing
one but Assets/
Within Within After Liabili-
One Five Five ties and
Year Years Years Equity Total
<S> <C> <C> <C> <C> <C>
(In Thousands)
Assets
Investment Securities. . . . . . . $ 3,615 $ 5,633 $ 8,010 $ -0- $17,258
Loans . . .. . . . . . . . . . . . 21,829 24,097 15,447 -0- 61,373
Other Assets . . . . . . . . . . . 5,132 -0- -0- 11,274 16,406
Total Assets . . . . . . . . . . . . $30,576 $29,730 $23,457 $11,274 $95,037
Liabilities and
Shareholders' Equity
Demand Deposits-Non Interest . . . $ -0- $ -0- $ -0- $13,147 $13,147
All Interest-bearing Deposits. . . 40,375 28,734 -0- -0- 69,109
Other Liabilities. . . . . . . . . 2,291 -0- 684 1,036 4,011
Shareholders' Equity . . . . . . . . -0- -0- -0- 8,770 8,770
Total Liabilities and
Shareholders' Equity . . . . . . . . $42,666 $28,734 $ 684 $22,953 $95,037
Interest Rate
Sensitivity Gap. . . . . . . . . . $(12,090) $ 996 $22,773 $(11,679) -0-
</TABLE>
<PAGE>
Return on Equity and Assets
<TABLE>
The following table highlights certain ratios for the periods indicated:
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Net income to:
Average total assets . . . . . . . . . . . . . 0.94 1.04 .86
Average shareholders' equity . . . . . . . . . 10.17 10.89 9.59
Dividend payout ratio (dividends declared per
share divided by net income per share) . . . . .00 .00 .00
Average shareholders' equity to average total
assets ratio . . . . . . . . . . . . . . . . . 9.20 9.27 8.92
</TABLE>
Item 2. Properties
The headquarters building (the "Headquarters") of the Corporation and the
Bank were completed in 1986 and is a three story building of masonry
construction, with approximately 21,000 square feet of floor space. The Bank
utilizes two floors and leases the third floor to others. The office operates
nine teller windows, including two drive-up facilities, a walk-up facility and a
24 hour teller machine.
The Bank has entered into a lease with Boush Bank Building Associates, a
limited partnership (the "Partnership"), to rent the Headquarters, which is
located at the corners of Freemason and Boush Streets, Norfolk, Virginia. The
lease requires the Bank to pay all taxes, maintenance and insurance. The term
of the lease is twenty-three years and eleven months, and began on December
19, 1984. In connection with this property, the lessor has secured financing in
the form of a $1,600,000 industrial development revenue bond from the Norfolk
Redevelopment and Housing Authority payable in annual installments,
commencing on January 1, 1987, at amounts equal to 3% of the then
outstanding principal balance through the twenty-fifth year, when the unpaid
balance will become due. Interest on his bond is payable monthly, at 68.6% of
the prime rate of Crestar Bank in Richmond, Virginia. Monthly rent paid by the
Bank is equal to interest on the above bond, plus any interest associated with
secondary financing provided the lessor by the Bank. The Bank has the right to
purchase, at its option, an undivided interest in the property at undepreciated
original cost, and is obligated to purchase in each January after December 31,
1986 an undivided interest in an amount equal to 90% of the legal amount
allowed by banking regulations for investments in fixed properties, unless the
Bank's return on average assets is less than seven-tenths of one percent.
Under this provision the Bank purchased 19.7% of this property for $362,201 in
1987. At the time of the 1987 purchase the Bank assumed $305,744 of the
above-mentioned bond. Pursuant to the purchase option contained in the lease
agreement, the Bank recorded an additional interest of $637,410 (34.7%) in the
leased property as of December 31, 1988 by assuming a corresponding portion
($521,888) of the unpaid balance of the related revenue bond and applying the
difference of $115,522 to amounts due from the lessor.
Accordingly the Bank now owns 54.4%, of the Headquarters property. No
purchases have been made after 1988.
The general partner of the Partnership is Boush Bank Building Corporation.
All of the limited partners of the Partnership, namely Messrs. Woodard, Burton
and Kellam, are directors of the Bank and the Corporation. The terms of the
lease are not less favorable than could be obtained from a non-related party.
<PAGE>
Prior to executing the lease, the shareholders of the Bank owning a majority
of Bank common stock, consented to the foregoing lease. Additionally, formal
shareholder approval of the lease, due to the above described interest of the
Bank's directors, was obtained during the Bank's 1985 Annual Meeting of
Shareholders.
The Bank operates a branch office in Norfolk at 4101 Granby Street and
three branches in Virginia Beach at 225 South Rosemont Road, 2712 Mall
Drive and 1124 First Colonial Road. Two of those locations are owned by the
Bank and the remaining two are leased under long-term operating leases with
renewal options, at total annual rentals of approximately $32,000 paid to
unrelated parties.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Corporation's Articles of Incorporation, in accordance with the
provisions of Section 13.1-646 of the Virginia Stock Corporation Act, authorized
the issuance of up to 25,000 shares of the Corporation's Common Stock on the
date of grant. At the same time, the Board of Directors granted options for
12,500 of such shares to 13 officers and key employees of the Corporation and
the Bank, including an option for 2,500 shares granted to Edward J. Woodard,
Jr., the President, Chairman of the Board and Chief Executive Officer of the
Corporation and the Bank. All of such options are $9.75 per share, the fair
value of the Corporation's Common Stock, as determined by its Board of
Directors, on the date of the grant. On January 18, 1994, the Board of
Directors granted options for a total of 7,500 shares to 7 officers, including
an option for 2,500 shares granted to Mr. Woodard, at an exercise price of $8.85
per share. The Plan will expire on February 20, 2000. Until expiration, the
options may be exercised in whole at any time or in part from time to time.
Certain options have expired at the employee's termination. Total options
outstanding as of December 31, 1995 were 16,138. This total reflects the 1994
5% stock dividend and the 1995 6% stock dividend. None of the options
granted to employees have been exercised as of February 29, 1996.
On April 25, 1995 the shareholders approved a non-employee director stock
compensation plan (the "Plan") for the issuance of 50,000 shares of the
corporation's common stock to eligible non-employee directors of the
corporation at prices determined by average of the five most recent trades of
the common stock on the over-the-counter market during the period, not to
exceed 30 calendar days, immediately preceding an option's granted date or
such other value per share as is determined by the employee directors. No
options will be awarded under the plan after January 17, 2000. On January 17,
1995 the Board of Directors granted options for a total of 17,500 to seven
directors. None of the option granted to directors have been exercised as of
February 29, 1996.
Anderson & Strudwick, Inc., Underwriters/Distributors of Investment
Securities are an "active market marker" in the stock of the Corporation.
Anderson & Strudwick, Inc. maintains offices in Richmond, Charlottesville,
Fredericksburg, Lynchburg, and Norfolk, Virginia. They are members of the
New York Stock Exchange.
Please refer to the table below entitled Common Stock Performance for a
breakdown of the trades quoted by Anderson & Strudwick, Inc. for the four
quarters of 1995 and four quarters of 1994. It is the opinion of management
that this range accurately reflects the market value of the Company's common
stock at the present time.
There were no cash dividends declared during 1995, 1994, 1993 or 1992.
The Corporation issued a five (5%) percent stock dividend during the first
quarter of 1994 and a six (6%) percent stock dividend during the first quarter
of 1995.
<PAGE>
Common Stock Performance
<TABLE>
Common Stock Prices
1995 1994
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $8.140 $7.781 $5.250 $4.250
Second Quarter 8.500 7.250 5.500 5.000
Third Quarter 9.250 7.500 8.750 5.375
Fourth Quarter 10.000 8.500 8.875 8.000
</TABLE>
The foregoing over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
In addition, the Corporation completed a rights offering of 100,000 shares
to existing shareholders in February, 1989. The price of the 52,391 shares sold
in the offering was $9.75 per share. At the conclusion of the rights offering,
unsold shares plus 300,000 additional shares of the Corporation were sold to
the public at a price of $9.75 per share.
The Corporation's Board of Directors determines whether to declare
dividends and the amount of any dividends declared. Such determinations by
the Board take into account the Corporation's financial condition, results of
operations, and other relevant factors. The declaration, amount and timing of
future dividends will be determined by the Board of Directors after a review of
the Corporation's operations and will be dependent upon, among other factors,
the Corporation's income, operating costs, overall financial condition and
capital requirements and upon general business conditions. The Corporation's
only source of funds for cash dividends will be dividends paid to the
Corporation by the Bank, which is subject to regulatory restrictions.
At January 31, 1996, there were approximately 536 holders of the
Corporation's common stock (based on the number of record holders as of the
date).
<PAGE>
Item 6. Selected Consolidated Financial Data
<TABLE>
The following table sets forth certain selected consolidated financial data
for the past five years.
<CAPTION>
Years Ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share data)
Income Statement Amounts:
Gross interest income. . . . . . . . . . . $6,859 $5,831 $5,589 $6,032 $7,056
Gross interest expense . . . . . . . . . . 3,632 2,652 2,744 3,516 4,985
Net interest income. . . . . . . . . . . . 3,227 3,179 2,845 2,516 2,071
Provision for possible loan
losses . . . . . . . . . . . . . . . . . (53) (102) (167) (235) (672)
Net interest income after
provision. . . . . . . . . . . . . . . . 3,174 3,077 2,678 2,281 1,399
Other operating income . . . . . . . . . . 810 746 824 614 981
Other operating expense. . . . . . . . . . 2,866 2,731 2,636 2,532 2,602
Income (loss) before income
taxes and other item . . . . . . . . . . 1,118 1,092 866 363 (222)
Income taxes . . . . . . . . . . . . . . . 282 278 219 85 -
Income (loss) before cumulative
effect of change in accounting
principle. . . . . . . . . . . . . . . . 836 814 647 278 (222)
Cumulative effect of change in
accounting principle. . . . . . . . . . -0- -0- -0- 39 -0-
Net income (loss). . . . . . . . . . . . . . $836 $814 $647 $317 $(222)
Per Share Data (1):
Net income (loss) per share . .(1) . . . . $ .93 $ .91 $ .72 $ .35 $ (.25)
Cash dividends per share . . . . . . . . . -0- -0- -0- -0- -0-
Book value (at year end) . . . . . . . . . 9.81 9.23 8.86 8.05 7.66
Balance Sheet Amounts:
(at year end)
Total assets . . . . . . . . . . . . . . . $95,037 $81,458 $79,205 $71,833 $73,622
Total loans. (net of unearned income). . . 61,373 55,463 49,084 46,701 51,086
Total deposits . . . . . . . . . . . . . . 82,256 71,324 68,805 63,496 65,856
Long-term debt . . . . . . . . . . . . . . 684 662 687 771 854
Total equity . . . . . . . . . . . . . . . 8,770 7,787 7,117 6,470 6,153
<FN>
<F1>
(1) Adjusted to reflect 1995 and 1994 stock dividends.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
This section of the Annual Report should be read in conjunction with the
statistical information, Financial Statement and related Notes and the selected
financial data appearing elsewhere in the Report.
New Accounting Standards
In March 1995 the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which requires certain assets to be reduced in value whenever events or
changes in circumstances indicate that the carrying value of those assets may
not be recoverable. The Statement is required to be applied for years
beginning after December 15, 1995. The Bank plans to adopt this new
accounting standard as of December 31, 1996 and does not expect the
adoption to have a material impact on the consolidated financial statements.
Financial Condition and Results of Operations
Commonwealth Bankshares, Inc. and Subsidiary
This commentary provides an overview of Commonwealth Bankshares Inc.'s
financial condition, changes in financial condition and results of operations
for the years 1993 through 1995. The following discussions should assist
readers in their analysis of the accompanying consolidated financial statements
and supplemental financial information. It should be read in conjunction with
the statistical information.
Earnings Overview
Net income in 1995 of $835.5 thousand represented a 2.6% increase over
the $814.1 thousand reported for the year 1994. This improvement in earnings
reflected the Bank's continued growth in core operating earnings and improved
credit quality, positive trends which are expected to continue into 1996.
Net income for 1994 of $814.1 thousand represented an increase of 25.8%
over the $647.3 thousand reported in 1993. This was primarily due to a growth
in core earnings and a decrease in the provision for loan losses, combined with
an improved net interest margin.
Commonwealth's core earnings, defined by the Corporation as pre-tax
earning exclusive of the provision for loan losses and nonrecurring items such
as securities gains, have improved steadily since 1993.
<PAGE>
The key profitability measures of return on average assets (ROA) and return
on average total shareholders' equity (ROE) reflected a modest decline in 1995
over 1994 as a result of the implementation of new technological innovations,
the planning for a more sophisticated customer information system and the
introduction of home banking scheduled for the first quarter of 1996. ROA
equalled .94% in 1995 compared with 1.04% in 1994. ROE equalled 10.17% in
1995 compared with 10.89% in 1994. ROA and ROE improved in 1994 over
1993 as a result of the Corporation's significantly increased earnings. These
ratios, along with other significant earnings and balance sheet information for
each of the years in the five-year period ended December 31, 1995, are shown
in Table 1 as follows:
<TABLE>
Table 1 - Selected Financial Information
<CAPTION>
(Dollars in thousands, except per share data)
Results of Operations (for the year): 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Income From Earning Assets $6,859 $5,831 $5,590 $6,031 $7,056
Net Interest Income 3,227 3,179 2,845 2,515 2,071
Provision For Loan Losses 53 102 167 235 672
Net Income (Loss) 836 814 647 317 (222)
Earnings Per Share:
Net Income (Loss) (1) $0.93 $0.91 $0.72 $0.35 ($0.25)
Average Shares Outstanding (1) 894,103 894,103 894,103 894,103 894,103
Financial Condition (at December 31):
Total Assets $95,037 $81,458 $79,205 $71,833 $73,622
Total Equity 8,770 7,787 7,117 6,470 6,153
Selected Ratios (for the year):
Return on Average Assets 0.94% 1.04% 0.86% 0.42% (0.28%)
Net Interest Margin 3.92% 4.53% 4.32% 3.87% 2.96%
<FN>
<F1>
1) Adjusted to reflect 1995 & 1994 stock dividends.
</FN>
</TABLE>
<PAGE>
Earnings per share in 1995 represented a 2.2% increase over 1994. This
followed by increase in 1994 of 26.4% over that of 1993. Significant items
affecting the change in earnings per share for 1995, 1994 and 1993 are
summarized as follows:
1995 1994
vs. vs.
1994 1993
Interest on loans and
investments and loan fees 17.6% increase 4.3% increase
Interest on deposits and
funds purchased 36.9% increase 3.3% decrease
Net interest income 1.50% increase 11.7% increase
Provision for loan losses 48.0% decrease 39.0% decrease
Other income 8.5% increase 9.4% decrease
<PAGE>
Net Interest Income and Net Interest Margin
Net interest income, the largest contributor to Commonwealth's earnings, is
defined as the difference between income on assets and the cost of funds
supporting those assets. Earning assets are composed primarily of loans and
securities while deposits and short-term borrowings represent the major portion
of interest-bearing liabilities. Variations in the volume and mix of these
assets and liabilities, as well as changes in the yields earned and rates paid,
are determinants in changes in net interest income.
Net interest income increased $47.9 thousand or 1.5% in 1995 to $3.23
million, compared to an increase of $333.8 thousand or 11.7% in 1994, or to
$3.18 million as compared with the $2.85 million reported in 1993. This
improved performance in 1995 was primarily the result of an increase in interest
income on loans and investments brought about by an increase in the volume
of loans and investment securities outstanding, in spite of the significant
increase in interest paid on deposits, as deposits repriced during the year. In
1994, the improved performance over 1993 was attributable to an increase in
interest income on loans and investments and a decrease in interest paid on
deposits.
The net interest margin for 1995 was 3.92% compared to 4.53% for 1994.
The decline was primarily attributable to a 19.0% increase in the cost of
deposits for 1995 as compared to 1994. The 4.53% net interest margin for
1994 represented an 11.6% increase over the 4.32% reported for 1993. During
1994, the improved performance was attributable to an increase in the interest
earned on loans and investment securities outstanding combined with a
decrease in the interest paid on deposits. 1993's performance was bolstered
by a significant decrease in interest paid on deposits. The performance
reported herein is reflected in Commonwealth's earning assets yield which
declined 51 basis points to 9.43 in 1994 from 9.94 in 1993, and increased 16
basis points to 9.59 in 1995. Commonwealth's average cost of deposits
declined 26 basis points from 4.04 in 1993 to 3.78 in 1994, and increased 72
basis points in 1995 from 1994 to 4.50%.
An increase in nonperforming loans during 1995 of $942 thousand to $1.8
million resulted in an unfavorable impact on the net interest margin. Without
this increase additional income under the contractual terms of the credits would
have been recorded in the amount of $115.9 thousand on all nonperforming
assets during 1995.
Decreased nonperforming loans in 1994 and 1993 had a favorable impact on
the net interest margin. Additional income of approximately $86.0 thousand for
1994, and $140.0 thousand for 1993 would have been realized had all
nonperforming loans performed as originally expected.
Average interest earning assets increased $11 million in 1995 as compared
with an increase of $3.26 million in 1994 and a $695 thousand increase in
1993. Average net loans increased $6.9 milion in 1995 as compared with an
increase of $5.35 million in 1994 and a decease of $1.1 million in 1993.
Average investment securities increased by $2 million during 1995 compared
with an increase of $934 thousand during 1994 and a decrease of $1.1 million
in 1993.
<PAGE>
Provision and Allowance for Loan Losses
The provision for loan losses is the annual cost of maintaining an allowance
for inherent credit losses. The amount of the provision each year and the level
of the allowance are matters of judgement and are impacted by many factors,
including actual credit losses during the period, the prospective view of credit
losses, loan performance measures and trends (such as delinquencies and
charge-offs), and other factors, both internal and external that may affect the
quality and future loss experience of the credit portfolio.
On a quarterly basis, Commonwealth evaluates the adequacy of the
allowance for loan losses, and, based on such review, establishes the amount
of the provision for loan losses. For large commercial and real estate
exposures, a detailed loan-by-loan review is performed. The remainder of the
commercial and real estate portfolio is analyzed utilizing a formula-based
determination of the allowance. The formula is impacted by the risk rating of
the loan, historical losses and expectations. Loan loss allowances for the
various consumer credit portfolios are based on historical and anticipated
losses and the current and projected characteristics of the various portfolios.
In addition, consideration of factors such as economic conditions, underwriting
standards, and compliance and credit administration practices may impact the
level of inherent credit loss. Management's evaluation and resulting provision
and allowance decisions are reviewed by the Board of Directors quarterly.
A strengthening economy, combined with the Corporation's continued loan
workout activities resulted in a reduction in the provision for loan losses
during 1995. The Corporation made provisions for loan losses of $52.9 thousand
in 1995 down $48.9 thousand from the $101.8 thousand reported in 1994. This
followed a $65 thousand or 39% reduction in the provision in 1994 over 1993.
Details of the activity in the allowance for loan losses for the past three
years are shown in Note 5 to the Consolidated Financial Statement.
Net charge-offs during 1995 amounted to $5 thousand compared with 1994
net charge-offs of $23 thousand which were down $50 thousand or 68.6% from
1993. 1993 net charge-offs of $73 thousand were down $204 thousand or
73.6% from the prior year. Current expectations are that total net charge-offs
in 1996 will be comparable to those of 1995. This expectation is based upon
assumptions regarding the general economic climate in Commonwealth's trade
area and the performance characteristics of the loan portfolio, including
Commonwealth's continued success in working out remaining nonperforming
loans. Changes in these conditions could warrant different results.
The allowance for loan losses at December 31, 1995 was $1.256 million
compared with $1.208 million at December 31, 1994. This represented 2.04%
of year-end gross loans at December 31, 1995 compared with 2.2% of year-end
gross loans at December 31, 1994. At December 31, 1993 the allowance
equalled $1.129 million, representing 2.3% of year-end gross loans.
<PAGE>
Nonperforming loans at December 31, 1995 increased $942 thousand and at
year end equalled $1.8 million. While this increase was substantial, it was
centered in a relatively small number of loans with large balances (7). Based
on the Bank's current workout plans, we expect to return each of these loans to
an accrual status during 1996 with minimum loss to the Bank. Each of the
loans are fully secured and represent minimal risk. Nonperforming loan levels
at December 31, 1994 declined $731 thousand from December 31, 1993.
The Corporation continues to allocate significant resources to the expedient
disposition and collection of nonperforming and other lower quality assets. As
a part of this workout process, the Corporation routinely re-evaluates all
reasonable alternatives, including sale of these assets. Individual action
plans have been developed for each nonperforming asset.
The amount of loans past due 90 days or more that were not classified as
nonaccrued loans totaled $198 thousand at December 31, 1995, $106 thousand
at December 31, 1994, and $48 thousand at December 31, 1993.
The following table reflects the trends discussed herein:
<TABLE>
Nonperforming Assets
<CAPTION>
December 31, (in thousands) 1995 1994 1993
<S> <C> <C> <C>
90 Days delinquent and still accruing $ 198,000 $ 106,000 $ 48,000
Nonaccrual 1,655,000 806,000 1,409,000
Foreclosed properties 3,467,000 3,364,000 3,550,000
$5,320,000 $4,276,000 $5,007,000
</TABLE>
Asset Quality Review and Credit Risk Management
In conducting business activities, the Corporation is exposed to the
possibility that borrowers or counterparties may default on their obligations to
the Corporation. Credit risk arises through the extension of loans, leases,
certain securities, and financial guarantees. To manage this risk, the
Corporation establishes policies and procedures to manage both on and
off-balance sheet risk and communicates and monitors the application of these
policies and procedures throughout the Corporation.
<PAGE>
Loan Portfolio
The Corporation's credit risk is centered in its loan portfolio which on
December 31, 1995 totaled $61.6 million, or 73.3% of total earning assets. The
Corporation's overall objective in managing loan portfolio risk is to minimize
the adverse impact of any single event or set of occurrences. To achieve this
objective, the Corporation strives to maintain a loan portfolio that is diverse
in terms of loan type, industry concentration, geographic distribution and
borrower concentration.
For commercial loans, loan officers prepare proposals supporting the
extension of credit. These proposals contain an analysis of the borrower and
an evaluation of the ability of the borrower to repay the potential credit. The
proposals are subject to varying levels of approval by senior line and credit
policy management prior to the extension of credit. Commercial loans receive
an initial risk rating by the originating loan officer. This rating is based on
the amount of credit risk inherent in the loan and is reviewed for
appropriateness by senior line and credit policy management. Credits are
monitored by line and credit policy personnel for deterioration in a borrower's
financial condition which would impact the borrower's ability to repay the
credit. Risk ratings are adjusted as necessary.
For consumer loans, approval and funding is conducted in various locations
with the major number of loans being approved at the Corporation's
headquarters facility.
An independent credit review group conducts ongoing reviews of the loan
portfolio, reexamining on a regular basis risk assessments for loans and overall
compliance with policy.
To limit credit exposure, the Corporation obtains collateral to support
credit extensions and commitments when deemed necessary. The most significant
categories of collateral are real and personal property, cash on deposit and
marketable securities. The Corporation obtains real property as security for
some loans that are made on the basis of the general creditworthiness of the
borrower and whose proceeds were not used for real estate-related purposes.
Senior level management is devoted to the management and/or collection of
certain nonperforming assets as well as certain performing loans. Aggressive
collection strategies and a proactive approach to managing overall credit risk
has expedited the Corporation's disposition, collection and renegotiation of
nonperforming and other lower-quality assets and allowed loan officers to
concentrate on generating new business.
As the volume of past due loans declines, it is anticipated that the level
of nonaccrual loans will be reduced. It should be noted that of all loans on
nonaccrual, the majority are making regular monthly payments. Two loans are
self-liquidating and payments are being received from the assignment of
commissions, two loans are in the process of being purchased by the Small
Business Administration, and the others are for the most part fully secured with
workout arrangements currently in place.
If nonaccruing loans had been performing fully, these loans would have
contributed an additional $116 thousand in 1995, $86 thousand to interest
income in 1994, and $140 thousand in 1993.
<PAGE>
The Corporation's other real estate owned (OREO) at December 31, 1995
was relatively unchanged from the $3.4 million reported at December 31, 1994.
At December 31, 1993 other real estate owned equalled $4.36 million. Of the
$3.4 million, one property represents a $1.9 million investment. This property
is 100% leased and the Bank has relocated its Lynnhaven Office to the facility.
There are two other properties that are performing pursuant to the established
leases.
During the last three years, there were additions to and liquidations of
other real estate owned. Properties acquired during 1995 equalled $680 thousand
compared with $631 thousand during 1994 and $237 thousand in 1993.
Proceeds from properties disposed of during 1995 equalled $658 thousand
compared with $904 thousand in 1994 and $424 thousand in 1993.
During 1995, there was a net gain on the sale of other real estate of $8.7
thousand compared with net losses equalling $11.1 thousand in 1994, and
$20.7 thousand in 1993.
The Bank has developed individual action plans for each property for the
ultimate liquidation of these properties. The objectives are diligently pursued
by management and reviewed with the Board of Directors monthly.
Other Income
Total other income increased 8.5% in 1995 following a 9.4% decrease in
1994 and a 34.1% increase in 1993. The increase in 1995 was attributable to a
gain in sale of loans of $17.8 thousand, and a gain in securities available for
sale of $28.4 thousand, compared with a loss of $9.2 thousand in 1994 and a
gain in 1993 of $121.8 thousand, and a gain on the sale of real estate of $8.7
thousand in 1995 compared with losses of $11.2 thousand and $20.7 thousand
in 1994 and 1993 respectively. In each of the three years mentioned, income
received from OREO properties equalled $208.9, $224.0, and $126.5 thousand
respectively. The increases realized in 1993 were supported by a growth in
service charges on deposit accounts of $112.1 thousand or 27.9%.
Commonwealth's other fee-generating businesses, either supported or
contributed to the Corporation's steady growth in other revenues.
The income achieved in service charges and commissions and fees on
deposits, are indicative of the recent trend in commercial banking to generate
additional income from services not related to the lending function.
<PAGE>
Other Expense
Total other expense increased to $2.9 million in 1995 or 4.9% compared to
an increase of 3.6% in 1994 and an increase of 4.1% in 1993. This represents
a moderate increase when compared with the increase in the Corporation's
noninterest income and the Bank's overall growth. These results reflect
management's continued emphasis and commitment to the management of this
area of the Bank's operations. Salaries and employee benefits, the largest
component of other expenses increased by 6.6% in 1995. This expense
increased 8.3% in 1994 and 2.0% in 1993. Net occupancy expense increased
$73.3 thousand in 1995, following a $37.1 thousand decrease in 1994, and a
$27.7 thousand increase in 1993. The increases in 1995 and 1993 reflected
necessary modifications and improvements to the Bank's physical facilities as
well as the installation of new ATM equipment at all ATM locations during 1995.
Other operating expenses, which include a grouping of numerous transactions
relating to normal banking operations, decreased $43.7 thousand or 5.1%
following an increase of $11.9 thousand or 1.4% in 1994 and an increase of
$24.9 thousand or 3.1% in 1993. Again, when compared with the increase
in the Corporation's noninterest income during the past three years, the
increase in noninterest expense is considered nominal and reflects normal
increases for outside services.
Liquidity and Interest Sensitivity
Bank liquidity is a measure of the ability to generate and maintain
sufficient cash flows to fund operations and to meet financial obligations to
depositors and borrowers promptly and in a cost-effective manner. Asset
liquidity is provided primarily by maturing loans and investments, and by cash
received from operations. Other sources of asset liquidity include readily
marketable assets, especially short-term investments, and longer-term investment
securities that can serve as collateral for borrowings. On the liability side,
liquidity is affected by the timing of maturing liabilities and the ability to
generate new deposits or borrowings as needed.
Commonwealth's Asset/Liability Management Committee (ALCO) is
responsible for formulating liquidity strategies, monitoring performance based
on established objectives and approving new liquidity initiatives. ALCO's
overall objective is to optimize net interest income within the constraints of
prudent capital adequacy, liquidity needs, the interest rate and economic
outlook, market opportunities, and customer requirements. General strategies to
accomplish this objective include maintaining a strong balance sheet, achieving
solid core deposit growth, taking on manageable interest rate risk, adhering to
conservative financial management on a daily basis, monitored regularly by
ALCO and reviewed periodically with the Board of Directors.
<PAGE>
The Bank's funding requirements are supplied from a wide range of
traditional sources, including various types of demand deposits, money market
accounts, certificates of deposit and short-term borrowings. Large certificates
of deposit, over $100,000 accounted for 4.8%, 4.19%, and 7.3% of the Bank's
total deposits at December 31, 1995, 1994, and 1993, respectively. As a
percentage of average assets, core deposits have increased from 81.1% in
1993 to 86.9% in 1994, and 87.8% in 1995. Management seeks to ensure
adequate liquidity to fund loans, deposit withdrawals, and the Bank's financial
requirements and opportunities. To provide liquidity for current, ongoing and
unanticipated needs, the Bank maintains a portfolio of marketable investment
securities, structures and monitors the flow of funds from these securities and
from maturing loans, and maintains access to short-term funding sources,
including a Federal funds line of credit with its correspondent banks and the
ability to borrow from the Federal Reserve System.
The Corporation's loan portfolio net of unearned income and allowance for
loan losses increased by 10.8% to $60.1 million in 1995 compared with a
13.1% increase in 1994 to $54.3 million and an increase of 13.1% to $47.9
million at year end 1993. Balances in a number of loan categories increased.
Total commercial loans increased 13.1% to $36.2 million in 1995 compared with
an increase of 14.1% to $32.0 million in 1994, following an 11.4% increase in
1993 to $28.0 million. These increases reflect a continuing exodus of
commercial customers from the area's regional institutions to Bank of the
Commonwealth, the oldest community Bank in Southside Hampton Roads.
Additionally, consumer loans increased $1.7 million or 7.1% in 1995 following
an increase of $2.3 million or 10.9% in 1994 and a decrease of $306.7
thousand or 1.4% in 1993.
Sources of Funds
Purchased liabilities are composed of certificates of deposit of $100,000
and over (large CDs) and balances held in "sweep accounts" for customers.
Purchased funds at December 31, 1995 equalled $6.3 million or a 68.6%
increase in short-term borrowings during 1995 following a $1.6 million or 35.3%
decrease in short term borrowings during 1994 and a $1.3 million or 22.4%
decrease in short-term borrowings during 1993. At December 31, 1995 and
1994, approximately 100% of Commonwealth's purchased funds consisted of
funds invested by local customers which, as such, are less volatile than other
categories of purchased funds or brokered deposits. This compares with
approximately 91.2% at year-end 1993. On both an average and year-end
basis, the composition of purchased funds continued to shift in 1995 and 1994
from the balance sheet category of large CDs to short-term borrowings. This
shift in mix coincided with liquidity needs and balance sheet management
strategies in a low interest rate environment.
Uses of Funds
Total earning assets at December 31, 1995 increased 17.3% from year-end
1994 compared with 1994's increase of 2.8% and 1993's increase of 11.7%.
The increase of 40.1% or $5.8 million in 1995 reflected investments in
government securities and Federal funds sold. The increases in 1994 reflected
higher levels of loans, while the increases in 1993 reflected higher loans
outstanding and higher levels of investments in Federal funds sold.
<PAGE>
The composition of long-term investment securities as of December 31, 1995
and 1994 is presented in Note 3 to the Consolidated Financial Statements.
At year-end 1995, 1994 and 1993, investment securities totaled $17.2
million, $14.9 million, and $13.9 million respectively.
In managing the investment securities portfolio, management's philosophy
has been to provide the maximum return over the long term on funds invested
while giving consideration to risk and other Corporate objectives. During
periods of increasing interest rates, the market value of the investment
portfolio declines in relation to book value.
Decisions to acquire investments of a particular type are based upon an
assessment of economic and financial conditions, including interest rate risk,
liquidity, capital adequacy, the type of incremental funding available to
support such assets and an evaluation of alternative loan or investment
instruments.
Investment securities are purchased with the ability to hold until maturity
and with the intent to hold for the foreseeable future. Management re-evaluates
asset and liability strategies when economic and financial conditions fluctuate
in a magnitude that might adversely impact the Company's overall interest rate
risk, liquidity or capital adequacy positions. Re-assessment may alter
management's intent to hold certain securities for the foreseeable future and
result in repositioning a portion of the investment portfolio. Often, security
sales are required to implement a change in strategy.
In keeping with the investment strategy developed in late 1991, the Bank's
Investment Committee moved forward with its plan to restructure the securities
portfolio to a laddered position by staggering the maturities from one to five
years on replacement bonds. The Committee's intent was to have the entire
portfolio positioned by the end of the third quarter of 1992 in such a way that
it reflected the investment policy and strategy of holding securities within the
portfolio for investment and disposing of securities only when it becomes
absolutely necessary to meet liquidity needs.
At year-end 1992 the securities portfolio restructuring had been completed
and was therefore treated as "held-for-investment", inasmuch as the Bank has
the ability and the intention to hold the securities to maturity.
As a result of changes in accounting standards for investment securities and
in preparation for the implementation of FAS 115 in 1994, it was the decision
of the investment Committee to again reposition the bonds held in the portfolio.
This repositioning was completed at year-end 1993. All securities were
reclassified as of January 1, 1994 and placed in the appropriate portfolios
which are "Securities to be Held to Maturity" and "Securities Available for
Sale". The Bank does not maintain a trading account.
<PAGE>
On November 15, 1995, the Financial Accounting Standards Board released
their Implementation Guide of Statement 115. As expected, the guide allowed
financial institutions to make a one-time reclassification (between November
15th and December 31, 1995) of investments between the ""Available-for-Sale"
(AFS) and "Held-to-Maturity" (HTM) portfolios. During this period (one day
only), transfers between HTM and AFS could be made without the risk of
tainting other securities within the portfolio. As a result of this action, an
adjustment was made in the Bank's securities portfolio. Certain bonds were
sold in anticipation of their "call" in order to prefund the reinvestment. This
partial portfolio restructure will enable the Bank to smooth out cashflows
within the Bank's "Investment Ladder". See Note 3 to the Consolidated Financial
Statements for a breakdown of the securities held in each of these accounts.
Year-end total loans net of unearned income increased $5.90 million or
10.6% in 1995 following increases of 12.9% or $6.37 million and 5.1% or $2.38
million at year end 1994 and 1993, respectively. The results were largely due
to the efforts of the Bank's officers to develop new loan relationships with
customers from the area's regional institutions combined with an improved
economic environment.
Loans represented the largest category of earning assets and the Bank will
continue with its efforts to develop creditable loan relationships in order to
enhance its earnings opportunities while simultaneously strengthening its
underwriting criteria. The policies, procedures and lending guidelines
implemented during the past two years have been reported to shareholders in
detail in previous quarterly and annual reports.
A number of measures have been taken by Commonwealth over the past
several years to reduce overall exposure and earnings vulnerability in the real
estate sectors of the Corporation's trade area, including strengthening real
estate underwriting, management review policies and practices, and reducing
higher risk concentrations within the real estate portfolio. Commonwealth's
real estate portfolio is comprised of loans to customers located within the
Corporation's established marketplace. Diversification of the loan portfolio
continues.
During the past two years, a considerable volume of new loan relationships
have been developed with "old line and well-established" local businesses, who
have transferred their relationships to Commonwealth from other "regional
financial institutions" that are experiencing further consolidation. This has
been an excellent source of new business for the Bank. We intend to
aggressively continue to target these relationships in future periods.
Further explanations regarding the changes in the volume of outstanding
loans are included in Management's Discussion and Analysis of Financial
Condition and Results of Operations under the section entitled "Liquidity".
<PAGE>
Dividends and Dividend Policy
The Corporation's Board of Directors determines the amount of and whether
or not to declare dividends. Such determinations by the Board take into
account the Corporation's financial condition, results of operations, and other
relevant factors. The Corporation's only source of funds for cash dividends are
dividends paid to the Corporation by the Bank.
Based on the Corporation's earnings record for 1995 and 1994, the
Corporation declared a 6% and 5% stock dividend respectively. It is anticipated
that this policy will continue to be re-evaluated during 1996. Based on the
Corporation's improved record of profitability, it is expected that the payment
of cash dividends will be resumed in future periods.
Income Taxes
Corporations are required to pay the greater of the regular corporate income
tax or the alternative minimum tax (AMT).
In 1995, income tax expense was $282.1 thousand, up from $278.3
thousand in 1994, and $218.7 thousand in 1993. These increases were
attributable to improvements in earnings.
Inflation
The Corporation carefully reviews Federal Reserve monetary policy in order
to insure an appropriate position between the cost and utilization of funds.
The effect of changing prices on financial institutions is typically
different than on non-banking companies since virtually all of a bank's assets
and liabilities are monetary in nature. In particular, interest rates are
significantly affected by inflation, but neither the timing nor magnitude of the
changes are directly related to price level indices. Therefore, the Corporation
can best counter inflation over the long term by managing net interest income
and controlling net increases in noninterest income and expenses.
Capital Resources and Adequacy
Average shareholders' equity increased at the rate of 13.4% in 1995
compared with 9.4% in 1994, and 7.8% in 1993. During these periods, the
main source of capital to the Bank has been internally generated retained
earnings.
The Federal Reserve Board, the Office of the Controller of the Currency, and
the FDIC have issued risk-based capital guidelines for U. S. banking
organizations. These guidelines provide a capital framework that is sensitive
to differences in risk profiles among banking companies.
<PAGE>
Risk-based capital ratios are another measure of capital adequacy. At
December 31, 1995, Commonwealth's consolidated risk-adjusted capital ratios
were 13.1% for Tier 1 and 14.4% for total capital, well above the required
minimums of 4.0% and 8.0%, respectively, as compared with 10.0% and 11.3%
respectively at December 31, 1994, and 9.84% and 11.1% at December 31,
1993. These ratios are calculated using regulatory capital (either Tier 1 or
total capital) as the numerator and both on-and off-balance sheet risk-weighted
assets as the denominator. Tier 1 capital consists primarily of common equity
less goodwill and certain other intangible assets. Total capital adds certain
qualifying debt instruments and a portion of the allowance for loan losses to
Tier 1 capital. One of four risk weights, primarily based on credit risk, is
applied to both on- and off-balance sheet assets to determine the asset
denominator. Under Federal Deposit Insurance Corporation (FDIC) rules,
Commonwealth was considered "well-capitalized," the highest category of
capitalization defined by the regulators allowing for the lowest level of FDIC
insurance premium rates, as of December 1995, 1994 and 1993.
The Bank's capital is adequate to support the present level of assets and to
provide for some future growth.
At December 31, 1995, shareholders' equity stood at $8.77 million as
compared with $7.79 million at year-end 194 and $6.85 million at year-end
1993. These increases were brought about by a net profit of $835.5 thousand
in 1995, combined with a change in unrealized gains of $149.8 thousand on
securities available for sale, a net profit of $814.1 thousand in 1994, and a
net profit of $647.3 thousand in 1993.
In order to maintain a strong equity capital position, to protect against
the risks of loss, in the investment and loan portfolios and on other assets,
management will continue to monitor the Bank's capital position. Several
measures have been or will be employed, to maintain the Bank's capital
position, including but not limited to:
Continuitng its efforts to return all nonperforming assets to performing
status,
Monitoring the Bank's growth, and
Continued utilization of its formal asset/liability policy.
Once again, it should be noted that the Bank's capital position has always
exceeded and continues to exceed the minimum standards established by the
regulatory authorities.
<PAGE>
<TABLE>
FIVE-YEAR SUMMARY CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $5,135,875 $4,764,835 $4,603,437 $4,504,842 $2,364,182
Investments held for sale -- -- -- -- 12,273,122
Investment securities -- -- 13,923,049 14,243,807 143,900
Investment Securities:
Available for Sale 5,968,175 6,489,145 -- -- --
Held to Maturity 11,290,140 8,393,628 -- -- --
Federal funds sold 5,131,844 1,056,522 6,360,000 870,000 2,500,000
Loans:
Commercial 8,889,880 9,899,880 9,539,927 8,523,608 10,755,228
Commercial Construction 1,470,129 988,192 478,214 410,481 341,684
Commercial Mortgage 25,795,631 21,068,295 17,983,733 16,214,371 15,725,535
Residential Mortgage 18,668,317 16,376,434 14,315,477 13,094,969 14,088,244
Installment loans to 3,970,015 4,103,107 4,075,197 4,608,809 4,564,748
individuals
Other 2,809,860 3,272,096 3,006,057 4,413,970 6,466,974
GROSS LOANS 61,603,832 55,708,004 49,398,605 47,266,208 51,942,413
Less: Unearned income (231,186) (244,930) (314,728) (565,581) (856,656)
Allowance for loan losses (1,256,000) (1,208,000) (1,129,000) (1,034,742) (1,076,512)
60,116,646 54,255,074 47,954,877 45,665,885 50,009,245
Premises and equipment 2,340,746 1,912,657 1,968,755 1,764,975 1,827,523
Other assets 5,053,931 4,586,250 4,394,932 4,783,526 4,503,760
$95,037,357 $81,458,111 $79,205,050 $71,833,035 $73,621,732
LIABILITIES & SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing $13,147,115 $9,080,263 $11,504,308 $7,291,537 $6,281,498
Interest bearing 69,109,244 62,243,345 57,300,448 56,203,792 59,574,464
TOTAL DEPOSITS 82,256,359 71,323,608 68,804,756 63,495,329 65,855,962
Securities sold under
agreement to repurchase 2,290,477 744,855 1,616,177 372,809 --
Long-term debt 684,019 661,504 687,616 770,871 854,126
Other liabilities 1,036,116 940,808 979,455 724,300 758,743
TOTAL LIABILITIES 86,266,971 73,670,775 72,088,004 65,363,309 67,468,831
SHAREHOLDERS' EQUITY
Common stock 2,235,258 2,109,313 2,009,380 2,009,380 2,009,380
Additional capital 3,715,666 3,376,454 3,122,226 3,122,226 3,122,226
Unrealized gains (loss) on
securities available for sale 7,900 (141,900) -- -- --
Retained earnings 2,811,562 2,443,469 1,985,440 1,338,120 1,021,295
8,770,386 7,787,336 7,117,046 6,469,726 6,152,901
$95,037,357 $81,458,111 $79,205,050 $71,833,035 $73,621,732
</TABLE>
<PAGE>
<TABLE>
FIVE-YEAR SUMMARY OF CONSOLIDATED OPERATIONS
<CAPTION>
Years Ended December 31
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Interest on loans and investments and loan fees $6,858,537 $5,831,266 $5,589,544 $6,031,054 $7,055,857
Interst on deposits and federal funds purchased 3,631,792 2,652,383 2,744,515 3,515,789 4,984,961
Net Interest Income 3,226,745 3,178,883 2,845,029 2,515,265 2,070,896
Provision for loan losses (52,932) (101,787) (166,869) (235,000) (672,070)
Net Interest Income After Provision
for Loan Losses 3,173,813 3,077,096 2,678,160 2,280,265 1,398,826
Other Income
Security gains (loss) 28,430 (9,187) 121,775 46,033 479,474
Gains (loss) on sale of real estate 8,668 (11,146) (20,661) (30,186) --
Other operating income 772,963 766,736 722,647 598,639 501,614
Total Other Income 810,061 746,403 823,761 614,486 981,088
Other Expenses:
Salaries and employee benefits 1,354,088 1,270,731 1,172,650 1,149,443 1,152,011
Occupancy expenses (net) 276,531 203,212 240,329 212,634 227,108
Furniture and equipment expenses 432,693 410,621 388,236 359,959 355,139
Other operating expenses 802,897 846,593 834,672 809,768 867,266
Total Other Expenses 2,866,209 2,731,157 2,635,887 2,531,804 2,601,524
Income (Loss) Before Income Taxes
and Other Item 1,117,665 1,092,342 866,034 362,947 (221,610)
Applicable Income Tax Expense 282,148 278,251 218,714 85,518 --
Income (loss) before cumulative effect of
change in accounting principle 835,517 814,091 647,320 277,429 (221,610)
Cumulative effect of change in
accounting principle - - - 39,396 -
Net Income (Loss) for Year $835,517 $814,091 $647,320 $316,825 ($221,610)
Net Income (Loss) per share
based on weighted average
number of shares outstanding (1) $0.93 $0.91 $0.72 $0.35 ($0.25)
Average shares outstanding (1) 894,103 894,103 894,103 894,103 894,103
<FN>
<F1>
(1) Adjusted to reflect 1995 & 1994 stock dividends.
</FN>
</TABLE>
<PAGE>
Item 8. Financial Statements and Supplementary Data
The report of independent auditors and the consolidated financial
statements of the Company are submitted in a separate section of this report.
Item 10. Directors and Executive Officers of the Registrant
The Corporation's Articles of Incorporation provide for the Board of
Directors to be divided into three classes, as nearly equal in number as
possible. Each class serves for a term of three years, with one class being
elected each year. The Board of Directors currently consists of eight
directors.
At the 1996 Annual Meeting, two directors comprising Class 2 will be
elected to serve until the 1998 Annual Meeting of Shareholders and until their
successors are elected and qualified. The Board recommends that the two
nominees named below be elected. Proxies received will be voted for the
election of such nominees, unless marked to the contrary. A shareholder who
desires to withhold voting of the proxy for all or one or more of the nominees
may so indicate on the proxy. All of said nominees are currently members of
the Board. All have consented to be named and have indicated their intent to
serve if elected. However, in the event any such nominee is not available for
election, the proxies will be voted for such person as shall be designated by
the Board as a replacement.
There is set forth below as to each of the nominees, and the remaining
incumbent directors who will continue to serve as indicated below, certain
information including age, principal occupation, and the year each nominee or
incumbent director first became a director. The dates shown for the first
election as a director represents the year in which the nominee or incumbent
director was first elected to the Board of the Corporation or its predecessors.
Unless otherwise indicated, the business experience and principal occupation
shown for each nominee or incumbent director has extended five or more
years.
The following table sets forth as of February 29, 1996 certain information
with respect to the beneficial ownership of the Corporation's Common Stock by
(i) each director or nominee, (ii) the executive officer listed in the Summary
Compensation Table and (iii) all directors and executive officers as a group:
<PAGE>
Number (Percent)
Served of Shares
as Principal Occupation Owned as of
Director During Past February 29, 1996
Name Age Since Five Years (1)(2)
Nominees For Election Whose Terms Expire in 1999 (Class 2)
Herbert L. Perlin 55 1987 General Agent for Guardian 18,893(3)
Life Insurance Co; 1.99%
President of Perlin Pension
Services Inc., a regional
pension administration
company.
George H. Burton, Jr. 85 1981 President of Burton Lumber 28,904(4)
Corp., a building materials 3.04%
and supplies company
located in Chesapeake,
Virginia.
Incumbent Directors Whose Terms Expire in 1997 (Class 3)
William P. Kellam 81 1971 Retired President of Kellam- 14,287(5)
Eaton Insurance Agency, 1.50%
Inc. (real estate and
insurance), Virginia Beach,
Virginia, a position he held
until 1986.
Edward J. Woodard, 53 1973 Chairman of the Board, 14,924(6)
Jr. President and Chief 1.57%
Executive Officer of the
Corporation and the Bank.
Morton M. Zedd 60 1971 Real estate developer and 46,914(7)
investor in Richmond, 4.93%
Virginia.
Incumbent Directors Whose Terms Expire in 1998 (Class 1)
William D. Payne, 60 1988 General and vascular 5,595(8)
M.D. surgeon with Drs. Payne *
and Ives, Inc. in Norfolk,
Virginia
Morton Goldmeier 72 1988 President of Hampton 35,757(9)
Roads Management 3.76%
Associates, Inc.
Richard J. Tavss 56 1988 Senior counsel of Tavss, 59,609(10)
Fletcher, Earley & King, P. 6.27%
C. in Norfolk, Virginia
All Directors, nominees and executive officers as Group (11 persons) 234,876
24.69%
<PAGE>
* Percentage of ownership is less than 1% of the outstanding shares of
Common Stock of the Corporation.
(1) Beneficial ownership as reported in the above table has been determined
in accordance with Rule 13d-3 of the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended,
and includes shares, where applicable, which an individual has the right
to acquire within 60 days through the exercise of stock options.
(2) Based on 951,291 shares, 894,103 issued and outstanding and 57,188
stock options issued and outstanding as of February 29, 1996.
(3) Includes 5,150 shares which Mr. Perlin has the right to acquire through
the exercise of stock options, 9,492 shares registered in the name of
Herbert L. Perlin, Profit sharing Trust, of which Mr. Perlin is Acting
Trustee.
(4) Includes 5,150 shares which Mr. Burton has the right to acquire through
the exercise of stock options.
(5) Includes 5,150 shares which Mr. Kellam has the right to acquire through
the exercise of stock options.
(6) Includes 8,065 shares which Mr. Woodard has the right to acquire
through the exercise of stock options, 336 shares registered in the name
of E.J. Woodard, Jr., Custodian for Troy Brandon Woodard; 798 shares
registered in the name of E.J. Woodard, Jr. and Sharon W. Woodard,
Custodians for Troy Brandon Woodard; and 1,113 shares held in trust,
representing the proceeds of a self-directed Individual Retirement Trust
for the benefit of E.J. Woodard, Jr.
(7) Includes 5,150 shares which Mr. Zedd has the right to acquire through
the exercise of stock options, 34,929 shares registered in the name of
Five Associates, a Virginia limited partnership, of which Mr. Zedd is
general partner; and 6,351 shares in the Maxwell Zedd, Trust which Mr.
Zedd is benficiary.
(8) Includes 5,150 shares which Dr. Payne has the right to acquire through
the exercise of stock options.
(9) Includes 5,150 shares which Mr. Goldmeier has the right to acquire
through the exercise of stock options.
(10) Includes 5,150 shares which Mr. Tavss has the right to acquire through
the exercise of stock options, 658 shares registered in the name of
Richard J. Tavss, Custodian for Bobbie J. Tavss; and 411 shares
registered in the name of the Estate of Daniel J. Tavss c/o Richard J.
Tavss, trustee under the will.
No family relationships exist among any of the directors or between any
of the directors and executive officers of the Corporation.
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
As of February 29, 1995, there were two shareholders of the Corporation
known to it to be the beneficial owner of more than 5% of the Corporation's
Common Stock: Richard J. Tavss, Two Commercial Place, Norfolk, Virginia
23510 and Morton M. Zedd, 2 Sandown Circle, Richmond, Virginia 23329. Mr.
Tavss beneficially owns 51,377 shares (6.1%) of the Corporation's Common
Stock and Mr. Zedd beneficially owns 51,385 shares (6.1%). The percentages
are based on 843,725 shares outstanding as of February 29, 1995.
INFORMATION REGARDING THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Corporation's Board of Directors has primary responsibility for the
determination of corporate policies and the overall financial condition of the
Corporation. The Board appoints a chief executive and other officers who are
responsible for conducting business on a day-to-day basis under the Board's
guidance and perspective. In turn, the management of the Corporation
provides the Board of Directors with a regular and detailed flow of information
relating to the Corporation's overall condition and financial performance.
During 1995, the Board of Directors met twelve times for regular monthly
meetings. All directors attended at least 75% of the total meetings of the
Board of Directors and the various committees on which they are members.
The Board of Directors has five standing committees: Executive
Committee; Audit Committee; Compensation Committee; Investment
Committee; and Nominating Committee. At its first meeting after the annual
meeting of shareholders, the Board elects each Committee. Committee
members serve for one year or until the first meeting of the Board following the
next annual meeting of shareholders.
Executive Committee
The Executive Committee during 1995 was composed of eight rotating
directors: E. J. Woodard, Jr.; George H. Burton, Jr.; William P. Kellam; Morton
M. Zedd; Morton Goldmeier; Richard J. Tavss; William D. Payne; and Herbert
L. Perlin. When the Board is not in session, the Executive Committee is
authorized to exercise all of the Board's power except for certain fundamental
responsibilities, such as approval of an amendment of the articles of
incorporation or a plan of merger or consolidation. The Executive Committee
meets to act on capital expenditures, to elect officers other than senior
officers and to review and consider certain matters and policies for
recommendation to the full Board. The Executive Committee met 32 times in 1995.
Audit Committee
The Audit Committee during 1995 was composed of three directors:
George H. Burton, Jr.; William P. Kellam; and Morton Goldmeier, none of whom
is an officer. The functions of the Audit Committee are to (i) recommend
selection of independent certified public accountants, (ii) approve the scope of
the accountants' examination, (iii) review internal accounting procedures, (iv)
review reports of examination by the accountants and by regulatory agencies
having jurisdiction over the Corporation, (v) monitor internal programs to
ensure compliance with the law and avoidance of conflicts of interest, and (vi)
aid the Board in fulfilling its responsibilities for financial reporting to the
public. There was 1 meeting held by the Audit Committee during 1995.
<PAGE>
Personnel/Compensation Committee
The Personnel Committee during 1995 was composed of four directors: E.
J. Woodard, Jr.; Richard J. Tavss; William P. Kellam and William D. Payne,
M.D. The Compensation Committee recommends the compensation of officers
to the Executive Committee and the Board. There was 1 meeting held by the
Compensation Committee during 1995.
Investment Committee
The Investment Committee during 1995 was composed of four directors: E.
J. Woodard, Jr.; Herbert L. Perlin; Morton Goldmeier; and George H. Burton, Jr.
The Investment Committee administers the investment policies of the
Corporation. The Committee met 5 times during 1995.
Nominating Committee
The Nominating Committee of the Board during 1995 was composed of four
directors: E. J. Woodard, Jr.; Morton M. Zedd; William P. Kellam; and Richard
J. Tavss. The basic function of this Committee is the recommendation of those
persons to be designated as Board nominees for election to the Board by the
shareholders of the Corporation at its Annual Meeting. The Nominating
Committee met 1 time in 1995.
The Nominating Committee will consider suggestions from all sources,
including shareholders, regarding possible candidates for nomination and
election to the Board. Generally, candidates should be highly qualified by
business, professional or comparable experience, affirmatively desirous of
serving on the Board, and able to represent the interest of all shareholders.
Shareholders wishing to nominate a candidate should forward the candidate's
name and a description of the candidate's background and qualifications to the
Corporate Secretary.
DIRECTOR'S COMPENSATION
The fees paid the Corporation's directors during 1995 were $375 for each
meeting of the Board attended. In addition, directors received $150 for
attending meetings of each of the standing committees. The Corporation has
adopted a Director's Deferred Compensation Plan by which directors may defer
recognition of income on all or a portion of their meeting fees earned during
the fiscal year. A total of $22,275 was deferred by directors in 1995 pursuant
to the Plan.
EXECUTIVE COMPENSATION
The following table sets forth the annual compensation paid or accrued by
the Corporation and its subsidiaries to officers of the Corporation and the
Bank, for the past three fiscal years.
<PAGE>
<TABLE>
Summary Compensation Table
<CAPTION>
Annual Compensation Long Term
Compensation
Other All
Name and Annual Other
Principal Position Year Salary(1) Compensation(2) Compensation
<S> <C> <C> <C> <C>
Edward J. Woodard, Jr., 1995 158,300 - 6,759(3)
CLBB 1994 145,650 - 7,068(4)
Chairman of the Board 1993 121,500 - 10,944(5)
President and Chief
Executive Officer
John H. Gayle 1995 50,000 - 3,125(6)
Senior Vice President 1994 42,500 - 2,285(6)
and Secretary 1993 36,500 - 811(6)
Simon Hounslow 1995 37,500 - 433(8)
Vice President and 1994 33,250 - 554(8)
Commercial Loan 1993 28,250 7,767(7) 353(8)
Officer
Richard W. Webb 1995 44,500 - 2,071(10)
Vice President and 1994 42,167 - -
Special Projects 1993 16,427(9) - -
Officer
<FN>
<F1>
(1) Includes base salary, bonus, and directors' fees.
<F2>
(2) All perquisites or other benefits of a personal nature did not exceed
the lesser of $50,000 or 10% of the total annual salary shown in the
table for Mr. Woodard.
<F3>
(3) Amount represents (i) contributions of $2,334 to the Bank's 401(k) Profit
Sharing Plan on behalf of Mr. Woodard and (ii) accrual of $4,425 in
connection with a Deferred Supplemental Compensation Agreement with
Mr. Woodard.
<F4>
(4) Amount represents (i) contributions of $2,643 to the Bank's 401(k) Profit
Sharing Plan on behalf of Mr. Woodard and (ii) accrual of $4,425 in
connection with a Deferred Supplemental Compensation Agreement with
Mr. Woodard.
<F5>
(5) Amount represents (i) contributions of $1,251 to the Bank's 401(k) Profit
Sharing Plan on behalf of Mr. Woodard and (ii) accrual of $9,693 in
connection with a Deferred Supplemental Compensation Agreement with
Mr. Woodard.
<F6>
(6) Amount represents contribution to the Bank's 401(k) Profit Sharing Plan
on behalf of Mr. Gayle.
<F7>
(7) Amount represents compensation to Mr. Hounslow for accrued vacation
and sick leave.
<F8>
(8) Amount represents contribution to the Bank's 401(k) Profit Sharing Plan
on behalf of Mr. Hounslow.
<F9>
(9) Amount represents salary for August 1993 through December 1993.
<F10>
(10) Amount represents contribution to the Bank's 401(k) Profit Sharing Plan
on behalf of Mr. Webb.
</FN>
</TABLE>
<PAGE>
Employment Agreements
The Boards of Directors of the Corporation and the Bank approved the
execution of an employment agreement (the "Agreement"), effective January 1,
1990, between the Bank and Edward J. Woodard, Jr. ("Woodard"), Chairman
of the Board, President and Chief Executive Officer of the Corporation and the
Bank. The Agreement, as amended on January 1, 1994, provides for
employment of Woodard, with duties and responsibilities substantially the same
as those assigned on the date of the agreement, until the earlier of (i)
December 31, 1998, (ii) his death, or (iii) his physical or mental disability;
provided, however, that provisions are made for the termination of employment
by either the Bank or Woodard in the event of a "change in control" of the
Corporation or the Bank, or for "good reason"; and provided further, however,
that the Agreement will be renewed automatically for an additional period of one
year on each January 1, unless prior to August 1 in any given year either party
to the Agreement shall give notice of non-renewal to the other party.
In the case of termination (i) by the Corporation or the Bank prior to a
"change in control," unless "for good cause," or (ii) by Woodard for "good
reason," certain payments stipulated in the Agreement are due Woodard as
follows: (a) if by the Corporation or the Bank prior to "a change in control,"
unless "for good cause," twelve equal monthly payments equal to Woodard's
base salary, plus director's fees, if any; and (b) if by Woodard for "good
reason" or by the Bank without "good cause," 60 equal monthly payments equal to
approximately three times Woodard's existing salary at the time of termination.
A "change in control" is defined in the Agreement to occur upon (i) any
entity acquiring or entering into a definitive agreement to acquire more than
25% of the stock of either the Corporation or the Bank, (ii) a change in the
composition of a majority of the Board of Directors of either the Corporation or
the Bank in any twelve month period, or (iii) the Corporation ceasing to be the
owner of all of the Bank's stock, except for directors' qualifying shares. The
term "for good cause" is defined as dismissal of Woodard for his failure to
perform required services, gross or willful neglect of duty or illegal or
intentional acts demonstrating bad faith. The term "good reason" is defined to
include the assignment to Woodard of duties or responsibilities inconsistent
with those in effect on the dates of the Agreement, or a change of control of
either the Corporation or the Bank.
The Bank also has entered into a Deferred Supplemental Compensation
Agreement (the "Supplemental Agreement") with Woodard. The Supplemental
Agreement, as amended on April 27, 1993, provides that if Woodard remains in
the full-time employment of the Bank until age 65, then upon retirement
Woodard or his designated beneficiary shall be entitled to receive the sum of
$250,000 payable in 120 equal monthly installments. If Woodard is employed
full-time by the Bank and dies prior to age 65, then in addition to payment of
the foregoing amount in such installments, the Bank also shall make a lump
sum payment of $250,000 to Woodard's designated beneficiary.
Notwithstanding the foregoing, if Woodard's employment with the Bank is
terminated for any reason whatsoever at any time before Woodard attains the
age of 65, then (i) the sum of $250,000 shall be payable to Woodard or his
designated beneficiary in 120 equal monthly installments commencing upon
Woodard attaining the age of 65 and (ii) a lump sum payment of $250,000 shall
be payable to Woodard's spouse, estate, trust or named beneficiary on his
death. The Supplemental Agreement obligates Woodard to make himself
available to the Bank after retirement, so long as he receives payments under
the Supplemental Agreement, for occasional consultation which the Bank may
reasonably request. All amounts unpaid under the Supplemental Agreement
may be forfeited after notice to Woodard in the event the Board of Directors of
the Bank determines in good faith that Woodard is performing services of any
kind to a firm or corporation competitive with the business of the Bank during
the period that he is receiving payments under the Supplemental Agreement.
<PAGE>
Employee Benefit Plans
Employee Stock Options. On February 20, 1990, the Corporation's Board
of Directors approved a non-qualified stock option plan (the "Plan") for the
issuance of 25,000 shares of the Corporation's Common Stock to eligible
officers and key employees of the Corporation and the Bank at prices not less
than the market value of the Corporation's Common Stock on the date of grant.
At the same time, the Board of Directors granted options for 12,500 of such
shares to 11 officers of the Corporation and the Bank, including an option for
2,500 shares granted to Edward J. Woodard, Jr., the Chairman of the Board,
President and Chief Executive Officer of the Corporation and the Bank. All of
such options are exercisable at $9.75 per share, (subsequently adjusted to
$8.76 per share as a result of the 1994 and 1995 stock dividend) the fair
value of the Corporation's Common Stock as determined by its Board of
Directors on the date of grant. On January 18, 1994, the Board of Directors
granted options for a total of 7,500 shares to seven officers, including an
option for 2,500 shares granted to Mr. Woodard, at an exercise price of $8.85
per share (subsequently adjusted to $7.95 per share as a result of the 1994 and
1995 stock dividend). The Plan will expire on February 20, 2000. Until
expiration, the options may be exercised in whole at any time or in part from
time to time. None of the options granted to employees have been exercised
as of February 29, 1996.
401(k) Profit Sharing Plan. In 1993 the Bank adopted a thrift and profit
sharing plan qualified under Section 401(k) of the Internal Revenue Code (the
"401(k) Plan") to replace the Bank's former Profit Sharing Plan. Employees
who have attained the age of 20 years and six months and completed six
months of service with the Bank are eligible to participate in the 401(k) Plan.
Eligible employees who elect to participate may contribute up to 15% of their
annual salary to the 401(k) Plan. The Bank may make a matching contribution.
The amount of the match, if any, will be determined by the Bank each year.
The Bank contributed a matching contribution of $10,722 and a discretionary
profit sharing contribution of $9,200 to the 401(k) Profit Sharing Plan during
1995.
Item 12. Security of Ownership of Certain Beneficial Owners and Management
Information called for in this section is incorporated by reference to the
Company's definitive proxy statement for the 1996 Annual Meeting filed with the
Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions
Information called for in this section is incorporated by reference to the
Company's definitive proxy statement for the 1996 Annual Meeting filed with the
Securities and Exchange Commission.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) The response to this portion of Item 14 is submitted as a
separate section of this report.
(a) (3) Exhibits
3.1 Ariticles of Incorporation. Filed June 15, 1988, as Exhibit
3.1 to the Registrant's Form S-4, and incorporated herein
by reference.
3.2 By laws. Filed June 15, 1988, as Exhibit 3.2 to the
Registrant's Form S-4, and incorporated herein by
reference.
3.3 Amendment to Articles of Incorporation dated July 28,
1989. Filed March 20, 1990, as Exhibit 3.3 to the
Registrant's Form 10-K, and incorporated herein by
reference.
10.1 Lease. Filed June 15, 1988, as Exhibit 10.1 to the
Registrants Form S-4, and incorporated herein by
reference.
<PAGE>
10.2 Financing Agreement. Filed June 15, 1988, as Exhibit 10.2
to the Registrants Form S-4, and incorporated herein by
reference.
10.5 Employee Director's Deferred Compensation Plan. Filed
March 21, 1989, as Exhibit 10.5 to the Registrant's Form
10-K, and incorporated herein by reference.
10.6 Non-Employee Director's Deferred Compensation Plan.
Filed March 21, 1989, as Exhibit 10.6 to the Registrant's
Form 10-K, and incorporated herein by reference.
10.7 Deferred Supplemental Compensation Agreement with
Edward J. Woodard, Jr. Filed March 21, 1989, as Exhibit
10.7 to the Registrant's Form 10-K, and incorporated herein
by reference.
10.8 Employment Agreement with Edward J. Woodard, Jr. Filed
March 20, 1990, as Exhibit 10.8 to Registrant's Form 10-K,
and incorporated herein by reference
10.9 Employment Agreement with John H. Gayle. Filed March
28, 1991, as Exhibit 10.9 to Registrant's Form 10-K, and
incorporated herein by reference.
10.10 Amendment to Deferred Supplemental Compensation
Agreement with Edward J. Woodard, Jr. Filed March 30,
1994, as Exhibit 10.10 to Registrant's Form 10-K, and
incorporated herein by reference.
10.11 Amendment to Employment Agreement with Edward J.
Woodard, Jr. Filed March 30, 1994, as Exhibit 10.11 to
Registrant's Form 10-K, and incorporated herein by
reference.
10.12 Amendment to Employment Agreement with John H. Gayle.
Filed March 30, 1994, as Exhibit 10.12 to Registrant's Form
10-K, and incorporated herein by reference.
10.13 Non-Employee Director Stock Compensation Plan
(b) Reports filed on Form 8-K for the quarter ended December 31, 1995.
None
(c) The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) The response to this portion of Item 14 is submitted as a separate
section of this report.
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2), (c) AND (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 1995
COMMONWEALTH BANKSHARES, INC.
<PAGE>
FORM 10-K--ITEM 14(a)(1) AND (2)
COMMONWEALTH BANKSHARES, INC.
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
The following consolidated financial statements of Commonwealth Bankshares,
Inc. and subsidiary are included:
Consolidated balance sheets--December 31, 1995 and 1994
Consolidated statements of income--Years ended December 31,
1995, 1994, and 1993.
Consolidated statements of stockholders' equity--Years ended December
31, 1995, 1994, and 1993,
Consolidated statements of cash flows--Years ended December 31,
1995, 1994 and 1993.
Notes to consolidated financial statements--December 31, 1995.
Schedules to the consolidated financial statements required by Article 9 of
Regulations S-X are not required under the related instructions or are
inapplicable, and therefore have been omitted.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Commonwealth Bankshares, Inc.
(Registrant)
Date: March 26, 1995 by: E. J. Woodard, Jr.
E. J. Woodard, Jr., CLBB
Chairman of the Board,
President & CEO
by: John H. Gayle
Senior Vice President & Cashier
(Principal Financial Officer)
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 indicated.
E. J. Woodard, Jr. Herbert L. Perlin
E. J. Woodard, Jr., CLBB Director and Herbert L. Perlin, Director
Chairman of the Board, President and
Chief Executive Officer
George H. Burton, Jr. Richard J. Tavss
George H. Burton, Jr.,Director Richard J. Tavss, Director
Morton Goldmeier Morton M. Zedd
Morton Goldmeier, Director Morton M. Zedd, Director
William P. Kellam
William P. Kellam, Director
William D. Payne, MD
William D. Payne, MD, Director
<PAGE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
AND FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1995
with
INDEPENDENT AUDITOR'S REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of
Commonwealth Bankshares, Inc.
Norfolk, Virginia
We have audited the accompanying consolidated balance sheets of
Commonwealth Bankshares, Inc. and its subsidiary as of December 31, 1995
and 1994, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Commonwealth
Bankshares, Inc. and its subsidiary at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.
PLOTT & WALTON, PC
Richmond, Virginia
January 12, 1996
<PAGE>
<TABLE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<CAPTION>
ASSETS
1995 1994
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks (Note 2) $ 5,135,875 $ 4,764,835
Federal funds sold 5,131,844 1,056,522
Total cash and cash equivalents 10,267,719 5,821,357
Investment securities:
Securities available for sale (Note 3) 5,968,175 6,489,145
Securities to be held to maturity
(Note 3) 11,290,140 8,393,628
Total investment securities 17,258,315 14,882,773
Loans (Notes 4 and 5):
Commercial 8,889,880 9,899,880
Commercial construction 1,470,129 988,192
Commercial mortgage 25,795,631 21,068,295
Residential mortgage 18,668,317 16,376,434
Installment loans to individuals 3,970,015 4,103,107
Other 2,809,860 3,272,096
Gross loans 61,603,832 55,708,004
Unearned income (231,186) (244,930)
Allowance for loan losses (1,256,000) (1,208,000)
Net loans 60,116,646 54,255,074
Premises and equipment, net (Notes 6
and 10) 2,340,746 1,912,657
Real estate acquired in settlement of
loans 3,467,207 3,363,893
Accrued interest receivable 634,383 541,415
Other assets 952,341 680,942
$95,037,357 $81,458,111
</TABLE>
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
1995 1994
<S> <C> <C>
Liabilities:
Deposits:
Non-interest bearing $13,147,115 $ 9,080,263
Interest bearing:
Demand 15,482,900 18,467,224
Savings 4,195,594 4,584,757
Certificates of deposit:
Less than $100,000 45,025,176 35,696,416
$100,000 or more 4,405,574 3,494,948
Total deposits 82,256,359 71,323,608
Securities sold under
agreements to repurchase
(Notes 3 and 9) 2,290,477 744,855
Long-term debt (Note 10) 684,019 661,504
Accrued interest payable 283,726 194,529
Income tax payable 16,206 68,000
Other liabilities 736,184 678,279
Total liabilities 86,266,971 73,670,775
Stockholders' equity (Notes 7, 8,
and 16):
Common stock, par value $2.50 -
1,500,000 shares authorized;
894,103 and 843,725 shares issued
and outstanding in 1995 and 1994,
respectively 2,235,258 2,109,313
Additional paid-in capital 3,715,666 3,376,454
Retained earnings 2,811,562 2,443,469
Net unrealized gain (loss) on
securities available for sale,
net of tax provision (benefit)
of $4,000 and $(73,100) in 1995
and 1994, respectively 7,900 (141,900)
Total stockholders' equity 8,770,386 7,787,336
$95,037,357 $81,458,111
<FN>
<F1>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Interest income:
Loans, including fees:
Taxable $5,618,136 $4,880,638 $4,622,022
Tax-exempt 81,771 84,509 95,443
Investment securities:
Taxable 845,204 732,355 720,091
Tax-exempt 67,003 43,514 -
Other interest income 246,423 90,250 151,988
Total interest income 6,858,537 5,831,266 5,589,544
Interest expense:
Deposits 3,475,299 2,578,995 2,681,312
Federal funds purchased and securities
sold under agreements to repurchase 116,727 47,737 27,193
Other interest expense 39,766 25,651 36,010
Total interest expense 3,631,792 2,652,383 2,744,515
Net interest income 3,226,745 3,178,883 2,845,029
Provision for loan losses (Note 5) (52,932) (101,787) (166,869)
Net interest income after provision for
loan losses 3,173,813 3,077,096 2,678,160
Other income (loss):
Service charges on deposit accounts 449,199 464,691 514,751
Other service charges and fees 277,554 264,785 172,660
Net realized investment securities
gain (loss) (Note 3) 28,430 (9,187) 121,775
Gain (loss) on sale of real estate
acquired in settlement of loans 8,668 (11,146) (20,661)
Other 46,210 37,260 35,236
Total other income 810,061 746,403 823,761
Other expenses:
Salaries and employee benefits 1,354,088 1,270,731 1,172,650
Net occupancy expense 276,531 203,212 240,329
Furniture and equipment expenses 432,693 410,621 388,236
Other 802,897 846,593 834,672
Total other expenses 2,866,209 2,731,157 2,635,887
</TABLE>
(Continued)
<PAGE>
<TABLE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Income before income taxes 1,117,665 1,092,342 866,034
Applicable income tax expense
(Note 12) 282,148 278,251 218,714
Net income $ 835,517 $ 814,091 $ 647,320
Per share data:
Net income $ .93 $ .91 $ .72
Average shares outstanding (Note 7) 894,103 894,103 894,103
<FN>
<F1>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, and 1993
<CAPTION>
Net Unrealized
Gain (Loss) on
Additional Securities
Common Stock Paid-in Retained Available
Shares Amount Capital Earnings for Sale
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 803,752 $2,009,380 $3,122,226 $1,338,120 $ -
Net income for 1993 - - - 647,320 -
Balance, December 31, 1993 803,752 2,009,380 3,122,226 1,985,440 -
Net income for 1994 - - - 814,091 -
Stock dividend (Note 7) 39,973 99,933 254,228 (356,062) -
Net unrealized loss on
securities available
for sale, net of tax
benefit of $73,100 - - - - (141,900)
Balance, December 31, 1994 843,725 2,109,313 3,376,454 2,443,469 (141,900)
Net income for 1995 - - - 835,517 -
Stock dividend (Note 7) 50,378 125,945 339,212 (467,424) -
Unrealized gain on
securities transferred
from held to maturity
to available for sale
on November 15, 1995,
net of tax provision
of $6,400 - - - - 12,424
Net change in unrealized
gain (loss) on
securities available
for sale, net of tax
provision (benefit)
of $70,700 - - - - 137,376
Balance, December 31, 1995 894,103 $2,235,258 $3,715,666 $2,811,562 $ 7,900
<FN>
<F1>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, 1993
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Operating activities:
Net income $ 835,517 $ 814,091 $ 647,320
Adjustments to reconcile net income to net
cash from operating activities:
Provision (benefit) for:
Loan losses 52,932 101,787 166,869
Depreciation and amortization 226,195 196,890 182,779
Amortization of organizational costs - - 12,170
Deferred income taxes (100,352) (109,035) (101,980)
Net realized investment securities gain (loss) (28,430) 9,187 (121,775)
Loss (gain) on sale of real estate acquired in
settlement of loans (8,668) 11,146 20,661
Decrease (increase) in accrued interest
receivable (92,968) (87,119) 105,644
Increase (decrease) in accrued interest payable 89,197 29,003 (5,088)
Increase (decrease) in income taxes payable (51,794) (162,000) 148,446
Decrease in refundable income taxes - - 21,653
Other (184,059) (11,595) 296,574
Net cash from operating activities 737,570 792,355 1,373,273
Investing activities:
Purchases of:
Investment securities (9,184,923) (4,041,016) (7,244,170)
Premises and equipment (650,037) (94,024) (391,806)
Assets relating to real estate acquired in
settlement of loans (82,547) (147,013) (37,086)
Net increase in loans (6,544,821) (7,032,504) (2,692,872)
Proceeds from:
Maturities of investment securities 3,341,600 1,364,667 1,255,064
Sale of investment securities 3,723,111 1,492,438 6,431,639
Sale of real estate acquired in settlement of
loans 657,528 903,500 424,013
Sale of premises and equipment - - 1,000
Net cash used in investing activities (8,740,089) (7,553,952) (2,254,218)
Financing activities:
Net increase in certificates of deposit 10,239,386 5,359,989 3,125,890
Net increase (decrease) in other deposits 693,365 (2,841,137) 2,183,537
</TABLE>
(Continued)
<PAGE>
<TABLE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Net increase (decrease) in securities sold under
agreements to repurchase 1,545,622 (871,322) 1,243,368
Principal payments on long-term borrowings (27,225) (26,112) (83,255)
Dividends paid (2,267) (1,901) -
Net cash from financing activities 12,448,881 1,619,517 6,469,540
Net increase (decrease) in cash and cash equivalents 4,446,362 (5,142,080) 5,588,595
Cash and cash equivalents, beginning of year 5,821,357 10,963,437 5,374,842
Cash and cash equivalents, end of year $10,267,719 $ 5,821,357 $10,963,437
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 3,542,595 $ 2,623,380 $ 2,749,603
Income taxes 434,294 549,286 150,595
Supplemental disclosure of noncash operating,
investing and financing activities:
Activities involving the acceptance of real
estate in settlement of loans:
Increase in real estate acquired in
settlement of loan $ 680,057 $ 630,520 $ 237,010
Net decrease in loans and accrued interest (630,317) (630,520) (237,010)
Net increase in long-term debt (49,740) - -
Transfer of other real estate owned to
premises and equipment:
Increase in premises and equipment 10,430 49,223 -
Decrease in real estate acquired in
settlement of loans (10,430) (49,223) -
Other activities:
Common stock distributed as a dividend:
Common stock 125,945 99,933 -
Additional paid-in capital 339,212 254,228 -
Fair value of stock dividend $ 465,157 $ 354,161 $ -
Net unrealized gain (loss) on securities
available for sale included in the
following:
Retained earnings $ 149,800 $ (141,900) $ -
Deferred income taxes 77,100 (73,100) -
$ 226,900 $ (215,000) $ -
<FN>
<F1>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. Summary of significant accounting policies
The accounting and reporting policies of Commonwealth
Bankshares, Inc. (the Parent) and its subsidiary, Bank of the
Commonwealth (the Bank), are in accordance with generally accepted
accounting principles and conform to general practices within the banking
industry. The more significant of the principles used in preparing the
financial statements are briefly described below.
Principles of consolidation - The accompanying consolidated
financial statements include the accounts of the Parent and the Bank,
collectively referred to as "the Company." All significant intercompany
balances and transactions have been eliminated in consolidation.
Nature of operations - The Bank operates under a state bank
charter and provides full banking services. As a state bank, the Bank is
subject to regulation of the Bureau of Financial Institutions and the
Federal Reserve System. The Bank serves Norfolk and Virginia Beach,
Virginia through its five banking offices.
Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Investment securities - Management determines the appropriate
classification of securities at the time of purchase. If management has
the intent and the Company has the ability at the time of purchase to
hold securities until maturity or on a long-term basis, they are
classified as investments to be held to maturity and carried at amortized
historical cost. Securities to be held for indefinite periods of time
and not intended to be held to maturity or on a long-term basis are
classified as available for sale and carried at fair value. Securities
held for indefinite periods of time include securities that management
intends to use as part of its asset and liability management strategy and
that may be sold in response to changes in interest rates, resultant
prepayment risk and other factors related to interest rate and resultant
prepayment risk changes.
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
1. Summary of significant accounting policies (Continued)
Investment securities - (Continued)
Realized gains and losses on dispositions are based on the net
proceeds and the adjusted book value of the securities sold, using the
specific identification method. Unrealized gains and losses on
investment securities available for sale are based on the difference
between book value and fair value of each security. These gains and
losses are credited or charged to stockholders' equity, whereas realized
gains and losses flow through the Company's yearly operations.
Loans - Interest on loans is accrued and credited to income based
upon the principal amount outstanding. Fees collected and costs
incurred in connection with loan originations are deferred and recognized
over the term of the loan.
It is management's practice to cease accruing interest on loans
when payments are 90 days delinquent. However, management may
elect to continue the accrual of interest when the estimated net
realizable value of collateral is sufficient to cover the principal
balance and accrued interest, and the loan is in the process of
collection.
Impaired loans - Effective January 1, 1995, the Bank adopted
Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by
SFAS No. 118. These pronouncements require that an impaired loan be
measured based on the present value of expected future cash flows
discounted at the effective interest rate of the loan, or at fair value
of the loan's collateral for "collateral dependent" loans. The Bank
considers a loan impaired when it is probable that the Bank will be
unable to collect all interest and principal payments as scheduled in the
loan agreement. A loan is not considered impaired during a period of
delay in payment if the ultimate collectibility of all amounts due is
expected. A valuation allowance is required to the extent that the
measure of the impaired loan is less than the recorded investment.
Consistent with the Bank's method for nonaccrual loans, interest receipts
for impaired loans are recognized on the cash basis. The Bank had no
impaired loans as of December 31, 1995.
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
1. Summary of significant accounting policies (Continued)
Allowance for loan losses - The allowance for loan losses is
maintained at a level adequate to absorb probable losses.
Management's determination of the adequacy of the allowance is based
on an evaluation of past loan loss experience, an analysis of potential
problem loans, current economic conditions, volume, growth and
composition of the loan portfolio and other relevant factors. The
allowance is increased by provisions for loan losses charged against
operations.
Real estate acquired in settlement of loans - Real estate acquired
in settlement of loans is stated at the lower of cost or estimated fair
market value of the property, less estimated disposal costs, if any.
Cost includes loan principal and accrued interest. Any excess of cost
over the estimated fair market value at the time of acquisition is
charged to the allowance for loan losses. The estimated fair market
value is reviewed periodically by management and any write-downs are
charged against current earnings.
Premises and equipment - Premises and equipment are stated at
cost, less accumulated depreciation and amortization. Depreciation is
computed generally by the straight-line method over the estimated useful
lives of the assets ranging from 3 to 40 years. Leasehold improvements
are amortized over the shorter of the term of the respective leases or
their estimated useful lives.
Income taxes - Deferred income taxes are provided for timing
differences in the recognition of income and expenses for financial
reporting purposes and for income tax purposes. Timing differences
result principally from provisions for loan losses, depreciation and net
loan fees.
Per share data - Net income per share is based on the weighted
average number of shares outstanding.
Off balance sheet financial instruments - In the ordinary course
of business the Bank has entered into off balance sheet financial
instruments consisting of commitments to extend credit, commitments under
credit card arrangements and standby letters of credit. Such financial
instruments are recorded in the financial statements when they become
payable.
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
1. Summary of significant accounting principles (Continued)
Cash and cash equivalents - For purposes of the consolidated
statements of cash flows, cash and cash equivalents includes cash and
due from banks and federal funds sold.
Long-lived assets - In March 1995 the Financial Accounting
Standards Board (FASB) issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," which requires certain assets to be reduced in value
whenever events or changes in circumstances indicate that the carrying
value of those assets may not be recoverable. The Statement is
required to be applied for years beginning after December 15, 1995.
The Bank plans to adopt this new accounting standard as of December
31, 1996, and does not expect the adoption to have a material impact on
the consolidated financial statements.
Reclassifications - Certain prior year amounts have been
reclassified to conform to the 1995 presentation. These
reclassifications have no effect on previously reported net income.
2. Cash and due from banks
The Bank is required to maintain average reserve balances in
cash or on deposit with the Federal Reserve Bank. Required reserves
were approximately $195,000 at December 31, 1995 and 1994.
3. Investment securities
Securities with a carrying value of $1,864,750 on November 15,
1995, were transferred from held to maturity to available for sale. This
transfer was in accordance with the FASB's special report "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments
in Debt and Equity Securities."
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
3. Investment securities (Continued)
<TABLE>
The aggregate carrying and market values of investment securities
at December 31, 1995 and 1994, were as follows:
<CAPTION>
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
<S> <C> <C> <C> <C>
Securities available for
sale-
December 31, 1995:
U.S. Government
and agency
securities $3,476,806 $14,313 $2,702 $3,488,417
Mortgage-backed
securities 1,466,977 2,962 6,508 1,463,431
State and
municipal
securities 868,592 3,835 - 872,427
Federal Reserve
Bank stock 143,900 - - 143,900
$5,956,275 $21,110 $9,210 $5,968,175
Securities to be held to
maturity-
December 31, 1995:
U.S. Government
and agency
securities $ 6,933,242 $25,266 $280,662 $ 6,677,846
Mortgage-backed
securities 3,191,199 6,164 45,999 3,151,364
State and
municipal
securities 1,165,699 - 13,507 1,152,192
$11,290,140 $31,430 $340,168 $10,981,402
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
3. Investment securities (Continued)
<CAPTION>
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
<S> <C> <C> <C> <C>
Securities available
for sale-
December 31, 1994:
U.S. Government
and agency
securities $6,560,245 $ - $215,000 $6,345,245
Federal Reserve
Bank stock 143,900 - - 143,900
$6,704,145 $ - $215,000 $6,489,145
Securities to be held to
maturity-
December 31, 1994:
U.S. Government
and agency
securities $5,149,813 $3,225 $689,916 $4,463,122
Mortgage-backed
securities 1,831,414 - 98,938 1,732,476
State and
municipal
securities 1,412,401 3,997 126,555 1,289,843
$8,393,628 $7,222 $915,409 $7,485,441
</TABLE>
Securities with a book value of $5,810,802 and $6,895,627 and
market value of $5,617,676 and $6,277,738 at December 31, 1995 and
1994, respectively, were pledged as collateral to secure public deposits
and for other purposes.
<TABLE>
Proceeds from the sale of investment securities, gross realized
gains, gross realized losses, and the related income taxes on net
realized gains were as follows:
<CAPTION>
Year ended December 31,
1995 1994
<S> <C> <C>
Securities available for sale-
Proceeds from sales $3,723,111 $1,492,438
Gross realized gains 31,359 -
Gross realized loss - 7,338
Applicable income tax on net
realized gains (loss) 10,662 (2,495)
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
<TABLE>
3. Investment securities (Continued)
<CAPTION>
Year ended December 31,
1995 1994
<S> <C> <C>
Securities to be held to maturity-
Proceeds from maturities 3,341,600 1,364,667
Gross realized gains 447 107
Gross realized loss 3,376 1,956
Applicable income tax on net
realized gains (loss) (996) (629)
</TABLE>
Proceeds from sales and maturities of investment securities during
1993 were $7,686,703. Gross gains of $124,934 and gross losses of
$3,159 were realized from those sales.
The amortized cost and fair values of investment securities
available for sale and to be held to maturity at December 31, 1995, by
expected maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Available Securities to be
for Sale Held to Maturity
Carrying Market Carrying Market
Amount Value Amount Value
<S> <C> <C> <C> <C>
Due in one year or less $2,314,030 $2,315,484 $ 395,595 $ 399,200
Due after one year
through five years 1,162,775 1,172,953 3,395,994 3,263,945
Due after five years
through ten years 458,394 459,962 3,807,352 3,664,002
Due after ten years 410,199 412,445 500,000 502,891
4,345,398 4,360,844 8,098,941 7,830,038
Mortgage-backed securities 1,466,977 1,463,431 3,191,199 3,151,364
Equity security 143,900 143,900 - -
$5,956,275 $5,968,175 $11,290,140 $10,981,402
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
4. Loans
Nonaccrual loans were approximately $1,655,000 and $806,000 at
December 31, 1995 and 1994, respectively. Interest which would have
been recorded on these loans under the contractual terms is
approximately $175,000 and $112,000 as of December 1995 and 1994,
respectively. Interest income actually recorded on these loans was
approximately $59,000 and $27,000 in 1995 and 1994, respectively.
5. Allowance for loan losses
<TABLE>
Changes in the allowance for loan losses were as follows:
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Balance, beginning of
year $1,208,000 $1,129,000 $1,034,742
Provision for loan
losses 52,932 101,787 166,869
Loans charged off (12,657) (54,442) (119,315)
Recoveries of previous
charge-offs 7,725 31,655 46,704
Net charge-offs (4,932) (22,787) (72,611)
Balance, end of year $1,256,000 $1,208,000 $1,129,000
</TABLE>
6. Premises and equipment and leases
Premises and equipment:
<TABLE>
Premises and equipment are summarized as follows:
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Land $ 190,308 $ 190,308
Buildings and improvements 1,264,664 1,240,633
Leasehold improvements 281,870 229,776
Furniture and equipment 2,116,689 1,834,949
Construction in progress 212,589 2,800
4,066,120 3,498,466
Less accumulated depreciation 1,725,374 1,585,809
$2,340,746 $1,912,657
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
6. Premises and equipment and leases (Continued)
Leases:
The principal offices of the Parent and the Bank are leased from
Boush Bank Building Associates, a related party, under terms of a net
operating lease which expires on November 18, 2008. The Bank has the
option of renewing the lease for up to five additional five-year periods
at the same rental terms and conditions. The Bank also has the option of
purchasing undivided interests in the building and related land at any
time at the lessor's original cost. In connection with the acquisition
of the leased property, the lessor obtained primary financing of
$1,600,000 through the issuance of a revenue bond by the Norfolk
Redevelopment and Housing Authority and secondary financing of
approximately $240,000 by the Bank. Rent expense under the lease, which
is based on interest expense incurred by the lessor, was $74,895 in 1995,
$60,151 in 1994 and $67,603 in 1993. The Bank has a commitment to
provide the lessor with such loans as are necessary for the lessor to
make principal payments on the primary financing described above. The
Bank is obligated to purchase in January of each year, if certain
financial covenants are met as of the preceding year end, such undivided
interest in the leased property as would not exceed 90% of what the Bank
would be permitted to purchase under banking regulations of the
Commonwealth of Virginia. Under this provision of the lease, the Bank
purchased 34.7% of the leased property in 1988 for $637,410 and 19.7%
in 1987 for $362,201. The Bank has not made any additional purchases
since 1988.
The Bank also leases other buildings for two branch offices. Such
leases contain renewal options and have remaining terms of 18 to 45
months as of December 31, 1995.
<TABLE>
Rental expense and related sublease income are as follows:
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Gross rental expense $187,936 $181,049 $201,450
Sublease rental income 65,368 81,773 86,585
Net rental expense $122,568 $ 99,276 $114,865
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
6. Premises and equipment and leases (Continued)
<TABLE>
Future minimum lease payments, by year and in the aggregate,
under noncancelable operating leases consist of the following at
December 31, 1995:
<CAPTION>
Sublease
Rental Rental
Expense Income
<S> <C> <C>
1996 $ 93,944 $ 57,091
1997 85,768 56,394
1998 77,592 47,087
1999 71,815 35,640
2000 57,039 -
Thereafter 151,453 -
$537,611 $196,212
</TABLE>
7. Stockholders' equity
The Company's Articles of Incorporation authorize the issuance of
300,000 shares of Serial Preferred Stock, par value $25 per share, none
of which has been issued at December 31, 1995. The Board of
Directors is authorized to issue this stock in one or more series, to
establish the number of shares to be included in each such series, and
to fix the designation, relative rights, preference and limitations of
each such series.
During 1995, the Company declared a 6% stock dividend to
stockholders of record on March 31, 1995. Cash of $2,267 was paid for
fractional shares. During 1994, the Company declared a 5% stock
dividend to stockholders of record on April 1, 1994. Cash of $1,901 was
paid for fractional shares. The Company's earnings per share data have
been restated for prior years to reflect the changes in shares
outstanding.
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
8. Stock option plans
During 1990, a stock option plan was adopted which granted
options to certain employees to purchase shares of the Company's
common stock at a price determined at the date the options were
granted. Options to purchase 16,138 shares are outstanding as of
December 31, 1995. The options expire February 20, 2000. No options
have been exercised. Options to purchase shares were adjusted for the
stock dividends declared in 1995 and 1994.
During 1995, a stock option plan was adopted which granted
options to non-employee directors to purchase shares of the Company's
common stock at a price determined at the date the options were
granted. Options to purchase 17,500 shares are outstanding as of
December 31, 1995. The options expire January 17, 2005. No options
have been exercised.
9. Short-term borrowings
Securities sold under agreements to repurchase generally mature
within one to three days from the transaction date.
10. Long-term debt
<TABLE>
Long-term debt is summarized as follows:
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Obligation under Norfolk
Redevelopment and Housing
Authority Revenue Bond
due January 1, 2010 $635,392 $661,504
Note payable to Navy Federal
Credit Union due July 1, 2001 48,627 -
$684,019 $661,504
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
10. Long-term debt (Continued)
The bond represents the unpaid balance of that portion of the
primary financing of the Bank's principal offices related to the Bank's
interest in the property. At December 31, 1995, premises with a carrying
value of approximately $816,000 were pledged as collateral for the
Bank's portion of the total unpaid obligation related to the bond.
Principal payments of $26,112 are due each January 1 with a final
payment of the remaining balance due January 1, 2010. Interest is
payable monthly at 68.6% of the prime rate of a regional bank which
totalled 5.831% at December 31, 1995.
The note payable to Navy Federal Credit Union is secured by a
first deed of trust on property with a book value of $112,909 at
December 31, 1995. Payments of $928 are due on the first of each
month with a final payment of the remaining balance due on July 1,
2001. Interest is included in the payments at a fixed rate of 9%.
Maturities of long-term debt by year and in the aggregate are
summarized as follows:
1996 $ 33,152
1997 33,812
1998 34,534
1999 35,325
2000 36,189
Thereafter 511,007
$684,019
11. Retirement plan and other supplemental compensation agreements
In 1993 the Bank adopted a thrift and profit sharing plan (Plan)
qualified under Section 401(k) of the Internal Revenue Code. Eligible
employees, as defined by the Plan, can elect to defer up to 15% of
compensation. The Bank may at its discretion make a matching
contribution and the amount was $10,722 and $8,160 for 1995 and 1994,
respectively. In addition, a discretionary contribution of $9,200 and
$11,840 was made in 1995 and 1994, respectively, to the profit sharing
section of the Plan.
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
11. Retirement plan and other supplemental compensation
agreements (Continued)
The Bank has entered into a Deferred Supplemental
Compensation Agreement (the Supplemental Agreement) with Mr. E. J.
Woodard, Jr. The Supplemental Agreement, as amended on April 27,
1993, provides that if Mr. Woodard remains in the full-time employment
of the Bank until age 65, then upon retirement Mr. Woodard or his
designated beneficiary will be entitled to receive the sum of $250,000
payable in 120 equal monthly installments.
12. Income taxes
Net deferred tax asset, included in other assets, is $491,029 and
$467,777 as of December 31, 1995 and 1994, respectively.
<TABLE>
The net deferred tax asset includes the following components:
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Deferred tax liability:
Depreciation $(111,595) $(111,516)
Net unrealized gain on
securities available
for sale (4,000) -
Total deferred tax
liability (115,595) (111,516)
Deferred tax asset:
Provision for loan losses 325,278 261,966
Deferred compensation 156,591 140,230
Accrued vacation 76,583 70,919
Deferred net loan fees 48,172 33,078
Net unrealized loss on
securities available
for sale - 73,100
Total deferred tax
asset 606,624 579,293
Net deferred tax asset $ 491,029 $ 467,777
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
12. Income taxes (Continued)
<TABLE>
The components of applicable income tax expense (benefit) are
as follows:
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Current $382,500 $387,286 $320,694
Deferred (100,352) (109,035) (101,980)
$282,148 $278,251 $218,714
</TABLE>
Timing differences in the recognition of revenues and expenses
for income tax and financial reporting purposes result in deferred income
taxes as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Provision for loan
losses $ (63,312) $ (84,562) $ (75,596)
Depreciation 79 6,389 (1,767)
Deferred compensation (16,361) (18,953) (20,611)
Accrued vacation (5,664) (10,329) (8,872)
Deferred net loan fees (15,094) (1,580) 4,866
$(100,352) $(109,035) $(101,980)
</TABLE>
The difference between income tax expense and the amount
computed by applying the statutory federal income tax rate of 34% are
as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Income tax expense
at statutory rates $380,006 $371,396 $294,452
Increase (decrease)
due to:
Tax exempt income (50,583) (43,528) (31,013)
Other (47,275) (49,617) (44,725)
Applicable income tax
expense $282,148 $278,251 $218,714
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
13. Commitments, contingent liabilities and financial instruments
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit risk not recognized in the balance
sheet.
The Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance-sheet instruments. The Bank anticipates no losses as a
result of these transactions.
Financial instruments whose contract amounts represent credit
risk are as follows:
December 31,
1995 1994
Commitments to extend credit $6,471,703 $7,451,295
Standby letters of credit 592,133 573,759
Commitments to extend credit include unused lines of credit, credit
card arrangements, and the unused portions of construction loans.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of customers to a third party. The Bank
evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained if deemed necessary by the Bank
upon extension of credit is based upon management's credit evaluation
of the counter party. Collateral held varies, but may include cash,
marketable securities, accounts receivable, inventory, property, plant
and equipment and real estate.
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
13. Commitments, contingent liabilities and financial
instruments (Continued)
SFAS No. 107, "Disclosures about Fair Values of Financial
Instruments", requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet.
In cases where quoted market prices are not available, fair values are
based on estimates using discounted cash flow analyses or other valuation
techniques. Those techniques involve subjective judgement and are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. As a result, the derived fair
value estimates cannot be substantiated by comparison to independent
markets, and in many cases, could not be realized in immediate
settlement of the instrument.
The following methods and assumptions were used by the Bank in
estimating the fair value of its financial instruments. All of the
Bank's financial instruments were held or issued for purposes other than
trading.
The principal components of calculated fair values are cash flows
and the discount rate. Cash flows are affected by scheduled principal
maturities, repricing characteristics, prepayment assumptions, and
interest cash flows.
Interest cash flows are calculated by assuming that the yield/cost
of the portfolio remains unchanged from the historical level until
affected by maturity, prepayment or repricing.
The discount rates used to determine the fair value of the financial
instruments are constructed using a build-up approach. This approach
views the discount rate as consisting of four components: the risk-free
rate, credit quality, operating expenses and prepayment option price.
The risk-free rate forms the foundation of the discount rate and is
derived from the term structure of interest as reflected in the Treasury
yield curve. The point on the Treasury yield curve which corresponds to
the time into the future for the cash flow is selected as the risk-free
rate.
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
13. Commitments, contingent liabilities and financial
instruments (Continued)
The credit quality component is the annualized yield needed to
cover the loss of value expected over the entire life of a portfolio.
The higher the credit quality component, the higher the credit risk.
The operating expense component represents an annualized cost
rate derived from operating expense allocations. This component is
used to adjust the risk-free rate in order to compensate for operating
expenses of the Bank.
The prepayment option price is the final component and
represents a basis point adjustment to the risk-free rate to reflect the
value of imbedded prepayment options.
<TABLE>
The estimated fair values of the Bank's financial instruments as of
December 31, 1995 and 1994, are as follows (in thousands):
<CAPTION>
December 31, December 31,
1995 1994
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and short term investments $10,266 $10,266 $ 5,735 $ 5,735
Investment securities 17,258 16,949 14,883 13,975
Loans 61,066 55,179
Allowance for loan loss (1,256) (1,208)
Net loans 59,810 62,188 53,971 53,577
Total financial assets $87,334 $89,403 $74,589 $73,287
Financial liabilities:
Deposits $82,566 $83,266 $71,596 $70,438
Securities sold not owned 2,291 2,291 745 745
Long-term debt 684 703 661 585
Total financial liabilities $85,541 $86,260 $73,002 $71,768
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
13. Commitments, contingent liabilities and financial
instruments (Continued)
SFAS No. 107 excludes certain financial instruments and all non
financial instruments from its disclosure requirements. The disclosures
also do not include certain intangible assets such as core deposit
premiums, mortgage-servicing rights and goodwill. Accordingly, the
aggregate fair value amount presented should not be interpreted as
representing the underlying value of the Bank.
14. Concentrations of credit
The Bank grants commercial, real estate and consumer loans to
customers throughout its lending area, primarily the cities of Virginia
Beach and Norfolk, Virginia. Although the Bank has a diversified loan
portfolio, a significant portion of its debtors' abilities to honor their
contracts is dependent upon the economic environment of its lending
area. The concentrations of credit by type of loan are set forth in the
balance sheet. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. Standby letters of
credit were granted primarily to commercial borrowers.
15. Related parties
The Bank has granted loans to directors and executive officers of
the Company and to their associates. Related party loans are made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than normal risk of collectibility. The
aggregate dollar amount of these loans was $2,447,136 and $2,242,381
at December 31, 1995 and 1994, respectively. During 1995, $560,654 of
new loans were made, and repayments totaled $355,899.
The Bank has also sold participation in loans on a non-recourse
basis to certain of the Company's directors. Such loans amounted to
$386,745 and $730,950 as of December 31, 1995 and 1994,
respectively.
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
16. Regulatory matters
The Company and its subsidiary are affiliates within the meaning
of Section 23A of the Federal Reserve Act. Accordingly, they are subject
to the limitations specified in such section on the making of loans or
extension of credit to, or purchase of securities under repurchase
agreement from, each other. Therefore, substantially all of the net
assets of the Bank are restricted from use by the Company in the form of
loans or advances. Dividends, however, may be paid to the Company by
the Bank under formulas established by the appropriate regulatory
authorities. These formulas contemplate that the current earnings and
earnings retained for the two preceding years may be paid to the
Company without regulatory approval. In 1996, the Bank can initiate
dividend payments without said regulatory approvals of approximately
$1,664,000 plus an additional amount equal to the Bank's net earnings
for 1996 up to the date of any such dividend declaration. Substantially
all of the retained earnings of the Company are represented by
undistributed earnings of the Bank.
At December 31, 1995, the Bank is required to have minimum Tier
I and Total risk-based capital ratios of 4.0% and 8.0%, respectively.
The Bank's actual ratios at that date were 13.1% and 14.4%, respectively.
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
17. Parent company only financial information
<TABLE>
COMMONWEALTH BANKSHARES, INC.
(PARENT COMPANY ONLY)
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<CAPTION>
ASSETS
1995 1994
<S> <C> <C>
Cash on deposit with subsidiary $ 251,111 $ 262,490
Investment in subsidiary 8,516,580 7,675,858
$8,767,691 $7,938,348
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to subsidiary $ 5,204 $ 9,112
Total stockholders' equity 8,762,487 7,929,236
$8,767,691 $7,938,348
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
17. Parent company only financial information (Continued)
<TABLE>
COMMONWEALTH BANKSHARES, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Expenses:
Amortization of organiza-
tional costs $ - $ - $ 12,170
Legal expense 6,560 12,862 -
Other 1,325 950 2,957
Total expenses 7,885 13,812 15,127
Loss before income taxes
and equity in undistributed
net income of subsidiary (7,885) (13,812) (15,127)
Income tax benefits 2,681 4,700 5,143
Loss before equity in
undistributed net income
of subsidiary (5,204) (9,112) (9,984)
Equity in undistributed net
income of subsidiary 840,721 823,203 657,304
Net income $835,517 $814,091 $647,320
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
17. Parent company only financial information (Continued)
<TABLE>
COMMONWEALTH BANKSHARES, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Operating activities:
Net income $835,517 $814,091 $647,320
Adjustments to reconcile net
income to net cash from
operating activities:
Equity in undistributed
net income of subsidiary (840,721) (823,203) (657,304)
Amortization of organiza-
tional costs - - 12,170
Decrease (increase) in
amount due from subsidiary - 2,187 (300)
Increase (decrease) in amount
due to subsidiary (3,908) 9,112 -
Net cash from (used in) operating
activities (9,112) 2,187 1,886
Financing activities -
Dividends paid (2,267) (1,901) -
Net increase (decrease) in cash
on deposit with subsidiary (11,379) 286 1,886
Cash on deposit with subsidiary,
beginning of year 262,490 262,204 260,318
Cash on deposit with subsidiary,
end of year $251,111 $262,490 $262,204
</TABLE>
<PAGE>
Exhibit 10.13
Page 1 of 6
COMMONWEALTH
BANKSHARES,
INC.
NON-EMPLOYEE
DIRECTOR
STOCK
COMPENSATION
PLAN
<PAGE>
Exhibit 10.13
Page 2 of 6
ARTICLE I
DEFINITIONS
1.01 Agreement means a written agreement (including any amendment or
supplement thereto) between the Company and a Participant specifying
the terms and conditions of an Award granted to such Participant.
1.02 Award means an award of Options as provided for hereunder.
1.03 Bank means Bank of the Commonwealth, or its successors.
1.04 Board means the Board of Directors of the Company.
1.05 Code means the Internal Revenue Code of 1986, as amended.
1.06 Common Stock means the common stock of the Company.
1.07 Date of Grant means the date that the Board sets for the grant of
Options to Participants under the Plan.
1.08 Fair Market Value means the average of the five (5) most recent trades
of the Common Stock on the over-the-counter market during the period,
not to exceed thirty (30) calendar days, immediately preceding an
Option's Date of Grant.
1.09 Option means a stock option granted pursuant to Article IV, and that
entitles the holder to purchase from the Company a stated number of
shares of Common Stock at the shares' Fair Market Value.
1.10 Participant means a memeber of the Board who is not an employee of
the Company or the Bank on the applicable Date of Grant.
1.11 Plan means the Commonwealth Bankshares, Inc. Non-Employee Director
Stock Compensation Plan.
1.12 Company means Commonwealth Bankshares, Inc. and its subsidiaries,
or such successors thereto.
ARTICLE II
PURPOSE
The Plan is intended to promote a greater identity of interest between
Participants and the Company's shareholders by increasing the Participants'
proprietary interest in the Company through the receipt of Awards in the form of
Options.
<PAGE>
Exhibit 10.13
Page 3 of 6
ARTICLE III
ADMINISTRATION
The Plan shall be administered by the one or more persons who are
employees of the Company and directors of the Board (the "Employee
Directors"), and such additional employees as the Employee Directors shall
appropriately designate, who shall have complete authority to interpret all
provisions of this Plan; to prescribe the form of Agreements; to adopt, amend,
and rescind rules and regulations pertaining to the administration of the Plan;
and to make all other determinations necessary or advisable for the
adminsitration of this Plan. Any decision made, or action taken, by the
Employee Directors in connection with the administration of this Plan shall be
final and conclusive. All expenses of administering this Plan shall be borne by
the Company.
ARTICLE IV
GRANT OF OPTIONS
The Board shall have authority to designate Participants to whom
Options are to be granted and shall specify the number of shares subject to
grants. All Options shall be evidenced by a Memorandum of Option agreement
which shall be subject to the applicable provisions of the Plan and to such
other provisions as the Employee Directors may adopt.
ARTICLE V
STOCK SUBJECT TO OPTIONS
Upon the exercise of any Option, the Company may deliver to the
Participant (or the Participant's broker if the Participant so directs)
authorized but unissued Common Stock. The maximum aggregate number of shares of
Common Stock that may be issued pursuant to the exercise of Options under
this Plan is 50,000, subject to adjustment as provided in Article IX. If an
Option is terminated, in whole or in part, for any reason other than its
exercise, the number of shares of Common Stock allocated to the Option or
portion thereof may be reallocated to other Options to be granted under this
Plan.
ARTICLE VI
OPTION PRICE
The price per share for Common Stock purchased on the exercise of an
Option shall be the share's Fair Market Value.
<PAGE>
Exhibit 10.13
Page 4 of 6
ARTICLE VII
EXERCISE OF OPTIONS
7.01 Maximum Option Period. No Option shall be exercisable after the
expiration of ten (10) years from its Date of Grant.
7.02 Nontransferability. Options granted under this Plan shall be
nontransferable except by will or by the laws of descent and
distribution. During the lifetime of the Participant to whom the Option
is granted, the Option may be exercised only by the Participant. No
right or interest of a Participant in any Option shall be liable for, or
subject to, any lien, obligation, or liability of such Participant.
ARTICLE VIII
METHOD OF EXERCISE OF OPTIONS
8.01 Exercisability of Options. Subject to the provisions of Articles VII
and X, and Option becomes exercisable six (6) months after its Date of
Grant. However, an Option granted to a Participant shall be immediately
exercisable if the Participant's membership on the Board terminates as a
result of the Participant's retirement in accordance with Company
policy, death or permanent and total disability (as such term is defined
in Section 22(e) of the Code). An Option shall be forfeited if, as of
the termination of the Participant's membership on the Board, the Option
is not then exercisable and such termination occurs for any reason other
than the Participant's retirement in accordance with Company policy,
death or disability (as defined above). Options that are exercisable or
that become exercisable upon the Participant's termination of
membership on the Board will remain exercisable until the tenth
anniversary of the Option's Date of Grant. An Option may be exercised
with respect to any number of whole shares less than the full number for
which the Option could be exercised. A partial exercise of an Option
shall not affect the right to exercise the Option from time to time in
accordance with this Plan and the applicable Agreement with respect to
the shares remaining subject to the Option.
8.02 Payment. Unless otherwise provided by the Agreement, payment of the
Option price shall be made in cash or a cash equivalent acceptable to
the Board. In addition, all or part of the Option price may be paid by
surrendering shares of Common Stock to the Company. If Common
Stock is used to pay all or part of the Option price, the shares
surrendered must have a fair market value (determined as of the day
before the date of exercise and based on the average of the five [5]
most recent trades of the Common Stock on the over-the-counter market
during the period, not exceed thirty [30] calendar days, preceding such
date) that is not less than such price or part thereof.
8.03 Shareholder Rights. No Participant shall have any rights as a
stockholder with respect to shares subject to his Option until the date
of exercise of such Option.
<PAGE>
Exhibit 10.13
Page 5 of 6
ARTICLE IX
ADJUSTMENT UPON CHANGE IN COMMON STOCK
The maximum number of shares to which Awards may be granted under
this Plan shall be proportionately adjusted, and the terms of outstanding Awards
shall be adjusted, as the Employee Directors shall determine to be equitably
required in the event that the Company (i) effectes one or more stock
dividends, stock split-ups, subdivisions or consolidations of shares or (ii)
engages in a transaction to which Section 424 of the Code applies. Any
determination made under this Article IX by the Board shall be final and
conclusive.
The issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, for cash or property,
or for labor or services, either upon direct sale or upon the exercise of rights
or warrants to subscribe therefor, or upon conversion of shares of obligations
of the Company convertible into such shares or other securities, shall not
affect, and no adjustment by reason thereof shall be made with respect to,
outstanding Awards.
ARTICLE X
COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES
No Option shall be exercisable, no Common Stock shall be issued, no
certificates for shares of Common Stock shall be deliverd, and no payment shall
be made under this Plan except in compliance with all applicable federal and
state laws and regulations (including, without limitation, withholding tax
requirements), and applicable requirements of any exchange or other market
having authority over the trading of the Company's shares.
ARTICLE XI
GENERAL PROVISIONS
12.01 Effect on Service. Neither the adoption of this Plan, its operation,
documents describing or referring to this Plan (or any part thereof)
shall confer on any Participant any right to continue service as a
member of the Board.
12.02 Unfunded Plan. The Plan, insofar as it provides for grants, shall be
unfunded and the Company shall not be required to segregate any
assets that may be represented at any time by grants under this Plan.
Any liability of the Company to any person with respect to any grant
under this Plan shall be based solely upon any contractual obligations
that are created pursuant to this Plan. No such obligation of the
Company shall be deemed to be secured by any pledge of, or other
encumbrance on, any property of the Company.
12.03 Rules of Construction. Headings are given to the articles and sections
of the Plan solely as a convenience to facilitate reference. The
reference to any statute, regulation or provision of law shall be
constructed to refer to any amendment to or successor of such provision
of law.
<PAGE>
Exhibit 10.13
Page 6 of 6
ARTICLE XII
AMENDMENT
The Board may amend this Plan from time to time; provided that no
amendment may become effective until shareholder approval is obtained if the
amendment (i) materially increases the aggreagte number of shares of
Common Stock that may be issued under the Plan, except in accordance with
the provisions of Article IX, (ii) materially changes the class of individuals
eligible to become Participants or (iii) materially increases the benefits that
may accrue to Participants under the Plan, and provided further that the Board
may not amend the Plan more than once in any six month period unless such
amendment is required to comply with the Code. No amendment shall, without
a Participant's consent, adversely affect any rights of such Participant under
any Option outstanding at the time such amendment is made.
ARTICLE XIII
TERMINATION
The Board may terminate this Plan at any time. This Plan will terminate
automatically, without any action of the Board, if, on any Date of Grant, there
are insufficient shares available for the grant of Awards in accordance with the
terms of this Plan. The termination of this Plan shall not affect any rights of
a Participant under any Option outstanding at the time of such termination.
ARTICLE XIV
DURATION OF PLAN
No Award may be granted under this Plan after five (5) years from the
date of the first grant of an Option under the Plan. Options granted on or
before such date shall remain valid in accordance with their terms.
ARTICLE XV
EFFECTIVE DATE OF PLAN
This Plan is subject to approval by a majority of the votes entitled to be
cast by the Company's shareholders, voting either in person or by proxy, at a
duly held shareholders' meeting. No Awards granted shall be exercisable prior
to approval by the Company's shareholders. However, Awards may be granted
prior to approval of the Plan by shareholders, subject to such approval.
