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 June 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 June 30,
1998
INDEX
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
NORFOLK, VIRGINIA
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- June 30, 1998 and
December 31, 1997.
Condensed consolidated statements of income -- Three months
ended June 30, 1998 and 1997; Six months ended June 30,
1998 and 1997.
Condensed consolidated statements of comprehensive income --
Six months ended June 30, 1998 and 1997.
Condensed consolidated statements of cash flows -- Six months
ended June 30, 1998 and 1997.
Notes to condensed consolidated financial statements -- June
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>
June 30 December 31
1998 1997
<S> <C> <C>
ASSETS (Dollars in thousands)
Cash and due from banks $ 5,310 $ 4,348
Federal funds sold 139 6,440
Securities:
Available for sale 14,299 11,834
Held to maturity 8,131 10,830
------- -------
TOTAL SECURITIES 22,430 22,664
Loans:
Commercial 57,183 50,552
Residential mortgage 20,089 19,836
Installment loans to individuals 5,552 4,875
Other 2,720 3,182
------- -------
GROSS LOANS 85,544 78,445
Unearned income (231) (194)
Allowance for loan losses (1,011) (969)
------- -------
NET LOANS 84,302 77,282
Premises and equipment 2,603 2,326
Real estate acquired in settlement of loans 839 1,533
Other assets 1,829 1,513
------- -------
$117,452 $116,106
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 14,450 $ 12,083
Interest bearing 86,672 88,677
------- -------
TOTAL DEPOSITS 101,122 100,760
Federal funds purchased and securities
sold under agreement to repurchase 3,334 2,761
Long-term debt 557 583
Other liabilities 1,422 1,471
------- -------
TOTAL LIABILITIES 106,435 105,575
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
issued and outstanding in 1997. 2,710 2,510
Additional paid-in-capital 5,176 4,536
Retained earnings 3,195 3,477
Net unrealized gain (loss) on securities
available for sale (64) 8
------- -------
11,017 10,531
------- -------
$117,452 $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 Six months ended
June 30 June 30 June 30 June 30
1998 1997 1998 1997
<S> <C> <C>
Interest income: (Dollars in thousands) (Dollars in thousands)
Loans, including fees $ 1,930 $ 1,666 $ 3,792 $ 3,217
Securities 349 386 705 800
Other 54 52 142 75
------- ------- ------- -------
TOTAL INTEREST INCOME 2,333 2,104 4,639 4,092
Interest expense:
Deposits 1,177 1,008 2,358 2,016
Federal funds purchased and securities
sold under agreement to repurchase 27 31 52 57
Other 8 9 16 17
------- ------- ------- -------
TOTAL INTEREST EXPENSE 1,212 1,048 2,426 2,090
------- ------- ------- -------
NET INTEREST INCOME 1,121 1,056 2,213 2,002
Provision for loan losses 20 30 50 30
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,101 1,026 2,163 1,972
Other income:
Service charges on deposit accounts 223 107 426 217
Other service charges and fees 50 28 86 51
Realized gain (loss) on securities
available for sale 13 (2) 10 (6)
Realized loss on securities
held to maturity (9) 0 (10) 0
Loss on sale of real estate acquired
in settlement of loans (68) (4) (62) (24)
Other income 54 40 108 70
------- ------- ------- -------
263 169 558 308
Other expenses:
Salaries and employee benefits 434 411 910 845
Net occupancy 103 114 210 203
Furniture and equipment expenses 127 121 241 222
Other expenses 308 258 548 496
------- ------- ------- -------
972 904 1,909 1,766
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 392 291 812 514
Applicable income taxes 120 88 252 153
------- ------- ------- -------
NET INCOME $ 272 $ 203 $ 560 $ 361
======= ======= ======= =======
Per share data (1):
Basic $ 0.25 $ 0.19 $ 0.52 $ 0.33
======= ======= ======= =======
Diluted $ 0.23 $ 0.17 $ 0.47 $ 0.30
======= ======= ======= =======
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) June 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>
Six months ended
June 30 June 30
1998 1997
<S> <C> <C>
(Dollars in thousands)
Net income $ 560 $ 361
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities
available for sale (72) 15
------ ------
COMPREHENSIVE INCOME $ 488 $ 376
====== ======
See notes to condensed consolidated financial statements.
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended
June 30 June 30
1998 1997
OPERATING ACTIVITIES (Dollars in thousands)
Net income $ 560 $ 361
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Provision for loan losses 50 30
Depreciation and amortization 169 167
Realized loss (gain) on securities
available for sale (10) 6
Realized loss on securities
held to maturity 10 0
Loss on sale of real estate
acquired in settlement of loans 62 24
Increase in interest receivable (55) (83)
Increase (decrease) in interest payable (25) 5
Loss (gain) on disposal of fixed assets (5) 2
Other (248) (220)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 508 292
INVESTING ACTIVITIES
Net decrease in short
term investments 6,301 3,561
Purchase of securities held to maturity (500) (878)
Purchase of securities available for sale (7,321) (3,305)
Proceeds from:
Maturity of securities available for sale 2,369 1,200
Maturity of securities held to maturity 3,187 863
Sale of securities available for sale 2,390 1,298
Sale of real estate acquired in
settlement of loans 656 234
Purchase of assets relating to real estate
acquired in settlement of loans (24) (69)
Decrease from net change in loans (7,070) (5,303)
Purchase of premise and equipment (441) (131)
------- -------
NET CASH USED BY INVESTING ACTIVITIES (453) (2,530)
FINANCING ACTIVITIES
Increase (decrease) from net change
in demand deposits and savings accounts 1,000 (521)
Increase (decrease) from net change in
certificates of deposit (638) 636
Principal payments on long-term debt (26) (26)
Increase from net change in
short-term liabilities 573 787
Cash paid for fractional shares (2) (3)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 907 873
======= =======
NET INCREASE (DECREASE) IN CASH
AND DUE FROM BANKS 962 (1,365)
Cash and due from banks at January 1 4,348 5,656
------- -------
CASH AND DUE FROM BANKS AT JUNE 30 $ 5,310 $ 4,291
======= =======
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 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 three months ended June 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.
<PAGE>
PART I
ITEM 2. Management's discussion and analysis of financial conditions and
results of operations.
EARNINGS SUMMARY
Net income for the quarter ended June 30, 1998 totalled $272,000, as
compared with $203,000 in the second quarter of 1997. On a per share
basis, second quarter 1998 income was 25 cents compared with 19 cents for
1997.
Net income for the six months ended June 30, 1998 totalled $560,000, as
compared to $361,000 for the six months ended June 30, 1997. On a per
share basis, net income equalled 52 cents for 1998 compared to 33 cents
for 1997. Total interest for the first six months of 1998 increased to
$4,639,000, a $547,000 or 13.4% increase over the first six months of
1997. The items are discussed in more detail later in this report.
NET INTEREST INCOME
Net interest income was $1,121,000 for the quarter ended June 30, 1998
an increase of $65,000 over the comparable period in 1997. For the six
months ended June 30, 1998, net interest income increased to $2,163,000,
an increase of $191,000 over 1997.
Total interest income was $2,333,000 for the quarter ended June 30, 1998
an increase of $229,000 over the same period in 1997. Interest income
for the six months ended June 30, 1998 increase by $547,000 over the same
period of 1997. This increase is mainly attributable to a 20.0% increase
in total loans when comparing June 30, 1998 to June 30, 1997.
Interest expense of $1,212,000 for the quarter ended June 30, 1998
represents a $164,000 increase from the comparable period in 1997. For
the six months ended June 30, 1998, interest expense increased by
$336,000 over the same period of 1997. This increase is attributable to
a 10.7% increase in interest bearing deposits when comparing June 30,
1998 to June 30, 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $50,000 for the first six months of
1998 as compared to $30,000 for the same period of 1997. Loan charge
offs for the six months ended June 30, 1998 totalled $10,000 and
recoveries for the same period totalled $2,000. At June 30, 1998, Bank
of the Commonwealth had a total allowance for loan losses of $1,011,000
or 1.2% of total loans.
OTHER INCOME
Other income for the quarter ended June 30, 1998 was $263,000, an
increase of $94,000 from the $169,000 reported for the three months ended
June 30, 1997. For the six months ended June 30, 1998, other income was
$558,000 as compared to $308,000 for the six months ended June 30, 1997.
$209,000 of this increase is attributable to an increase in service
charges on deposit accounts.
OTHER EXPENSES
Other expenses for the quarter ended June 30, 1998 totalled $972,000, an
increase of $68,000 or 7.5% over the $904,000 recorded during the quarter
ended June 30, 1997. For the six months ended June 30, 1998 other
expenses increased to $1,909,000 from the $1,766,000 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.
<TABLE>
NONPERFORMING ASSETS
The Bank's nonperforming assets consisted of the following:
<CAPTION>
June 30, 1998 December 31, 1997
<S> <C> <C>
Loans past due 90 days or
more and still accruing $ 218,000 $ 124,000
Nonaccrual loans 1,164,000 1,450,000
Other real estate owned 839,000 1,533,000
---------- ----------
Total nonperforming $2,221,000 $3,107,000
========== ==========
</TABLE>
CAPITAL POSITION
Shareholder's Equity for the Corporation increased to $11,017,000 from
$10,531,000 or 4.6% from December 31, 1997 to June 30, 1998.
Shareholders' Equity for June 30, 1998 reflects a $64,000 net unrealized
loss 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 13.8% as of June 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 ISSUE
Many computer systems may experience problems handling dates into and
beyond the year 1999 and therefore need to be modified prior to the year
2000 in order to remain functional. The corporation has been taking
actions to ensure the internal readiness of its hardware, software and
processes for century date compliance. The Corporation does not believe
that the cost of these actions will have material adverse effect on the
Corporation's results of operations or financial condition. The
Corporation is also assessing the possible effects on its operations of
the year 2000 readiness of its key vendors and deposit and loan
customers. Testing of mission-critical applications has begun and is
expected to be substantially complete by December 1998. The Board of
Directors is provided monthly reports on the status of the Corporation's
year 2000 readiness.
SUMMARY
As of June 30, 1998, 66.9% of the Bank's loan portfolio consists of
commercial loans which are considered to provide higher yields and also
generally carry a greater risk. It should be noted that 73.4% of these
commercial loans are collateralized with real estate, and accordingly do
not represent an unfavorable risk. At June 30, 1998, 72.5% of the Bank's
total loan portfolio consists 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.
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the
three months ended June 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Commonwealth Bankshares, Inc.
(Registrant)
Date: August 7, 1998 ----------------------------
E. J. Woodard, Jr.
Chairman of the Board, President
& CEO
Date: August 7, 1998 ----------------------------
John H. Gayle
Executive Vice President &
Cashier
[ARTICLE] 9
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] JUN-30-1998
[CASH] 5,310
[INT-BEARING-DEPOSITS] 0
[FED-FUNDS-SOLD] 139
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 14,299
[INVESTMENTS-CARRYING] 8,131
[INVESTMENTS-MARKET] 8,018
[LOANS] 85,544
[ALLOWANCE] 1,011
[TOTAL-ASSETS] 117,452
[DEPOSITS] 101,122
[SHORT-TERM] 3,334
[LIABILITIES-OTHER] 1,422
[LONG-TERM] 557
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 2,710
[OTHER-SE] 8,307
[TOTAL-LIABILITIES-AND-EQUITY] 117,452
[INTEREST-LOAN] 3,792
[INTEREST-INVEST] 705
[INTEREST-OTHER] 142
[INTEREST-TOTAL] 4,639
[INTEREST-DEPOSIT] 2,358
[INTEREST-EXPENSE] 2,426
[INTEREST-INCOME-NET] 2,213
[LOAN-LOSSES] 50
[SECURITIES-GAINS] 0
[EXPENSE-OTHER] 1,909
[INCOME-PRETAX] 812
[INCOME-PRE-EXTRAORDINARY] 812
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 560
[EPS-PRIMARY] .52
[EPS-DILUTED] .47
[YIELD-ACTUAL] .09
[LOANS-NON] 1,164
[LOANS-PAST] 218
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 1,437
[ALLOWANCE-OPEN] 969
[CHARGE-OFFS] 10
[RECOVERIES] 2
[ALLOWANCE-CLOSE] 1,011
[ALLOWANCE-DOMESTIC] 1,011
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
</TABLE>
