FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998.
Commission file number 01-17377
COMMONWEALTH BANKSHARES, INC.
(Exact name of small business issuer
as specified in its charter)
VIRGINIA 54-1460991
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
403 Boush Street
Norfolk, Virginia 23510
(Address of principal executive offices) (Zip Code)
(757) 446-6900
Issuer's telephone number
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report.)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter periods that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock, $2.50 Par Value -- 1,084,153 shares as of September
30, 1998
<PAGE>
INDEX
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
NORFOLK, VIRGINIA
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- September 30, 1998 and
December 31, 1997.
Condensed consolidated statements of income -- Three months
ended September 30, 1998 and 1997; Nine months ended
September 30, 1998 and 1997.
Condensed consolidated statements of comprehensive income --
Nine months ended September 30, 1998 and 1997.
Condensed consolidated statements of cash flows -- Nine months
ended September 30, 1998 and 1997.
Notes to condensed consolidated financial statements --
September 30, 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on 8-K
SIGNATURES
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
September 30 December 31
1998 1997
<S> <C> <C>
ASSETS (Dollars in thousands)
Cash and due from banks $ 4,418 $ 4,348
Federal funds sold 7,286 6,440
Securities:
Available for sale 15,620 11,834
Held to maturity 6,548 10,830
------- -------
TOTAL SECURITIES 22,168 22,664
Loans:
Commercial 59,750 50,552
Residential mortgage 19,802 19,836
Installment loans to individuals 5,581 4,875
Other 2,452 3,182
------- -------
GROSS LOANS 87,585 78,445
Unearned income (250) (194)
Allowance for loan losses (1,022) (969)
------- -------
NET LOANS 86,313 77,282
Premises and equipment 2,692 2,326
Real estate acquired in settlement of loans 950 1,533
Other assets 1,846 1,513
------- -------
$125,673 $116,106
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 13,596 $ 12,083
Interest bearing 94,806 88,677
------- -------
TOTAL DEPOSITS 108,402 100,760
Federal funds purchased and securities
sold under agreement to repurchase 3,763 2,761
Long-term debt 557 583
Other liabilities 1,535 1,471
------- -------
TOTAL LIABILITIES 114,257 105,575
SHAREHOLDERS' EQUITY
Common stock, par value $2.50 a share
Authorized--5,000,000 shares
Issued and outstanding 1,084,153
shares in 1998 and 1,004,094 shares
issued and outstanding in 1997. 2,710 2,510
Additional paid-in-capital 5,176 4,536
Retained earnings 3,479 3,477
Net unrealized gain on securities
available for sale 51 8
------- -------
11,416 10,531
------- -------
$125,673 $116,106
======== ========
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
Three months ended Nine months ended
September 30 September 30 September 30 September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income: (Dollars in thousands) (Dollars in thousands)
Loans, including fees $ 1,997 $ 1,730 $ 5,789 $ 4,947
Securities 325 388 1,030 1,188
Other 76 69 218 144
------- ------- ------- -------
TOTAL INTEREST INCOME 2,398 2,187 7,037 6,279
Interest expense:
Deposits 1,237 1,081 3,595 3,097
Federal funds purchased and securities
sold under agreement to repurchase 36 41 88 98
Other 8 9 24 26
------- ------- ------- -------
TOTAL INTEREST EXPENSE 1,281 1,131 3,707 3,221
------- ------- ------- -------
NET INTEREST INCOME 1,117 1,056 3,330 3,058
Provision for loan losses 30 20 80 50
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,087 1,036 3,250 3,008
Other income:
Service charges on deposit accounts 206 141 632 358
Other service charges and fees 54 47 140 98
Realized gain (loss) on securities
available for sale (5) (2) 5 (8)
Realized loss on securities
held to maturity (3) 0 (13) 0
Gain (loss) on sale of real estate acquired
in settlement of loans 0 1 (62) (23)
Other income 61 49 169 119
------- ------- ------- -------
313 236 871 544
Other expenses:
Salaries and employee benefits 457 431 1,367 1,276
Net occupancy 115 113 325 316
Furniture and equipment expenses 133 110 374 332
Other expenses 299 238 847 734
------- ------- ------- -------
1,004 892 2,913 2,658
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 396 380 1,208 894
Applicable income taxes 112 120 364 273
------- ------- ------- -------
NET INCOME $ 284 $ 260 $ 844 $ 621
======= ======= ======= =======
Per share data (1):
Basic $ 0.26 $ 0.24 $ 0.78 $ 0.57
======= ======= ======= =======
Diluted $ 0.24 $ 0.22 $ 0.71 $ 0.52
======= ======= ======= =======
Dividends per share $ 0 $ 0 $ 0 $ 0
======= ======= ======= =======
Average shares outstanding (1):
Basic 1,084,153 1,084,153 1,084,153 1,084,153
========= ========= ========= =========
Diluted 1,192,738 1,185,179 1,192,738 1,185,179
========= ========= ========= =========
<FN>
(1) September 30, 1997 restated to reflect 1998 stock dividend.
<FN>
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<CAPTION>
Nine months ended
September 30 September 30
1998 1997
(Dollars in thousands)
<S> <C> <C>
Net income $ 844 $ 621
Other comprehensive income, net of tax:
Unrealized gain on securities
available for sale 43 44
------ ------
COMPREHENSIVE INCOME $ 887 $ 665
====== ======
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Nine months ended
September 30 September 30
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES (Dollars in thousands)
Net income $ 844 $ 621
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 80 50
Depreciation and amortization 253 250
Realized loss (gain) on securities
available for sale (5) 8
Realized loss on securities
held to maturity 13 0
Loss on sale of real estate
acquired in settlement of loans 62 23
Increase in interest receivable (80) (138)
Increase in interest payable 46 54
Loss (gain) on disposal of fixed assets (5) 2
Other (258) (169)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 950 701
INVESTING ACTIVITIES
Net decrease in short
term investments (846) 3,346
Purchase of securities held to maturity (500) (1,401)
Purchase of securities available for sale (9,394) (4,327)
Proceeds from:
Maturity of securities available for sale 3,294 1,958
Maturity of securities held to maturity 4,764 1,636
Sale of securities available for sale 2,390 1,298
Sale of real estate acquired in
settlement of loans 662 308
Purchase of assets relating to real estate
acquired in settlement of loans (141) (117)
Decrease from net change in loans (9,111) (9,300)
Purchase of premise and equipment (614) (166)
------- -------
NET CASH USED BY INVESTING ACTIVITIES (9,496) (6,765)
FINANCING ACTIVITIES
Increase (decrease) from net change
in demand deposits and savings accounts (640) 696
Increase from net change in
certificates of deposit 8,282 4,704
Principal payments on long-term debt (26) (26)
Increase from net change in
short-term liabilities 1,002 644
Cash paid for fractional shares (2) (3)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,616 6,015
------- -------
NET INCREASE (DECREASE) IN CASH
AND DUE FROM BANKS 70 (49)
Cash and due from banks at January 1 4,348 5,656
------- -------
CASH AND DUE FROM BANKS AT September 30 $ 4,418 $ 5,607
======= =======
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the nine
months ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended December 31, 1997.
NOTE B--EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted average
of common and potential dilutive common equivalent shares outstanding during
the period. Average shares outstanding for 1998 and calculation of income
per share is restated to reflect an 8% stock dividend paid on April 28, 1998.
PART I
ITEM 2. Management's discussion and analysis of financial conditions and
results of operations.
EARNINGS SUMMARY
Net income for the quarter ended September 30, 1998 totalled $284,000, as
compared with $260,000 in the third quarter of 1997. On a per share basis,
third quarter 1998 income was 26 cents compared with 24 cents for 1997.
Net income for the nine months ended September 30, 1998 totalled
$844,000, as compared to $621,000 for the nine months ended September 30,
1997. On a per share basis, net income equalled 78 cents for 1998
compared to 57 cents for 1997. Total interest for the first nine months
of 1998 increased to $7,037,000, a $758,000 or 12.1% increase over the
first nine months of 1997. The items are discussed in more detail later
in this report.
NET INTEREST INCOME
Net interest income was $1,117,000 for the quarter ended September 30,
1998 an increase of $61,000 over the comparable period in 1997. For the
nine months ended September 30, 1998, net interest income increased to
$3,330,000, an increase of $272,000 over 1997.
Total interest income was $2,398,000 for the quarter ended September 30,
1998 an increase of $211,000 over the same period in 1997. Interest
income for the nine months ended September 30, 1998 increased by $758,000
over the same period of 1997. This increase is mainly attributable to a
16.3% increase in total loans when comparing September 30, 1998 to
September 30, 1997.
Interest expense of $1,281,000 for the quarter ended September 30, 1998
represents a $150,000 increase from the comparable period in 1997. For
the nine months ended September 30, 1998, interest expense increased by
$486,000 over the same period of 1997. This increase is attributable to
a 13.1% increase in interest bearing deposits when comparing September
30, 1998 to September 30, 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $80,000 for the first nine months of
1998 as compared to $50,000 for the same period of 1997. Loan charge
offs for the nine months ended September 30, 1998 totalled $30,000 and
recoveries for the same period totalled $3,000. At September 30, 1998,
Bank of the Commonwealth had a total allowance for loan losses of
$1,022,000 or 1.2% of total loans.
OTHER INCOME
Other income for the quarter ended September 30, 1998 was $313,000, an
increase of $77,000 from the $236,000 reported for the three months ended
September 30, 1997. For the nine months ended September 30, 1998, other
income was $871,000 as compared to $544,000 for the nine months ended
September 30, 1997. $274,000 of this increase is attributable to an
increase in service charges on deposit accounts.
OTHER EXPENSES
Other expenses for the quarter ended September 30, 1998 totalled
$1,004,000, an increase of $112,000 or 12.6% over the $892,000 recorded
during the quarter ended September 30, 1997. For the nine months ended
September 30, 1998 other expenses increased to $2,913,000 from the
$2,658,000 recorded for the same period of 1997.
INTEREST SENSITIVITY AND LIQUIDITY
Management attempts to match rate sensitive assets to rate sensitive
liabilities, by planning and controlling the mix and maturities of these
assets and liabilities. The purpose of this asset/liability management
is to create and maintain a proper relationship between rate sensitive
assets and liabilities and also to provide adequate liquidity.
Liquidity is the ability to meet customers' demand for funds. These
requirements are met by the sale or maturity of existing assets, loan
payments and increases in deposits.
NONPERFORMING ASSETS
The Bank's nonperforming assets consisted of the following:
September 30, 1998 December 31, 1997
Loans past due 90 days or
more and still accruing $ 152,000 $ 124,000
Nonaccrual loans 1,363,000 1,450,000
Other real estate owned 950,000 1,533,000
---------- ----------
Total nonperforming $2,465,000 $3,107,000
========== ==========
CAPITAL POSITION
Shareholder's Equity for the Corporation increased to $11,416,000 from
$10,531,000 or 8.4% from December 31, 1997 to September 30, 1998.
Shareholders' Equity for September 30, 1998 reflects a $51,000 net
unrealized gain on securities available for sale in accordance with FASB
115, as compared to an $8,000 net unrealized gain as of December 31,
1997.
Bank Holding Companies are required to meet a 7.3% risk-based capital
standard. The Corporation's risk based capital was 13.7% as of September
30, 1998.
STOCK DIVIDEND
The Board of Directors, at their February 1998 meeting voted to declare
an eight percent stock dividend payable on the Company's common shares
for stockholders of record as of March 31, 1998, on April 28, 1998.
Fractional shares were paid in cash, based on the book value of a whole
share at December 31, 1997 of $10.49.
YEAR 2000 STATEMENT
Bank of the Commonwealth has adopted an approach aimed at identifying and
correcting Year 2000 problems by December 1998, including testing, which
is planned to be substantially complete by that time. This will provide
a full year to complete additional testing, as well as external testing
to ensure that all of our systems are in compliance.
Specifically, Bank of the Commonwealth has a Year 2000 Committee,
consisting of the Bank's Corporate Officers, representing all areas of
the Bank. The Committee regularly reports and has the complete support
of the Board of Directors. The Committee has taken the following
approach for Year 2000 compliance:
<bullet> An inventory and analysis of the various systems have been
performed. Mission-critical systems have been identified.
<bullet> A budget of $110,000 has been established. $25,000 of the
budget is set aside for personnel costs for 1998-2000.
Replacement and renovation has cost $70,650 to date. $14,350
still remains for expenses through 2000.
<bullet> Non-compliant systems have been corrected through renovation or
replacement.
<bullet> Testing has begun on all systems to verify compliance.
<bullet> Working with vendors and significant customers to determine to
our satisfaction, that their systems will be Year 2000
compliant within an appropriate time frame.
<bullet> Establishing contingency plans to address business continuity
on January 1, 2000. Plans include a combination of alternative
methods to perform a job, including manual procedures and
incorporating our existing disaster recovery plans.
Bank of the Commonwealth is dedicated to ensure that all systems are
fully tested and compliant, and January 1, 2000 will be uneventful from a
systems standpoint.
SUMMARY
As of September 30, 1998, 68.2% of the Bank's loan portfolio consisted of
commercial loans which are considered to provide higher yields and also
generally carry a greater risk. It should be noted that 73.2% of these
commercial loans are collateralized with real estate, and accordingly do
not represent an unfavorable risk. At September 30, 1998, 72.5% of the
Bank's total loan portfolio consisted of loans collateralized with real
estate.
The Bank's commitment is to maintain the Corporation's strengths in the
markets it serves during difficult economic cycles, and to act
resourcefully when confronted with new challenges.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
three months ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Commonwealth Bankshares, Inc.
(Registrant)
Date: November 12, 1998 ----------------------------
E. J. Woodard, Jr.
Chairman of the Board, President
& CEO
Date: November 12, 1998 ----------------------------
John H. Gayle
Executive Vice President &
Cashier
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4418
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7286
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15620
<INVESTMENTS-CARRYING> 6548
<INVESTMENTS-MARKET> 6507
<LOANS> 87585
<ALLOWANCE> 1022
<TOTAL-ASSETS> 125673
<DEPOSITS> 108402
<SHORT-TERM> 3763
<LIABILITIES-OTHER> 1535
<LONG-TERM> 557
0
0
<COMMON> 2710
<OTHER-SE> 8706
<TOTAL-LIABILITIES-AND-EQUITY> 125673
<INTEREST-LOAN> 5789
<INTEREST-INVEST> 1030
<INTEREST-OTHER> 218
<INTEREST-TOTAL> 7037
<INTEREST-DEPOSIT> 3595
<INTEREST-EXPENSE> 3707
<INTEREST-INCOME-NET> 3330
<LOAN-LOSSES> 80
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 2913
<INCOME-PRETAX> 1208
<INCOME-PRE-EXTRAORDINARY> 1208
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 844
<EPS-PRIMARY> .78
<EPS-DILUTED> .71
<YIELD-ACTUAL> .08
<LOANS-NON> 1363
<LOANS-PAST> 152
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 207
<ALLOWANCE-OPEN> 969
<CHARGE-OFFS> 30
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 1022
<ALLOWANCE-DOMESTIC> 1022
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
