SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1996
Commission file number 01-17377
Commonwealth Bankshares, Inc.
(Exact name of registrant as specified in its charter)
Virginia 54-1460991
(State or other jurisdiction (I.R.S. Employer
of incorporated or organization) 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:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None 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-KSB or any amendment to this Form 10-KSB. X The aggregate market
value of the voting stock held by non-affiliates of the registrant as of March
15, 1997.
State issuer's revenues for its most recent fiscal year . . . . . . .
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange
Act).
Common Stock, $2.50 Par Value - 947,501 shares
- ----------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be held
April 29, 1997 are incorporated by reference into Part III.
<PAGE>
Part I
Item 1. Descrpition ofBusiness
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 the Bank.
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 four branches in Virginia Beach in 1975,
1982, 1983 and 1996.
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 trust, 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, 1996, the Bank had 44 full-time and 21 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.
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 depends upon the amount of
dividends declared by the Bank. Regulatory restrictions exist with respect to
the Bank's ability to pay dividends. See Note 17 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.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and
Interest Differential
<TABLE>
<CAPTION>
<S> <C>
Year Ended December 31,
1996 1995 1994
Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
ASSETS
- ------
Interest earning assets
(taxable-equivalent
basis (1) : $ 65,710 $ 6,126 9.32% $ 59,459 $ 5,705 9.66% $ 52,592 $ 4,966 9.52%
Loans (net of unearned
discount (2)
Securities 23,933 1,197 5.20 16,368 912 5.78 14,351 776 5.56
Federal funds sold 6,614 423 6.40 4,173 246 5.89 2,075 90 4.34
-------- -------- ---------- -------- -------- ---------- -------- -------- ----------
Total interest
earning assets 96,257 7,746 8.13 80,000 6,863 8.68 69,018 5,832 8.55
Non-interest earning
assets:
Cash and due from
banks 4,408 3,785 4,034
Premises and equipment 2,467 2,046 1,943
Other assets 3,002 3,428 3,166
----- ----- -----
TOTAL $106,134 $ 89,259 $ 78,161
======== ======== ========
</TABLE>
(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. (2) For the purposes of these computations, nonaccruing
loans are included in the daily average loan amounts outstanding.
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and
Interest Differential continued. . .
<TABLE>
<CAPTION>
<S> <C>
Year Ended December 31,
1996 1995 1994
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
LIABILITIES &
SHAREHOLDERS'
EQUITY
Interest bearing liabilities:
Savings and time deposits $80,037 $ 4,009 5.01% $67,419 $ 3,475 5.15% $58,743 $ 2,579 4.39%
Federal funds purchased &
securities sold under
agreements to repurchase 3,142 156 4.96 2,368 117 4.94 1,415 48 3.39
Long term debt 609 36 5.91 644 40 6.21 662 25 3.78
Short term debt --- --- --- --- --- --- --- --- ---
------- ------- ---- ------- ------- ---- ------- ------- ----
Total interest bearing liabilities 83,788 4,201 5.01 70,431 3,632 5.16 60,820 2,652 4.36
Non-interest bearing
liabilities
Demand deposits 11,600 9,516 9,064
Other 1,291 1,096 1,032
-------- ------- -------
Total liabilities 96,679 81,043 70,916
Common shareholders'
equity 9,455 8,216 7,245
-------- ------- -------
TOTAL $106,134 $89,259 $78,161
======== ======= =======
Net interest earnings $3,545 $3,231 $3,180
Net margin on interest
earning assets on a taxable
equivalent basis 3.77 4.14 4.70
Average interest spread
(taxable equivalent basis) 3.12 3.52 4.19
</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>
<S> <C>
1996 Compared to 1995 1995 Compared to 1994
----------------------- -------------------------
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)
------ ---- ---------- ------ ---- ----------
INTEREST INCOME
Securities . . . . . . . . . . $ 366 $ (81) $ 285 $ 112 $ 24 $ 136
Federal funds sold . . . . . 155 22 177 115 41 156
Loans . . . . . . . . . . . . . . 576 (155) 421 658 81 739
------- ------- ------- ------- ------- -------
1,097 (214) 883 885 146 1,031
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
Savings and time
deposits . . . . . . . . . . 629 (95) 534 411 485 896
Federal funds purchased &
securities sold under
agreement to repurchase 38 1 39 41 28 69
Long term debt . . . . . . (2) (2) (4) (1) 16 15
Short term debt . . . . . . -- -- -- -- -- --
------- ------- ------- ------- ------- -------
665 (96) 569 451 529 980
------- ------- ------- ------- ------- -------
Increase (Decrease) in
Net Interest Income . . . $ 432 $ (118) $ 314 $ 434 $ (383) $ 51
======= ======= ======= ======= ======= =======
</TABLE>
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>
<S> <C>
December 31,
---------------------------
1996 1995 1994
---- ---- ----
(In thousands)
U. S. Government and its Agencies ......................................... $21,483 $15,076 $13,327
State and Municipals ...................................................... 2,028 2,038 1,412
Other Securities .......................................................... 7 -- --
Federal Reserve Stock ..................................................... 144 144 144
------- ------- -------
$23,662 $17,258 $14,883
======= ======= =======
</TABLE>
The maturity distribution, par value, market value, and yield of the
investment portfolio at December 31, 1996, is presented in the following table.
December 31, 1996
---------------------------------
Par Value Market Value Yield
--------- ------------ -----
(Dollars in thousands)
Within 3 months .......................... $ 1,850 $ 1,848 5.61%
After 3 but within 6 months .............. 250 251 5.84
After 6 but within 12 months ............. -- -- --
After 1 but within 5 years ............... 6,182 6,075 6.19
After 5 but within 10 years .............. 8,911 8,744 6.16
After 10 years ........................... 6,300 6,318 6.96
Other Securities ....................... 7 7 --
Federal Reserve Bank Stock ............... 144 144 6.00
------- ------- ----
$23,644 $23,387 6.47%
======= ======= ====
Loan Portfolio:
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:
<TABLE>
<CAPTION>
<S> <C>
December 31
--------------------------------------------------------
1996 1995 1994
Amount % Amount % Amount %
------ - ------ - ------ -
(In thousands)
Commercial .................................. $11,080 16.83% $ 8,890 14.48% $ 9,900 17.85%
Commercial mortgage ......................... 30,664 46.58 27,266 44.43 22,056 39.77
Residential mortgage ........................ 17,206 26.13 18,668 30.42 16,376 29.52
Installment loans to
individuals ............................... 4,436 6.74 3,739 6.09 3,859 6.96
Other ....................................... 2,448 3.72 2,810 4.58 3,272 5.90
------- ------ ------- ------ ------- ------
TOTAL .............................. $65,834 100.00% $61,373 100.00% $55,463 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table shows the maturity of loans outstanding as of December 31,
1996. 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.
December 31, 1996
----------------------------------------------------
Maturing
----------------------------------------------------
After One
Within But Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(In thousands)
Commercial ......... $ 4,372 $ 4,203 $ 2,505 $11,080
Commercial mortgage 12,853 11,706 6,105 30,664
Residential Mortgage 3,696 8,513 4,997 17,206
Installment loans to
individuals .... 1,580 1,816 1,040 4,436
Other .............. 1,121 1,327 -- 2,448
TOTAL
------- ------- ------- -------
. .................. $23,622 $27,565 $14,647 $65,834
======= ======= ======= =======
Loans maturing after one year with:
Fixed interest rates . . . . . . . . $ 8,238 $13,448
Variable interest rates . . . . . . 19,397 1,239
-------- -------
TOTAL . . . . . . . . . . . . . $27,635 $14,687
======== =======
Non-performing Loans:
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:
<TABLE>
<CAPTION>
<S> <C>
December 31,
1996 1995 1994
---- ---- ----
(Dollars in thousands)
Non-accrual:
Real estate Loans ............................................ $1,869 $1,445 $ 720
Installment Loans ............................................ 16 62 13
Credit cards and related plans ............................... -- -- --
Commercial (time and demand) and
all other loans ............................................ 180 148 73
Lease financing receivables .................................. -- -- --
------ ------ ------
$2,065 $1,655 $ 806
Contractually past - due 90 days or more:
Real estate Loans .......................................... $ 102 $ 38 $ 22
Installment Loans .......................................... 9 21 6
Credit cards and related plans ............................. 20 37 10
Commercial (time and demand)
and all other loans ...................................... 49 102 68
Lease financing receivables ................................ -- -- --
------ ------ ------
Total Non-performing ........................................... $2,245 $1,853 $ 912
====== ====== ======
</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 was approximately $202,000 and $175,000 in 1996 and 1995,
respectively. Interest actually recorded on these loans was approximately
$102,000 and $59,000 in 1996 and 1995, respectively.
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.
The following table presents the Company's loan loss experience for the
past five years:
<TABLE>
<CAPTION>
<S> <C>
Year ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
Amount of loans outstanding at end
of year (net of unearned income) .......................... $65,835 $61,373 $55,463 $49,084 $46,701
======= ======= ======= ======= =======
Average amount of loans outstanding
(net of unearned income) .................................. $65,710 $59,459 $52,592 $47,239 $48,336
======= ======= ======= ======= =======
Balance of allowance for loan losses
at beginning of year ...................................... $ 1,256 $ 1,208 $ 1,129 $ 1,035 $ 1,077
Loans charged off:
Commercial ................................................ 59 -0- 18 1 81
Real Estate ............................................... 174 -0- -0- 89 177
Installment ............................................... 62 7 15 15 138
Credit Cards and Other Consumer ........................... 43 6 22 14 51
------- ------- ------- ------- -------
Total loans charged off ..................................... 338 13 55 119 447
------- ------- ------- ------- -------
Recoveries of loans previously
charged off:
Commercial ................................................ 3 -0- 9 22 60
Real Estate ............................................... 1 -0- 3 1 68
Installment ............................................... 6 6 12 16 31
Credit Cards and Other Consumer ........................... 4 2 8 7 11
------- ------- ------- ------- -------
Total recoveries ............................................ 14 8 32 46 170
------- ------- ------- ------- -------
Net loans charged off ....................................... 324 5 23 73 277
Additions to allowance charged
to expense ................................................ -0- 53 102 167 235
------- ------- ------- ------- -------
Balance at end of year ...................................... $ 932 $ 1,256 $ 1,208 $ 1,129 $ 1,035
======= ======= ======= ======= =======
Ratio of net charge-offs to average
loans outstanding ......................................... 0.5% 0.1% 0.4% 0.2% 0.6%
------- ------- ------- ------- -------
</TABLE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES:
The following table provides an allocation of the allowance for loan losses as
of December 31, 1996:
Year Ended December 31, 1996
----------------------------
Percent of Loans
on each category
Amount to total loans
------ --------------
(Dollars in Thousands)
Commercial . . . . . . . . . . . . . . . . . . . $12 16.83%
Commercial Mortgage . . . . . . . . . . . . . . 249 46.58
Residential Mortgage . . . . . . . . . . . . . . 26 26.13
Installment Loans to Individuals . . . . . . . . 10 6.74
Other . . . . . . . . . . . . . . . . . . . . . . 20 3.72
Unallocated . . . . . . . . . . . . . . . . . . . 615 N/A
----- ------
Total $932 100.00%
===== ======
Deposits:
The breakdown of deposits at December 31 for the years indicated is as
follows:
<TABLE>
<CAPTION>
<S> <C>
December 31,
------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Non-interest bearing demand deposits ......................... $10,687 $13,147 $ 9,080
Interest-bearing demand deposits ............................. 17,807 15,483 18,467
Savings deposits ............................................. 4,238 4,196 4,585
Certificates of deposit:
Less than $100,000 ........................................ 52,234 45,024 35,697
$100,000 or more .......................................... 5,296 4,406 3,495
------- ------- -------
$90,262 $82,256 $71,324
======= ======= =======
</TABLE>
The average daily amount of deposits and rates paid on such deposits is
summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
<S> <C>
Year Ended December 31,
1996 1995 1994
-----------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Non-interest bearing demand
deposits .......................................... $11,600 0.00% $ 9,516 0.00% $ 9,064 0.00%
Interest bearing demand
deposits .......................................... 17,848 2.96 16,871 2.98 19,446 2.93
Savings deposits .................................... 4,673 2.98 4,512 2.97 4,877 2.97
Certificates of Deposit:
Less than $100,000 ............................... 52,548 6.09 41,847 6.24 30,928 5.62
$100,000 or more ................................. 4,969 5.52 4,189 5.34 3,492 3.64
------- ---------- ------- ---------- ------- ----------
$91,638 $76,935 $67,807
======= ======= =======
</TABLE>
Remaining maturities of certificates $100,000 or more at December 31,
1996 as follows (in thousands):
Maturity
3 months or less . . . . . . . . . . . $3,154
Over 3 through 12 months . . . . . 969
Over 12 months . . . . . . . 1,173
------
$5,296
<PAGE>
Interest Rate Sensitivity Analysis:
The following table provides the maturities of investment securities,
loans, and deposits at December 31, 1996, and measures the interest rate
sensitivity gap for each range of maturity indicated:
<TABLE>
<CAPTION>
<S> <C>
December 31, 1996
Maturing
--------------------------------------------------------
Non-
Interest
Earning/
After Bearing
one but Assets/
Within Within After Liabili-
One Five Five ties and
Year Years Years Equity Total
---- ----- ----- ------ -----
(In Thousands)
Assets
Investment Securities ............................................. $ 3,488 $ 10,087 $ 10,087 $--- $ 23,662
Loans ............................................................. 23,622 27,565 14,647 -- 65,834
Other Assets ...................................................... 5,883 -- -- 10,791 16,674
Total Assets ......................................................... 32,993 37,652 24,734 10,791 106,170
Liabilities and
Shareholders' Equity
Demand Deposits-Non Interest ...................................... -- -- -- 10,687 10,687
All Interest-bearing Deposits ................................ 13,701 24,417 41,457 -- 79,575
Other Liabilities ............................................ 3,573 -- -- 2,767 6,340
Shareholders' Equity .................................................. -- -- -- 9,568 9,568
--------- --------- --------- --------- ---------
Total Liabilities and
Shareholders' Equity .................................................. 17,274 24,417 41,457 23,022 106,170
--------- --------- --------- --------- ---------
Interest Rate
Sensitivity Gap ..................................................... $ 15,719 $ 13,235 ($ 16,723) ($ 12,231) --
</TABLE>
Return on Equity and Assets
The following table highlights certain ratios for the periods indicated:
<TABLE>
<CAPTION>
<S> <C>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Net income to:
Average total assets ................................................................. .79 .94 1.04
Average shareholders' equity ......................................................... 8.85 10.17 10.89
Dividend payout ratio (dividends declared per
share divided by net income per share) ............................................... .00 .00 .00
Average shareholders' equity to average total
assets ratio ......................................................................... 8.91 9.20 9.27
</TABLE>
Item 2. Description of Properties
The headquarters building (the "Headquarters") of the Corporation and
the Bank, located at the corners of Freemason and Boush Streets, Norfolk,
Virginia, 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, one 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. 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 this 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.
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
four branches in Virginia Beach at 225 South Rosemont Road, 2712 North Mall
Drive, 1124 First Colonial Road and 1870 Kempsville Road.. One of the locations
is owned by the Bank and the remaining four are leased under long-term operating
leases with renewal options, at total annual rentals of approximately $103,000
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 Common Equity and Related
Stockholder Matters
The Corporation's Articles of Incorporation were amended at the 1996
Annual Meeting of Shareholders to authorize the issuance of up to 5,000,000
shares of Common Stock, par value $2.50 per share, 947,501 shares of which are
issued and outstanding. In addition, the Corporation has 300,000 shares of
authorized but unissued preferred stock, par value $25 per share.
The Corporation's Common Stock is not listed on an exchange or traded
through an interdealer quotation system, however, shares are traded in the
over-the-counter market. Anderson & Strudwick, Inc., a member of the New York
Stock Exchange, is an "active market maker" in the Common Stock of the
Corporation. Anderson & Strudwick, Inc. maintains offices in Richmond,
Charlottesville, Fredericksburg, Lynchburg and Norfolk, Virginia. The table
below describes trades quoted by Anderson & Strudwick, Inc. during 1995 and
1996. There may have been other transactions at other prices not known to the
Corporation.
There were no cash dividends declared during the past five years. The
Corporation issued a five (5%) percent stock dividend during the first quarter
of 1994 and six (6%) percent stock dividend during the first quarter of 1995,
and 1996. In addition, the Board of Directors of the Corporation declared a six
(6%) stock dividend in February 1997, payable to shareholders of record on March
31, 1997, which will be distributed April 30, 1997.
The Corporation's Board of Directors determines whether to declard
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, amoung other factors,
the Corporation's incme, 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.
Common Stock Prices
1996 1995
---- ----
High Low High Low
---- --- ---- ---
First Quarter $ 9.910 $ 8.020 $ 8.140 $ 7.781
Second Quarter 10.250 8.750 8.500 7.250
Third Quarter 10.500 9.000 9.250 7.500
Fourth Quarter 11.000 10.000 10.000 8.500
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.
At February 28, 1997, there were approximately 524 record holders of
the Corporation's common stock (based on the number of record holders as of the
date).
Item 6. Selected Consolidated Financial Data
The following table sets forth certain selected consolidated financial
data for the past five years.
<TABLE>
<CAPTION>
<S> <C>
Years Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
Income Statement Amounts:
Gross interest income ............................ $ 7,744 $ 6,859 $ 5,831 $ 5,589 $ 6,032
Gross interest expense ........................... 4,201 3,632 2,652 2,744 3,516
Net interest income .............................. 3,543 3,227 3,179 2,845 2,516
Provision for possible loan
losses ......................................... (1) (53) (102) (167) (235)
Net interest income after
provision ...................................... 3,542 3,174 3,077 2,678 2,281
Other operating income ........................... 871 810 746 824 614
Other operating expense .......................... 3,213 2,866 2,731 2,636 2,532
Income before income
taxes and other item ........................... 1,200 1,118 1,092 866 363
Income taxes ..................................... 364 282 278 219 85
Income before cumulative
effect of change in accounting
principle ...................................... 836 836 814 647 278
Cumulative effect of change in
accounting principle ........................... -- -- -- 39 --
Net income ....................................... $ 836 $ 836 $ 814 $ 647 $ 317
Per Share Data (1):
Net income per share . .(1) ...................... $ .88 $ .88 $ .86 $ .68 $ .33
Cash dividends per share ......................... -- -- -- -- --
Book value (at year end) ......................... 10.10 9.81 9.23 8.86 8.05
Balance Sheet Amounts:
(at year end)
Total assets ..................................... $ 106,170 $ 95,037 $ 81,458 $ 79,205 $ 71,833
Total loans (net of unearned income) ............. 65,833 61,373 55,463 49,084 46,701
Total deposits ................................... 90,262 82,256 71,324 68,805 63,496
Long-term debt ................................... 609 684 662 687 771
Total equity ..................................... 9,568 8,770 7,787 7,117 6,470
</TABLE>
(1) Adjusted to reflect 1996, 1995 and 1994 stock dividends.
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.
In addition to historical information, the following discussion
contains forward looking statements that are subject to risks and uncertainties
that could cause Commonwealth's actual results to differ materially from those
anticipated. These forward looking statements include, but are not limited to,
statements regarding management's expectations that the Bank will continue to
experience growth in core operating earnings, improved credit quality and
increased service fee income, and that Commonwealth may pay cash dividends in
the future. Readers are cautionied not to place undue reliance on these forward
looking statements, which reflect management's analysis only as of the date
hereof.
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 adopted this new accounting standard as of December
31, 1996 and there was no 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 1994 through 1996. 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 1996 of $836.4 thousand represented a modest increase
over the $835.5 thousand reported for the year 1995. This earning record
reflects the Bank's continued growth in core operating earnings and improved
credit quality and positive trends which are expected to continue into 1997.
Net income for 1995 of $835.5 thousand represented an increase of 2.6%
over the $814.1 thousand reported in 1994. This was primarily due to a growth in
core earnings and a decrease in the provision for loan losses.
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 1992.
The key profitability measures of return on average assets (ROA) and
return on average total shareholders' equity (ROE) reflected a decline in 1996
over 1995 as a result of the opening of the Bank's sixth branch office location,
full staffing of the Bank's newly established trust department, and the
implementation of new technological innovations, the planning for a more
sophisticated customer information system, the implementation of telephone
banking during the first quarter of 1996, and the expenses incurred for
expansion of the Bank's home banking system scheduled for the second quarter of
1997. ROA equalled .79% in 1996 compared with .94% in 1995. ROE equaled 8.85% in
1996 compared with 10.17% in 1995. ROA and ROE were similary affected in 1995 as
compared with 1994. These ratios, along with other significant earnings and
balance sheet information for each of the years in the five-year period ended
December 31, 1996, are shown in Table 1 as follows:
Table 1 - Selected Financial Information
<TABLE>
<CAPTION>
<S> <C>
(Dollars in thousands, except per share data)
Results of Operations (for the year): 1996 1995 1994 1993 1992
- ------------------------------------- ---- ---- ---- ---- ----
Income From Earning Assets $7,744 $6,859 $5,831 $5,590 $6,031
Net Interest Income 3,543 3,227 3,179 2,845 2,515
Provision For Loan Losses 1 53 102 167 235
Net Income 836 836 814 647 317
Earnings Per Share:
- -------------------
Net Income (1) $0.88 $0.88 $0.86 $0.68 $0.33
Average Shares Outstanding (1) 947,501 947,501 947,501 947,501 947,501
Financial Condition (at December 31):
- -------------------------------------
Total Assets $106,170 $95,037 $81,458 $79,205 $71,833
Total Equity 9,568 8,770 7,787 7,117 6,470
Selected Ratios (for the year):
- -------------------------------
Return on Average Assets 0.79% 0.94% 1.04% 0.86% 0.42%
Net Interest Margin 3.75% 3.92% 4.53% 4.32% 3.87%
(1) Adjusted to reflect 1996, 1995 & 1994 stock dividends.
</TABLE>
<PAGE>
Earnings per share were relatively unchanged when comparing 1996 to
1995. In 1995 earnings per share represented a 2.2% increase over 1994.
Significant items affecting the change in earnings per share for 1996, 1995 and
1994 are summarized as follows:
1996 1995
vs. vs.
1995 1994
---- ----
o Interest on loans and
investments and loan fees 12.9% increase 17.6% increase
o Interest on deposits and
funds purchased 15.7% increase 36.9% increase
o Net interest income 9.8% increase 1.5% increase
o Provision for loan losses 99.0% decrease 48.0% decrease
o Other income 7.5% increase 8.5% increase
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 $316 thousand or 9.8% in 1996 to $3.5
million, compared to an increase of $47.9 thousand or 1.5% in 1995, or to $3.3
million when compared with the $3.18 million reported in 1994. This improved
performance in 1996 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 increase in interest paid on
deposits, as deposits grew and repriced during the year. In 1995, the improved
performance over 1994 was attributable to a much greater increase in interest
income on loans and investments than the increase interest paid on deposits.
The net interest margin for 1996 was 3.75% compared to 3.92% for 1995.
The decline was primarily attributable to a 0.5% increase in the cost of
deposits for 1996 as compared to 1995. Similarly, the net interest margin for
1995 declined from the 4.53% reported in 1994. Again the decline was primarily
attributable to a 19.0% increase in the cost of deposits for 1995 as compared to
1994. The performance reported herein is reflected in Commonwealth's earning
assets yield which declined 55 basis points to 8.13% in 1996 compared with 13
basis points to 8.68% in 1995 from the 8.55% reported in 1994. Commonwealth's
average cost of deposits increased 72 basis points in 1995 from 1994 to 4.50%,
and 2 basis points in 1996 from 1995 to 4.52%.
A substantial decrease in nonperforming assets of $1.36 million to
$3.96 million will result in a favorable impact on the net interest margin
during future periods since the major reductions in nonperforming assets
occurred at year end in 1996. An increase in nonperforming loans of $392
thousand to $2.25 million resulted in an unfavorable impact on the net interest
margin during 1995. 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 loans during 1995.
Decreased nonperforming loans in 1994 had a favorable impact on the net
interest margin. Additional income of approximately $86.0 thousand for 1994,
would have been realized had all nonperforming loans performed as originally
expected.
Average interest earning assets increased $16.3 million in 1996 as
compared with an increase of $11.0 million in 1995 and $3.26 million in 1994.
Average net loans increased $6.3 milion in 1996 as compared with an increase of
$6.9 million in 1995 and $5.35 million in 1994. Average investment securities
increased by $7.6 million during 1996 compared with an increase of $2.0 million
during 1995 and $934 thousand in 1994.
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's management 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 1996. The Corporation made provisions for loan losses of $0.5 thousand in
1996 down $52.4 thousand from the $52.9 thousand reported in 1995. This followed
a $48.8 thousand or 47.9% reduction in the provision in 1995 over 1994. 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 1996 amounted to $325 thousand compared with a
modest $5 thousand reported in 1995. Charge-offs in 1995 were down $18 thousand
or 78.3% from 1994. 1994 net charge-offs of $23 thousand were down $50 thousand
or 68.5% from the prior year. The level of charge-offs during 1996 reflected
losses sustained, which were primarily attributable to the Bank's relationship
with one borrower, a relationship which has been in a workout position for an
extended period of time. Current expectations are that total net charge-offs in
1997 will be substantially reduced from the levels reached during 1996. 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, 1996 was $932 thousand
compared with $1.256 million at December 31, 1995. This represented 1.41% of
year-end gross loans at December 31, 1996 compared with 2.04% of year-end gross
loans at December 31, 1995. At December 31, 1994 the allowance equalled $1.208
million, representing 2.2% of year-end gross loans.
The tables on the following pages provide an analysis of the activity
in the Corporation's nonperforming assets and allowance for loan losses for each
of the last five years. Based on current expectations relative to portfolio
characteristics and performance measures including loss projections, management
considers the level of the allowance to be adequate.
Nonperforming loans at December 31, 1996 increased $392 thousand and at
year end equalled $2.2 million. Nonperforming loans continue to be centered in a
relatively small number of loans with large balances. Based on the Bank's
current workout plans, we expect to return each of these loans to an accrual
status during 1997 with minimum loss to the Bank. Each of the loans are fully
secured and represent minimal risk. Nonperforming loan levels at December 31,
1995 increased $942 thousand from December 31, 1994.
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 the 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 $180 thousand at December 31, 1996, and $198
thousand at December 31, 1995 and $106 thousand at December 31, 1994.
The following table reflects the trends discussed herein:
<TABLE>
<CAPTION>
<S> <C>
Nonperforming Assets
December 31, (in thousands) 1996 1995 1994
- --------------------------- ---- ---- ----
90 Days delinquent and still accruing $ 180,000 $ 198,000 $ 106,000
Nonaccrual 2,065,000 1,655,000 806,000
Foreclosed properties 1,720,000 3,467,000 3,364,000
---------- ---------- ----------
Totals $3,965,000 $5,320,000 $4,276,000
========== ========== ==========
</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.
Loan Portfolio
The Corporation's credit risk is centered in its loan portfolio which
on December 31, 1996 totaled $66.0 million, or 69.2% 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. One loan is
self-liquidating and payments are being received from the assignment of
commissions, one loan is 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 $100 thousand in 1996, $115.9 thousand to interest
income in 1995, and $86 thousand in 1994.
The Corporation's Other Real Estate Owned (OREO) at December 31, 1996
declined substantially to $1.7 million from the $3.5 million reported at
December 31, 1995. At December 31, 1994 other real estate owned equalled $3.4
million. Of the $1.7 million, three of the properties representing $737 thousand
are generating income under operating leases. The balance representing $982
thousand are in various stages of liquidation.
During the last three years, there have been additions to and
liquidations of other real estate owned. Properties acquired during 1996
equalled $603 thousand compared with $680 thousand during 1995 and $634 thousand
in 1994. Proceeds from the properties disposed of during 1996 equalled $2.6
million compared with $638 thousand in 1995 and $904 thousand in 1994.
During 1996, there was a net loss on the sale of other real estate of
$12.7 thousand compared with a net gain equalling $8.7 thousand in 1995, a net
loss of $11.1 thousand in 1994.
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 7.5% in 1996 following a 8.5% increase in
1995 and a 9.4% decrease in 1994. The increases in 1996 were attributable
principally to:
o gain in the sale of fixed assets of $65.3 thousand.
o $12.1 thousand increase in income generated from
properties held by the Bank for sale.
o n increase in other miscellaneous income items of $28
thousand.
In 1995 the increases were attributable to:
o A gain in the sale of small business administration loans
which equalled $17.8 thousand.
o A gain in the sale of securities available for sale of
$28.4 thousand compared with a loss of $9.2 thousand in
1994.
o A gain in the sale of Other Real Estate Owned of $8.7
thousand compared with a loss of $11.2 thousand in 1994.
In each of the three years mentioned, income from OREO properties
equalled $218.6, $208.9, and $224.0 thousand, respectively.
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.
Other Expense
Total other expense increased to $3.2 million in 1996 or 12% compared
to an increase of 4.9% in 1995 and an increase of 3.6% in 1994. 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 13.3% in 1996, as a result of fully staffing the
Bank's new branch on Kempsville Road, and the Bank's newly formed Trust
Department. This expense increased 6.6% in 1995 and 8.3% in 1994. Net occupancy
expense increased $24.3 thousand in 1996, following a $73.3 thousand increase in
1995, and a $37.1 thousand decrease in 1994. The increases in 1995 and 1996
reflected necessary modifications and improvements to the Bank's physical
facilities, the opening of the Bank's sixth branch location, 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, increased $130 thousand or 16.2% following a
decrease of $43.7 thousand or 5.1% in 1995 and an increase of $11.9 thousand or
1.4% in 1994. 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.
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 5.5%, 4.8%, and 4.19% of the Bank's
total deposits at December 31, 1996, 1995, and 1994, respectively. As a
percentage of average assets, core deposits have increased from 86.9% in 1994 to
87.8% in 1995, and 94.6% in 1996. 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 8% to $64.9 million in 1996 compared with a 10.8%
increase in 1995 to $60.1 million from the $54.3 million at year end 1994.
Balances in a number of loan categories also increased. Total commercial loans
increased 15.5% to $41.7 million in 1996 compared with an increase of 13.1% to
$36.2 million in 1995, following an 14.1% increase in 1994 to $32.0 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. Consumer loans decreased $1.1 million or 4.7%
in 1996, reflecting the intense competition for consumer installment loans in
Hampton Roads. This increase followed an increase of $1.7 million or 7.1% in
1995 and an increase of $2.3 million or 10.9% in 1994.
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, 1996 equalled $8.8 million or a 33.3%
increase in short-term borrowings during 1996 following a $1.9 million or 40%
increase in short term borrowings during 1995, and a $1.6 million or 35.3%
decrease in short term borrowings during 1994. At December 31, 1996, 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. On both an average and
year-end basis, the composition of purchased funds continued to shift in 1996,
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, 1996 increased 13.6% from year-end
1995 compared with 1995's increase of 17.2% and 1994's increase of 2.8%. The
increase of $7 million in 1996 reflected investments in government securities
and Federal funds sold. The increases in 1995 reflected higher levels of loans,
while the increases in 1994 reflected higher loans outstanding and higher levels
of investments in Federal funds sold.
The composition of long-term investment securities as of December 31,
1996 and 1995 is presented in Note 3 to the Consolidated Financial Statements.
At year-end 1996, 1995 and 1994, investment securities totaled $23.7
million, $17.3 million, and $14.9 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.
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 their reinvestment. This
partial portfolio restructure enabled the Bank to smooth out cashflows within
it's "Investment Ladder". See Note 3 to the Consolidated Financial Statements
for a breakdown of the securities held in each of these accounts. During 1996 it
was determined that further repositioning could enhance yields and smooth
cashflows from the investment portfolio by shifting certain investment funds to
different investment sectors and by moderately lengthening the portfolio's
duration. The liquidation and reinvestment achieved two important management
objectives:
o To increase the portfolio yield and thus the earnings
contribution from the Bank's investment portfolio, and
o To add amortizing investments and thus increase the
regularity of principal cashflows from the bond portfolio.
Management frequently assesses the performance of the investment
portfolio to ensure its yield and cashflow performances are consistant with the
broad strategic plan of the entire Bank. Flexibility is one of the hallmarks of
the Bank's ability to meet the dynamic banking needs of its customers.
Year-end total loans net of unearned income increased $4.4 million or
7.4% in 1996 following increases of 10.6% or $5.9 million and 12.9% or $6.37
million at year end 1995 and 1994, 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 and
Interest Sensitivity".
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 1996 and 1995, the
Corporation declared a 6% stock dividend in each year. It is anticipated that
this policy will continue to be re-evaluated during 1997. 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 1996, income tax expense was $364.2 thousand, up from $282.1
thousand in 1995, and $278.3 thousand in 1994. 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 15.1% in 1996
compared with 13.4% in 1995, and 9.4% in 1994. 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.
Risk-based capital ratios are another measure of capital adequacy. At
December 31, 1996, The Bank's 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 13.1% and 14.4% respectively at December 31,
1995, and 10.0% and 11.3% at December 31, 1994. 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 31, 1996, 1995 and
1994.
The Bank's capital is adequate to support the present level of assets
and to provide for some future growth.
At December 31, 1996, shareholders' equity stood at $9.57 million as
compared with $8.77 million at year-end 1995 and $7.79 million at year-end 1994.
These increases were brought about by a net profit of $836.4 thousand in 1996, a
net profit of $835.1 thousand in 1995, combined with a change in unrealized
gains of $149.8 thousand on securities available for sale, and a net profit of
$814.3 thousand in 1994.
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:
o Continuing its efforts to return all nonperforming assets
to performing status,
o Monitoring the Bank's growth, and
o 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.
<TABLE>
<CAPTION>
<S> <C>
FIVE-YEAR SUMMARY CONSOLIDATED BALANCE SHEETS
December 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
ASSETS
Cash and due from banks $5,655,944 $5,135,875 $4,764,835 $4,604,437 $4,504,842
Investments held for sale -- -- -- --
Investment securities -- -- -- 13,923,049 14,243,807
Investment Securities:
Available for Sale 9,590,274 5,968,175 6,489,145 -- --
Held to Maturity 14,072,217 11,290,140 8,393,628 -- --
Federal funds sold 5,718,439 5,131,844 1,056,522 6,360,000 870,000
Loans:
Commercial 11,078,914 8,889,880 9,899,880 9,539,927 8,523,608
Commercial Construction 1,867,926 1,470,129 988,192 478,214 410,481
Commercial Mortgage 28,796,673 25,795,631 21,068,295 17,983,733 16,214,371
Residential Mortgage 17,206,173 18,668,317 16,376,434 14,315,477 13,094,969
Installment loans to individuals 4,600,931 3,970,015 4,103,107 4,075,197 4,608,809
Other 2,448,714 2,809,860 3,272,096 3,006,057 4,413,970
------------ ----------- ----------- ----------- -----------
GROSS LOANS 65,999,331 61,603,832 55,708,004 49,398,605 47,266,208
Less: Unearned income (164,724) (231,186) (244,930) (314,728) (565,581)
Allowance for loan losses\ (932,000) (1,256,000) (1,208,000) (1,129,000) (1,034,742)
------------ ----------- ----------- ----------- -----------
64,902,607 60,116,646 54,255,074 47,954,877 45,665,885
Premises and equipment 2,442,691 2,340,746 1,912,657 1,968,755 1,764,975
Other assets 3,788,054 5,053,931 4,586,250 4,394,932 4,783,526
------------ ----------- ----------- ----------- -----------
$106,170,226 $95,037,357 $81,458,111 $79,206,050 $71,833,035
============ =========== =========== =========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $10,686,956 $13,147,115 $9,080,263 $11,504,308 $7,291,537
Interest bearing 79,575,499 69,109,244 62,243,345 57,300,448 56,203,792
------------ ----------- ----------- ----------- -----------
TOTAL DEPOSITS 90,262,455 82,256,359 71,323,608 68,804,756 63,495,329
Securities sold under
agreement to repurchase 3,573,350 2,290,477 744,855 1,616,177 372,809
Long-term debt 609,280 684,019 661,504 687,616 770,871
Other liabilities 2,156,671 1,036,116 940,808 979,455 724,300
------------ ----------- ----------- ----------- -----------
TOTAL LIABILITIES 96,601,756 86,266,971 73,670,775 72,088,004 65,363,309
SHAREHOLDERS' EQUITY
Common stock 2,368,752 2,235,258 2,109,313 2,009,380 2,009,380
Additional capital 4,106,361 3,715,666 3,376,454 3,122,226 3,122,226
Unrealized gains (loss) on
securities available for sale (28,005) 7,900 (141,900)
Retained earnings 3,121,362 2,811,562 2,443,469 1,985,440 1,338,120
------------ ----------- ----------- ----------- -----------
9,568,470 8,770,386 7,787,336 7,117,046 6,469,726
------------ ----------- ----------- ----------- -----------
$106,170,22 $95,037,357 $81,458,111 $79,205,05 $71,833,03
=========== =========== =========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
FIVE-YEAR SUMMARY OF CONSOLIDATED OPERATIONS
Years Ended December 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Interest on loans and investments and loan fees $7,744,380 $6,858,537 $5,831,266 $5,589,544 $6,031,054
Interst on deposits and federal funds purchased 4,201,221 3,631,792 2,652,383 2,744,515 3,515,789
---------- ---------- ---------- ---------- ----------
Net Interest Income 3,543,159 3,226,745 3,178,883 2,845,029 2,515,265
Provision for loan losses (529) (52,932) (101,787) (166,869) (235,000)
---------- ---------- ---------- ---------- ----------
Net Interest Income After Provision
for Loan Losses 3,542,630 3,173,813 3,077,096 2,678,160 2,280,265
Other Income
Security gains (loss) 3,570 28,430 (9,187) 121,775 46,033
Gains (loss) on sale of real estate (12,744) 8,668 (11,146) (20,661) (30,186)
Other operating income 879,795 772,963 766,736 722,647 598,639
---------- ---------- ---------- ---------- ----------
Total Other Income 870,621 810,061 746,403 823,761 614,486
Other Expenses:
Salaries and employee benefits 1,535,427 1,354,088 1,270,731 1,172,650 1,149,443
Occupancy expenses (net) 300,844 276,531 203,212 240,329 212,634
Furniture and equipment expenses 443,316 432,693 410,621 388,236 359,959
Other operating expenses 932,974 802,897 846,593 834,672 809,768
---------- ---------- ---------- ---------- ----------
Total Other Expenses 3,212,561 2,866,209 2,731,157 2,635,887 2,531,804
---------- ---------- ---------- ---------- ----------
Income Before Income Taxes
and Other Item 1,200,690 1,117,665 1,092,342 866,034 362,947
Applicable Income Tax Expense 364,264 282,148 278,251 218,714 85,518
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
change in accounting principle 836,426 835,517 814,091 647,320 277,429
======
Cumulative effect of change in
accounting principle -- -- -- -- 39,396
---------- ---------- ---------- ---------- ----------
Net Income for Year $836,426 $835,517 $814,091 $647,320 $316,825
========== ========== ========== ========== ==========
Net Income per share
based on weighted average
number of shares outstanding (1) 0.88 0.88 0.86 0.68 0.33
Average shares outstanding (1) 947,501 947,501 947,501 947,501 947,501
</TABLE>
(1) Adjusted to reflect 1996, 1995 & 1994 Stock Dividends.
PART II
Item 7. Financial Statements.
Refer to the index to the Consolidated Financial Statements on Page F-1
for the required information.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Complianc
With Section 16(a) of the Exchange Act.
The following sets forth the names, ages and business
experience of the Corporation's executive officers.
Edward J. Woodard, Jr., 54
Chairman of the Board, President and Chief Executive Officer of the
Corporation and the Bank.
John H. Gayle, 58
Executive Vice President and Secretary of the Corporation and Executive
Vice President and Cashier of the Bank, and Vice President and Secretary of BOC
Title Hampton Roads.
Richard R. Early, 52
Senior Vice President and Senior Trust Officer of the Bank since
September 1996. Prior to accepting the position with the Bank, Mr. Early was
Senior Vice President and Senior Trust Officer at Bank of Lancaster from May
1990 through September 1996.
Simon Hounslow, 32
Vice President and Commercial Loan Officer of the Bank.
Richard W. Webb, 44
Vice President and Branch Administration Officer of the Bank. Prior to
joining the Bank in August 1993, Mr. Webb was a banker with Home Savings Bank
from 1975 through July 1993.
Item 10. Executive Compensation.
The information called for in this Item is incorporated by reference
from the Corporation's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission no
later than 120 days after the end of the Corporation's fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Mangement.
The information called for in this Item is incorporated by reference
from the Corporation's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission no
later than 120 days after the end of the Corporation's fiscal year.
Item 12. Certain Relationships and Related Transactions.
The information called for in this item is incorporated by reference
form the Corporation's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission no
later than 120 days after the end of the Corporationi's fiscal year.
Item 13. Exhibits and Reports on Form 8-K.
(a) (3) Exhibits
<TABLE>
<S> <C>
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.
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. Filed March 30, 1996, as
Exhibit 10.13 to Registrant's form 10-K, and incorporated herein by
reference.
</TABLE>
(b) Reports filed on Form 8-K for the quarter ended December 31, 1996.
None
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8,
LIST OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 1996
COMMONWEALTH BANKSHARES, INC.
<PAGE>
FORM 10-KSB--ITEM 7
COMMONWEALTH BANKSHARES, INC.
LIST OF FINANCIAL STATEMENTS
The following consolidated financial statements of Commonwealth Bankshares, Inc.
and subsidiary are included:
Consolidated balance sheets--December 31, 1996 and 1995.
Consolidated statements of operations--Years ended December 31, 1996,
1995, and 1994.
Consolidated statements of shareholders' equity--Years ended December
31, 1996, 1995, and 1994.
Consolidated statements of cash flows--Years ended December 31, 1996,
1995 and 1994.
Notes to consolidated financial statements--December 31, 1996.
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 29, 1997 by: E. J. Woodard, Jr.
--------------------------------
E. J. Woodard, Jr., CLBB
Chairman of the Board,
President & CEO
by: John H. Gayle
--------------------------------
Executive 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>
INDEX
PAGE
Independent auditors' report F-2
Financial statements
Consolidated balance sheets F-3
Consolidated statements of income F-5
Consolidated statements of stockholders' equity F-7
Consolidated statements of cash flows F-9
Notes to consolidated financial statements F-11
F-1
<PAGE>
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, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
PLOTT & WALTON, PC
Richmond, Virginia
January 17, 1997
F-2
<PAGE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
---- ----
Cash and cash equivalents:
Cash and due from banks (Note 2) $ 5,655,944 $ 5,135,875
Federal funds sold 5,718,439 5,131,844
------------ -----------
Total cash and cash equivalents 11,374,383 10,267,719
Investment securities:
Securities available for sale (Note 3) 9,590,274 5,968,175
Securities to be held to maturity
(Note 3) 14,072,217 11,290,140
------------ -----------
Total investment securities 23,662,491 17,258,315
Loans (Notes 4 and 5):
Commercial 11,078,914 8,889,880
Commercial construction 1,867,926 1,470,129
Commercial mortgage 28,796,673 25,795,631
Residential mortgage 17,206,173 18,668,317
Installment loans to individuals 4,600,931 3,970,015
Other 2,448,714 2,809,860
------------ -----------
Gross loans 65,999,331 61,603,832
Unearned income (164,724) (231,186)
Allowance for loan losses (932,000) (1,256,000)
------------ -----------
Loans, net 64,902,607 60,116,646
Premises and equipment, net (Notes 6
and 11) 2,442,691 2,340,746
Real estate acquired in settlement of
loans 1,719,642 3,467,207
Accrued interest receivable 736,092 634,383
Other assets 1,332,320 952,341
------------ -----------
$106,170,226 $95,037,357
============ ===========
F-3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
---- ----
Liabilities:
Deposits:
Non-interest bearing $ 10,686,956 $13,147,115
Interest bearing:
Demand 17,807,271 15,482,900
Savings 4,237,750 4,195,594
Other time deposits 57,530,478 49,430,750
------------ -----------
Total deposits 90,262,455 82,256,359
Securities sold under
agreements to repurchase
(Notes 3 and 10) 3,573,350 2,290,477
Long-term debt (Note 11) 609,280 684,019
Accrued interest payable 334,162 283,726
Income tax payable - 16,206
Other liabilities 1,822,509 736,184
------------ -----------
Total liabilities 96,601,756 86,266,971
Stockholders' equity (Notes 8, 9,
and 17):
Common stock, par value $2.50 -
5,000,000 shares authorized;
947,501 and 894,103 shares issued
and outstanding in 1996 and 1995,
respectively 2,368,752 2,235,258
Additional paid-in capital 4,106,361 3,715,666
Retained earnings 3,121,362 2,811,562
Net unrealized gain (loss) on
securities available for sale,
net of income tax provision
(benefit) of $(14,428) and
$4,000 in 1996 and 1995,
respectively (28,005) 7,900
------------ -----------
Total stockholders' equity 9,568,470 8,770,386
------------ -----------
$106,170,226 $95,037,357
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
<S> <C>
1996 1995 1994
---- ---- ----
Interest income:
Loans, including fees:
Taxable $6,058,519 $5,618,136 $4,880,638
Tax exempt 65,833 81,771 84,509
Investment securities:
Taxable 1,106,220 845,204 732,355
Tax exempt 90,699 67,003 43,514
Other interest income 423,109 246,423 90,250
---------- ---------- ----------
Total interest income 7,744,380 6,858,537 5,831,266
Interest expense:
Deposits 4,009,124 3,475,299 2,578,995
Federal funds purchased and securities
sold under agreements to repurchase 155,864 116,727 47,737
Other interest expense 36,233 39,766 25,651
---------- ---------- ----------
Total interest expense 4,201,221 3,631,792 2,652,383
---------- ---------- ----------
Net interest income 3,543,159 3,226,745 3,178,883
Provision for loan losses (Note 5) (529) (52,932) (101,787)
---------- ---------- ----------
Net interest income after provision for
loan losses 3,542,630 3,173,813 3,077,096
Other income (loss):
Service charges on deposit accounts 443,958 449,199 464,691
Other service charges and fees 306,295 277,554 264,785
Net realized investment securities
gain (loss) (Note 3) 3,570 28,430 (9,187)
Net gain (loss) on sale of real estate
acquired in settlement of loans (12,744) 8,668 (11,146)
Other 129,542 46,210 37,260
---------- ---------- ----------
Total other income 870,621 810,061 746,403
Other expenses:
Salaries and employee benefits 1,535,427 1,354,088 1,270,731
Net occupancy expense 300,844 276,531 203,212
Furniture and equipment expenses 443,316 432,693 410,621
Other 932,974 802,897 846,593
---------- ---------- ----------
Total other expenses 3,212,561 2,866,209 2,731,157
---------- ---------- ----------
</TABLE>
(Continued)
F-5
<PAGE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
<S> <C>
1996 1995 1994
---- ---- ----
Income before income taxes 1,200,690 1,117,665 1,092,342
Applicable income tax expense
(Note 13) 364,264 282,148 278,251
---------- ---------- ----------
Net income $ 836,426 $ 835,517 $ 814,091
========== ========== ==========
Per share data (Note 8):
Net income $ .88 $ .88 $ .86
======= ======= =======
Average shares outstanding 947,501 947,501 947,501
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
<S> <C>
Net Unrealized
Gain (Loss) on
Common Stock Additional Securities
---------------- Paid-in Retained Available
Shares Amount Capital Earnings for Sale
------ ------ ------- -------- --------
Balance, December 31, 1993 $803,752 $2,009,380 $3,122,226 $1,985,440 $ -
Net income for 1994 - - - 814,091 -
Stock dividend (Note 8) 39,973 99,933 254,228 (356,062) -
Net unrealized loss on
securities available
for sale, net of income
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 8) 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 income tax
provision of $6,400 - - - - 12,424
Net change in unrealized
gain (loss) on
securities available
for sale, net of income
tax provision of
$70,700 - - - - 137,376
-------- ---------- ---------- ---------- ---------
Balance, December 31, 1995 894,103 2,235,258 3,715,666 2,811,562 7,900
</TABLE>
(Continued)
F-7
<PAGE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
<S> <C>
Net Unrealized
Gain (Loss) on
Common Stock Additional Securities
---------------- Paid-in Retained Available
Shares Amount Capital Earnings for Sale
------ ------ ------- -------- --------
Net income for 1996 - - - 836,426 -
Stock dividend (Note 8) 53,398 133,494 390,695 (526,626) -
Net change in unrealized
gain (loss) on
securities available
for sale, net of income
tax benefit of $18,428 - - - - (35,905)
-------- ---------- ---------- ---------- ---------
Balance, December 31, 1996 $947,501 $2,368,752 $4,106,361 $3,121,362 $ (28,005)
======== ========== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994
<TABLE>
<CAPTION>
<S> <C>
1996 1995 1994
---- ---- ----
Operating activities:
Net income $ 836,426 $ 835,517 $ 814,091
Adjustments to reconcile net income to net
cash from operating activities:
Provision (benefit) for:
Loan losses 529 52,932 101,787
Depreciation and amortization 305,934 226,195 196,890
Deferred income taxes (106,233) (100,352) (109,035)
Net realized investment securities loss (gain) (3,570) (28,430) 9,187
Gain on sale of premises and equipment (65,297) - -
Net loss (gain) on sale of real estate
acquired in settlement of loans 12,744 (8,668) 11,146
Increase in accrued interest receivable (101,709) (92,968) (87,119)
Increase in accrued interest payable 50,436 89,197 29,003
Decrease in income taxes payable (16,836) (51,794) (162,000)
Other 212,021 (184,059) (11,595)
----------- ----------- -----------
Net cash from operating activities 1,124,445 737,570 792,355
Investing activities:
Purchases of:
Securities to be held to maturity (6,200,301) (8,105,791) (3,541,016)
Securities available for sale (9,065,980) (1,079,132) (500,000)
Premises and equipment (459,646) (650,037) (94,024)
Assets relating to real estate acquired in
settlement of loans (257,771) (82,547) (147,013)
Net increase in loans (5,423,798) (6,544,821) (7,032,504)
Proceeds from:
Sale of securities to be held to maturity 4,167,374 3,341,600 1,364,667
Sale of securities available for sale 5,263,583 3,723,111 1,492,438
Sale of premises and equipment 117,064 - -
Sale of real estate acquired in settlement of
loans 2,629,900 657,528 903,500
----------- ---------- -----------
Net cash used in investing activities (9,229,575) (8,740,089) (7,553,952)
Financing activities:
Net increase in certificates of deposit 8,099,728 10,239,386 5,359,989
Net increase (decrease) in other deposits (93,632) 693,365 (2,841,137)
Net increase (decrease) in securities sold
under agreements to repurchase 1,282,873 1,545,622 (871,322)
Principal payments on long-term borrowings (74,739) (27,225) (26,112)
Dividends paid (2,436) (2,267) (1,901)
----------- ----------- -----------
Net cash from financing activities 9,211,794 12,448,881 1,619,517
----------- ----------- -----------
</TABLE>
(Continued)
F-9
<PAGE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994
<TABLE>
<CAPTION>
<S> <C>
1996 1995 1994
---- ---- ----
Net increase (decrease) in cash and cash
equivalents 1,106,664 4,446,362 (5,142,080)
Cash and cash equivalents, beginning of year 10,267,719 5,821,357 10,963,437
----------- ----------- -----------
Cash and cash equivalents, end of year $11,374,383 $10,267,719 $ 5,821,357
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 4,150,785 $ 3,542,595 $ 2,623,380
Income taxes 274,867 434,294 549,286
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 $ 637,308 $ 680,057 $ 630,520
Net decrease in loans and accrued
interest (637,308) (630,317) (630,520)
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 133,494 125,945 99,933
Additional paid-in capital 390,695 339,212 254,228
----------- ----------- -----------
Fair value of stock dividend $ 524,189 $ 465,157 $ 354,161
=========== =========== ===========
Net unrealized gain (loss) on securities
available for sale included in the
following:
Retained earnings $ (35,905) $ 149,800 $ (141,900)
Deferred income taxes (18,428) 77,100 (73,100)
----------- ----------- -----------
$ (54,333) $ 226,900 $ (215,000)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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) and its subsidiary, BOC Title of Hampton Roads,
Inc., 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
and its subsidiary, 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
six 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.
F-11
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. Summary of significant accounting policies (Continued)
Investment securities -(Continued) 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.
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 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.
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.
F-12
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. Summary of significant accounting policies (Continued)
Impaired loans - (Continued) 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, 1996 or 1995.
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. Ordinary maintenance and repairs
are expensed as they are incurred. Deprecation is computed generally by
the straight-line method. It is the Company's policy to capitalize
additions and improvements and amortize the cost thereof over the
estimated useful lives as follows:
Buildings and improvements 5 to 40 years
Furniture and equipment 3 to 10 years
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.
F-13
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. Summary of significant accounting policies (Continued)
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.
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 - Effective January 1, 1996, the Bank
adopted Statement of Financial Accounting Standards (SFAS) 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 adoption of
SFAS No. 121 had no impact on the consolidated financial statements.
Reclassifications - Certain prior year amounts have
been reclassified to conform to the 1996 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, 1996 and 1995.
F-14
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
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."
The aggregate carrying and market values of investment
securities at December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
------ ----- ------ -----
Securities available for sale
at December 31, 1996:
U.S. Government and
agency securities $5,648,280 $10,947 $29,222 $5,630,005
Mortgage-backed
securities 2,964,257 3,356 21,937 2,945,676
State and municipal
securities 868,492 - 5,577 862,915
Other equities 151,678 - - 151,678
---------- ------- ------- ----------
$9,632,707 $14,303 $56,736 $9,590,274
========== ======= ======= ==========
Securities to be held to
maturity at December 31,
1996:
U.S. Government and
agency securities $ 7,914,795 $ 4,943 $212,161 $ 7,707,577
Mortgage-backed
securities 4,992,553 4,766 50,825 4,946,494
State and municipal
securities 1,164,869 - 21,984 1,142,885
----------- ------- -------- -----------
$14,072,217 $ 9,709 $284,970 $13,796,956
=========== ======= ======== ===========
</TABLE>
F-15
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. Investment securities (Continued)
<TABLE>
<CAPTION>
<S> <C>
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
------ ----- ------ -----
Securities available for sale
at 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 at 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>
Securities with a book value of $7,102,557 and $5,810,802 and
market value of $6,883,544 and $5,617,676 at December 31, 1996 and
1995, respectively, were pledged as collateral to secure public
deposits and for other purposes.
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:
F-16
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. Investment securities (Continued)
Year ended December 31,
1996 1995 1994
-------------------------------
Securities available for
sale:
Gross realized gains $ 15,721 $ 31 359 $ -
Gross realized losses 3,488 - 7,338
Applicable income tax
on net realized
gains (losses) 3,235 10,662 (2,495)
Securities to be held to
maturity:
Gross realized gains 884 447 107
Gross realized losses 9,547 3,376 1,956
Applicable income tax
on net realized
gains (losses) (2,945) (996) (629)
The amortized cost and fair values of investment securities
available for sale and to be held to maturity at December 31, 1996, 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>
<S> <C>
Securities Available Securities to be
for Sale Held to Maturity
-------------------- ----------------
Carrying Market Carrying Market
Amount Value Amount Value
------ ----- ------ -----
Due in one year or less $ 701,948 $ 702,844 $ 1,399,307 $ 1,396,488
Due after one year
through five years 1,197,218 1,193,222 3,709,721 3,645,176
Due after five years
through ten years 4,116,672 4,099,943 3,470,636 3,314,423
Due after ten years 500,934 496,911 500,000 494,375
6,516,772 6,492,920 9,079,664 8,850,462
Mortgage-backed securities 2,964,257 2,945,676 4,992,553 4,946,494
Equity securities 151,678 151,678 - -
---------- ---------- ----------- -----------
$9,632,707 $9,590,274 $14,072,217 $13,796,956
========== ========== =========== ===========
</TABLE>
F-17
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
4. Loans
Nonaccrual loans were approximately $2,065,000 and $1,655,000
at December 31, 1996 and 1995, respectively. Interest which would have
been recorded on these loans under the contractual terms is
approximately $202,000 and $175,000 as of December 1996 and 1995,
respectively. Interest income actually recorded on these loans was
approximately $102,000 and $59,000 in 1996 and 1995, respectively.
5. Allowance for loan losses
Changes in the allowance for loan losses were as
follows:
Year ended December 31,
1996 1995 1994
-------------------------------
Balance, beginning of
year $1,256,000 $1,208,000 $1,129,000
Provision for loan
losses 529 52,932 101,787
Loans charged off (338,106) (12,657) (54,442)
Recoveries of previous
charge-offs 13,577 7,725 31,655
---------- ---------- ----------
Net loans charged off (324,529) (4,932) (22,787)
---------- ---------- ----------
Balance, end of year $ 932,000 $1,256,000 $1,208,000
========== ========== ==========
6. Premises and equipment and leases
Premises and equipment:
Premises and equipment are summarized as follows:
December 31,
1996 1995
----------------------
Land $ 185,918 $ 190,308
Buildings and improvements 1,241,438 1,264,664
Leasehold improvements 304,584 281,870
Furniture and equipment 2,504,645 2,116,689
Construction in progress 145,007 212,589
---------- ----------
4,381,592 4,066,120
Less accumulated depreciation 1,938,901 1,725,374
$2,442,691 $2,340,746
========== ==========
F-18
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
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 $74,641 in
1996, $74,895 in 1995 and $60,151 in 1994.
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 four branch
offices. Such leases contain renewal options and have remaining terms
of 6 to 155 months as of December 31, 1996.
Rental expense and related sublease income are as
follows:
Year ended December 31,
1996 1995 1994
----------------------------
Gross rental expense $134,072 $187,936 $181,049
Sublease rental income 63,378 65,368 81,773
-------- -------- --------
Net rental expense $ 70,694 $122,568 $ 99,276
======== ======== ========
F-19
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
6. Premises and equipment and leases (Continued)
Future minimum lease payments, by year and in the aggregate,
under noncancelable operating leases consist of the following at
December 31, 1996:
Sublease
Rental Rental
Expense Income
------- ------
1997 $ 159,247 $ 57,566
1998 151,109 47,087
1999 145,370 35,640
2000 130,631 -
2001 129,547 -
Thereafter 555,005 -
---------- --------
$1,270,909 $140,293
========== ========
7. Deposits
The aggregate amount of short-term jumbo certificates of
deposit, each with a minimum denomination of $100,000, was $5,295,686
and $4,405,574 at December 31, 1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities of certificates
of deposit, included in other time deposits, are as follows:
1997 $16,250,115
1998 7,619,317
1999 11,429,041
2000 9,501,653
2001 and thereafter 7,776,236
-----------
$52,576,362
===========
8. 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, 1996. 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.
F-20
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
8. Stockholders' equity (Continued)
During 1996, the Company declared a 6% stock dividend to
stockholders of record on March 31, 1996. Cash of $2,437 was paid for
fractional shares. 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.
9. 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 21,816 shares are outstanding as of December 31,
1996. The options expire February 20, 2000. No options have been
exercised. Options to purchase shares were adjusted for the stock
dividends declared in 1996, 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 38,213 shares are outstanding as of
December 31, 1996. The options expire January 17, 2005. No options have
been exercised. Options to purchase shares were adjusted for the stock
dividend declared in 1996.
10. Short-term borrowings
Securities sold under agreements to repurchase generally
mature within one to three days from the transaction date. The maximum
amount outstanding at the end of a month during 1996 was $5,224,056 and
the average daily balance during 1996 was $3,504,033. The securities
underlying these agreements were under the Bank's control.
F-21
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
11. Long-term debt
Long-term debt is summarized as follows:
December 31,
1996 1995
Obligation under Norfolk
Redevelopment and Housing
Authority Revenue Bond $609,280 $635,392
Other - 48,627
-------- --------
$609,280 $684,019
======== ========
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, 1996, premises with a
carrying value of approximately $793,000 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 5.66% at December 31, 1996.
Maturities of long-term debt by year and in the aggregate are
summarized as follows:
1997 $ 26,112
1998 26,112
1999 26,112
2000 26,112
2001 26,112
Thereafter 478,720
-------
$609,280
========
F-22
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
12. 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 $15,444, $10,722, and $8,160 for 1996,
1995, and 1994, respectively. In addition, a discretionary contribution
of $4,556, $9,200, and $11,840, was made in 1996, 1995, and 1994,
respectively, to the profit sharing section of the Plan.
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.
13. Income taxes
Net deferred tax asset, included in other assets, is $403,224
and $491,029 as of December 31, 1996 and 1995, respectively.
The net deferred tax asset includes the following
components:
December 31,
1996 1995
---------------------
Deferred tax liability:
Depreciation $(119,283) $(111,595)
Net unrealized gain on
securities available
for sale - (4,000)
Deferred gain on sale
of fixed assets (20,756) -
--------- ---------
Total deferred tax
liability (140,039) (115,595)
F-23
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
13. Income taxes (Continued)
December 31,
1996 1995
---------------------
Deferred tax asset:
Provision for loan losses 230,658 325,278
Deferred compensation 168,813 156,591
Accrued vacation 89,254 76,583
Deferred net loan fees 40,110 48,172
Net unrealized loss on
securities available
for sale 14,428 -
--------- ---------
Total deferred tax
asset 543,263 606,624
--------- ---------
Net deferred tax asset $ 403,224 $ 491,029
========= =========
The components of applicable income tax expense (benefit) are
as follows:
Year ended December 31,
1996 1995 1994
-----------------------------
Current $258,031 $382,500 $387,286
Deferred 106,233 (100,352) (109,035)
-------- -------- --------
$364,264 $282,148 $278,251
======== ======== ========
Timing differences in the recognition of revenues and expenses
for income tax and financial reporting purposes result in deferred
income taxes as follows:
Year ended December 31,
1996 1995 1994
----------------------------
Provision for loan
losses $ 94,620 $ (63,312) $ (84,562)
Depreciation 7,688 79 6,389
Deferred gain on sale
of fixed assets 20,756 - -
Deferred compensation (12,222) (16,361) (18,953)
Accrued vacation (12,671) (5,664) (10,329)
Deferred net loan fees 8,062 (15,094) (1,580)
-------- --------- ---------
$106,233 $(100,352) $(109,035)
======== ========= =========
F-24
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
13. Income taxes (Continued)
The difference between income tax expense and the amount
computed by applying the statutory federal income tax rate of 34% are
as follows:
Year ended December 31,
1996 1995 1994
----------------------------
Income tax expense
at statutory rates $408,234 $380,006 $371,396
Increase (decrease)
due to:
Tax exempt income (53,221) (50,583) (43,528)
Other 9,251 (47,275) (49,617)
-------- -------- --------
Applicable income tax
expense $364,264 $282,148 $278,251
======== ======== ========
14. Commitments, contingent liabilities and financial
instruments
The Bank is a party to financial instruments with
offbalance-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,
1996 1995
-----------------------
Commitments to extend credit $7,634,244 $6,471,703
Standby letters of credit 626,400 592,133
F-25
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
14. Commitments, contingent liabilities and financial
instruments (Continued)
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.
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.
F-26
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
14. Commitments, contingent liabilities and financial
instruments (Continued)
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.
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.
The estimated fair values of the Bank's financial instruments
as of December 31, 1996 and 1995, are as follows (in thousands):
December 31, December 31,
1996 1995
------------ ------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash and short term investments $11,281 $ 11,281 $10,266 $10,266
Investment securities 23,663 23,389 17,258 16,949
Loans 65,506 61,066
Allowance for loan loss (932) (1,256)
------- -------
Net loans 64,574 65,937 59,810 62,188
------- -------- ------- -------
Total financial assets $99,518 $100,607 $87,334 $89,403
======= ======== ======= =======
F-27
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
14. Commitments, contingent liabilities and financial
instruments (Continued)
December 31, December 31,
1996 1995
------------ -------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial liabilities:
Deposits $90,507 $90,959 $82,566 $83,266
Securities sold not owned 3,573 3,573 2,291 2,291
Long-term debt 609 575 684 703
------- ------- ------- -------
Total financial liabilities $94,689 $95,107 $85,541 $86,260
======= ======= ======= =======
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, mortgageservicing rights and goodwill. Accordingly,
the aggregate fair value amount presented should not be interpreted as
representing the underlying value of the Bank.
15. 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.
At December 31, 1996, the Company's cash and due from banks
included two commercial bank deposit accounts aggregating $129,575 in
excess of the Federal Deposit Insurance Corporation limit of $100,000
per institution.
F-28
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
16. 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
$2,601,252 and $2,447,136 at December 31, 1996 and 1995, respectively.
During 1996, $768,406 of new loans were made, and repayments totaled
$614,290.
The Bank has also sold participation in loans on a
non-recourse basis to certain of the Company's directors. Such loans
amounted to $764,832 and $386,745 as of December 31, 1996 and 1995,
respectively.
17. 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 1997, the Bank can
initiate dividend payments without said regulatory approvals of
approximately $1,680,000 plus an additional amount equal to the Bank's
net earnings for 1997 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.
F-29
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
17. Regulatory matters (Continued)
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain offbalance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to riskweighted assets (as defined) and of
Tier I capital (as defined ) to average assets (as defined). Management
believes, as of December 31, 1996, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the
Federal Reserve Bank categorized the Bank as adequately capitalized
under the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
<TABLE>
<CAPTION>
<S> <C>
To Be Well
For Capital Capitalized Under
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1996:
Total capital (to risk
weighted assets) $10,247,000 14.4% >$5,706,000 > 8.0% >$7,133,000 >10.0%
- - - -
Tier I capital (to
risk weighted assets) 9,355,000 13.1 > 2,853,000 > 4.0 > 4,280,000 > 6.0
- - - -
Tier I capital (to
average assets) 9,355,000 8.9 > 4,220,000 > 4.0 > 5,275,000 > 5.0
- - - -
</TABLE>
F-30
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
17. Regulatory matters (Continued)
<TABLE>
<CAPTION>
<S> <C>
To Be Well
For Capital Capitalized Under
Actual Adequacy Purposes Action Provisions
--------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1995:
Total capital (to risk
weighted assets) 9,334,000 14.4 > 5,201,000 > 8.0 > 6,502,000 >10.0
- - - -
Tier I capital (to
risk weighted assets) 8,516,000 13.1 > 2,601,000 > 4.0 > 3,901,000 > 6.0
- - - -
Tier I capital (to
average assets) 8,516,000 9.2 > 3,719,000 > 4.0 > 4,648,000 > 5.0
- - - -
</TABLE>
18. Parent company only financial information
COMMONWEALTH BANKSHARES, INC.
(PARENT COMPANY ONLY)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
Cash on deposit with subsidiary $ 243,470 $ 251,111
Investment in subsidiary 9,327,521 8,516,580
---------- ----------
$9,570,991 $8,767,691
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to subsidiary $ 2,521 $ 5,204
Total stockholders' equity 9,568,470 8,762,487
---------- ----------
$9,570,991 $8,767,691
F-31
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
18. Parent company only financial information
COMMONWEALTH BANKSHARES, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994
---- ---- ----
Expenses:
Legal expense $ 2,719 $ 6,560 $ 12,862
Other 1,100 1,325 950
-------- -------- --------
Total expenses 3,819 7,885 13,812
-------- -------- --------
Loss before income taxes
and equity in undistributed
net income of subsidiary (3,819) (7,885) (13,812)
Income tax benefits 1,298 2,681 4,700
-------- -------- --------
Loss before equity in
undistributed net income
of subsidiary (2,521) (5,204) (9,112)
Equity in undistributed net
income of subsidiary 838,947 840,721 823,203
-------- -------- --------
Net income $836,426 $835,517 $814,091
======== ======== ========
F-32
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
18. Parent company only financial information (Continued)
COMMONWEALTH BANKSHARES, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994
---- ---- ----
Operating activities:
Net income $836,426 $835,517 $814,091
Adjustments to reconcile net
income to net cash from
(used in)operating activities:
Equity in undistributed
net income of subsidiary (838,946) (840,721) (823,203)
Decrease in amount due from
subsidiary - - 2,187
Increase (decrease) in amount
due to subsidiary (2,684) (3,908) 9,112
-------- -------- --------
Net cash from (used in) operating
activities (5,204) (9,112) 2,187
Financing activity:
Dividends paid (2,437) (2,267) (1,901)
-------- -------- --------
Net increase (decrease) in cash
on deposit with subsidiary (7,641) (11,379) 286
Cash on deposit with subsidiary,
beginning of year 251,111 262,490 262,204
-------- -------- --------
Cash on deposit with subsidiary,
end of year $243,470 $251,111 $262,490
======== ======== ========
F-33
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,656
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,656
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,590
<INVESTMENTS-CARRYING> 23,705
<INVESTMENTS-MARKET> 23,387
<LOANS> 65,835
<ALLOWANCE> 932
<TOTAL-ASSETS> 106,170
<DEPOSITS> 90,262
<SHORT-TERM> 3,573
<LIABILITIES-OTHER> 2,157
<LONG-TERM> 609
0
0
<COMMON> 2,369
<OTHER-SE> 7,199
<TOTAL-LIABILITIES-AND-EQUITY> 106,170
<INTEREST-LOAN> 6,126
<INTEREST-INVEST> 1,611
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,744
<INTEREST-DEPOSIT> 4,009
<INTEREST-EXPENSE> 192
<INTEREST-INCOME-NET> 3,543
<LOAN-LOSSES> 338
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 3,213
<INCOME-PRETAX> 1,201
<INCOME-PRE-EXTRAORDINARY> 1,201
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 839
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.88
<YIELD-ACTUAL> 3.12
<LOANS-NON> 2,065
<LOANS-PAST> 180
<LOANS-TROUBLED> 2
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,256
<CHARGE-OFFS> 338
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 932
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 615
</TABLE>
