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, 1999.
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 -- 1,640,201 shares as of September 30, 1999
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INDEX
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
NORFOLK, VIRGINIA
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- September 30, 1999 and
December 31, 1998.
Condensed consolidated statements of income -- Three months ended
September 30, 1999 and 1998; Nine months ended September 30, 1999
and 1998.
Condensed consolidated statements of comprehensive income -- Nine months ended
September 30, 1999 and 1998.
Condensed consolidated statements of cash flows -- Nine months ended
September 30, 1999 and 1998.
Notes to condensed consolidated financial statements -- September 30, 1999.
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
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PART 1. FINANCIAL INFORMATION
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30 December 31
1999 1998
<S> <C> <C>
ASSETS (Dollars in thousands)
Cash and due from banks $ 5,223 $ 5,383
Federal funds sold 187 7,379
Investment Securities:
Available for sale 16,559 17,333
Held to maturity 4,787 5,665
------- -------
TOTAL INVESTMENT SECURITIES 21,346 22,998
Loans:
Commercial 80,905 63,892
Residential mortgage 23,372 19,576
Installment loans to individuals 6,506 5,564
Other 2,892 2,818
------- -------
GROSS LOANS 113,675 91,850
Unearned income (420) (274)
Allowance for loan losses (1,048) (969)
------- -------
NET LOANS 112,207 90,607
Premises and equipment 2,818 2,742
Real estate acquired in
settlement of loans 875 999
Other assets 2,285 2,129
------- -------
$144,941 $132,237
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 15,123 $ 16,433
Interest bearing 106,669 99,737
------- -------
TOTAL DEPOSITS 121,792 116,170
Short term borrowings 8,828 2,483
Long-term debt 531 557
Other liabilities 1,739 1,447
------- -------
TOTAL LIABILITIES 132,890 120,657
SHAREHOLDERS' EQUITY
Common stock, par value $2.50 a share
Authorized--5,000,000 shares
Issued and outstanding 1,640,201
shares in 1999 and 1,084,153 shares
issued and outstanding in 1998. 4,101 2,710
Additional paid-in-capital 3,893 5,176
Retained earnings 4,472 3,740
Net unrealized loss on securities
available for sale (415) (46)
------- -------
12,051 11,580
------- -------
$144,941 $132,237
======= =======
<FN>
See notes to condensed consolidated financial statements.
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COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended Nine months ended
September 30 September 30 September 30 September 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income: (Dollars in thousands) (Dollars in thousands)
Loans, including fees $ 2,433 $ 1,997 $ 6,794 $ 5,789
Investment securities 318 325 982 1,030
Other 5 76 44 218
------ ------ ------ ------
TOTAL INTEREST INCOME 2,756 2,398 7,820 7,037
Interest expense:
Deposits 1,300 1,237 3,805 3,595
Federal funds purchased and securities
sold under agreement to repurchase 50 36 98 88
Other 16 8 30 24
------ ------ ------ ------
TOTAL INTEREST EXPENSE 1,366 1,281 3,933 3,707
NET INTEREST INCOME 1,390 1,117 3,887 3,330
Provision for loan losses 30 30 80 80
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,360 1,087 3,807 3,250
Other income:
Service charges on deposit accounts 224 206 595 632
Other service charges and fees 62 54 163 140
Realized (loss) gain on securities
available for sale 0 (5) 7 5
Realized loss on securities
held to maturity 0 (3) 0 (13)
Loss on sale of real estate acquired
in settlement of loans (1) 0 (28) (62)
Other income 48 61 149 169
------ ------ ------ ------
333 313 886 871
Other expenses:
Salaries and employee benefits 597 457 1,696 1,367
Net occupancy 123 115 333 325
Furniture and equipment expenses 144 133 429 374
Other expenses 417 299 1,088 847
------ ------ ------ ------
1,281 1,004 3,546 2,913
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 412 396 1,147 1,208
Applicable income taxes 106 112 299 364
------ ------ ------ ------
NET INCOME $ 306 $ 284 $ 848 $ 844
====== ====== ====== ======
Per share data (1):
Basic $ 0.19 $ 0.18 $ 0.52 $ 0.52
====== ====== ====== ======
Diluted $ 0.17 $ 0.16 $ 0.47 $ 0.47
====== ====== ====== ======
Dividends per share $ 0.035 $ 0.000 $ 0.070 $ 0.000
====== ====== ====== ======
Average shares outstanding (1):
Basic 1,630,015 1,626,107 1,630,015 1,626,107
========= ========= ========= =========
Diluted 1,800,739 1,781,986 1,800,739 1,781,986
========= ========= ========= =========
<FN>
(1) September 30, 1999 restated to reflect 1999 stock dividend.
See notes to condensed consolidated financial statements
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COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Nine months ended
September 30 September 30
1999 1998
<S> <C> <C>
(Dollars in thousands)
Net income $ 848 $ 844
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities
available for sale (369) 43
----- -----
COMPREHENSIVE INCOME $ 479 $ 887
<FN>
See notes to condensed consolidated financial statements.
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COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended
September 30 September 30
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES (Dollars in thousands)
Net income $ 848 $ 844
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 80 80
Depreciation and amortization 291 253
Realized gain on securities
available for sale (7) (5)
Realized loss on securities
held to maturity 0 13
Loss on sale of real estate
acquired in settlement of loans 28 62
Increase in interest receivable (82) (80)
Increase in interest payable 77 46
Loss (gain) on disposal of fixed assets 1 (5)
Other 339 (258)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,575 950
INVESTING ACTIVITIES
Net decrease (increase) in short
term investments 7,192 (846)
Purchase of securities held to maturity 0 (500)
Purchase of securities available for sale (3,854) (9,394)
Proceeds from:
Maturity of securities available for sale 2,138 3,294
Maturity of securities held to maturity 867 4,764
Sale of securities available for sale 1,949 2,390
Sale of real estate acquired in
settlement of loans 115 662
Sale of premises and equipment 15 0
Purchase of assets relating to real estate
acquired in settlement of loans (19) (141)
Decrease from net change in loans (21,680) (9,111)
Purchase of premise and equipment (383) (614)
------ ------
NET CASH USED BY INVESTING ACTIVITIES (13,660) (9,496)
FINANCING ACTIVITIES
Increase (decrease) from net change
in demand deposits and savings accounts 123 (640)
Increase from net change in
certificates of deposit 5,492 8,282
Principal payments on long-term debt (26) (26)
Increase from net change in
short-term liabilities 6,344 1,002
Proceeds from sale of stock 61 0
Cash paid for dividends and fractional shares (69) (2)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,925 8,616
------ ------
NET INCREASE (DECREASE) IN CASH
AND DUE FROM BANKS (160) 70
Cash and due from banks at January 1 5,383 4,348
------ ------
CASH AND DUE FROM BANKS AT SEPTEMBER 30 $ 5,223 $ 4,418
====== ======
<FN>
See notes to condensed consolidated financial statements.
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COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1999
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, 1999 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999. 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,
1998.
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 50% stock dividend paid on May 27,
1999.
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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, 1999 totaled $306,000, as
compared with $284,000 in the third quarter of 1998. On a per share basis,
third quarter 1999 income was 19 cents compared with 18 cents for 1998.
Net income for the nine months ended September 30, 1999 totaled $848,000, as
compared to $844,000 for the nine months ended September 30, 1998. On a per
share basis, net income equaled 52 cents for 1999 and 1998. Total interest for
the first nine months of 1999 increased to $7,820,000, a $783,000 or 11.1%
increase over the first nine months of 1998. The items are discussed in more
detail later in this report.
NET INTEREST INCOME
Net interest income was $1,390,000 for the quarter ended September 30, 1999 an
increase of $273,000 over the comparable period in 1998. For the nine months
ended September 30, 1999, net interest income increased to $3,887,000, an
increase of $557,000 over 1998.
Total interest income was $2,756,000 for the quarter ended September 30, 1999
an increase of $358,000 over the same period in 1998. Interest income for the
nine months ended September 30, 1999 increased by $783,000 over the same period
of 1998. This increase is mainly attributable to a 29.8% increase in total
loans when comparing September 30, 1999 to September 30, 1998.
Interest expense of $1,366,000 for the quarter ended September 30, 1999
represents an $85,000 increase from the comparable period in 1998. For the
nine months ended September 30, 1999, interest expense increased by $226,000
over the same period of 1998. This increase is attributable to a 12.5%
increase in interest bearing deposits when comparing September 30, 1999 to
September 30, 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $80,000 for the first nine months of 1999 and
1998 Loan charge offs for the nine months ended September 30, 1999 totaled
$9,000 and recoveries for the same period totaled $8,000. At September 30,
1999, Bank of the Commonwealth had a total allowance for loan losses of
$1,048,000 or .92% of total loans.
OTHER INCOME
Other income for the quarter ended September 30, 1999 was $333,000, an increase
of $20,000 from the $313,000 reported for the three months ended September 30,
1998. For the nine months ended September 30, 1999, other income was $886,000
as compared to $871,000 for the nine months ended September 30, 1998.
OTHER EXPENSES
Other expenses for the quarter ended September 30, 1999 totaled $1,281,000, an
increase of $277,000 or 27.6% over the $1,004,000 recorded during the quarter
ended September 30, 1998. For the nine months ended September 30, 1999 other
expenses increased to $3,546,000 from the $2,913,000 recorded for the same
period of 1998.
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, 1999 December 31, 1998
Loans past due 90 days or
more and still accruing $ 467,000 $ 202,000
Nonaccrual loans 1,005,000 1,109,000
Other real estate owned 875,000 999,000
--------- ---------
Total nonperforming $2,347,000 $2,310,000
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CAPITAL POSITION
Shareholder's Equity for the Corporation increased to $12,051,000 from
$11,580,000 or 4.1% from December 31, 1998 to September 30, 1999.
Shareholders' Equity for September 30, 1999 reflects a $415,000 net unrealized
loss on securities available for sale in accordance with FASB 115, as compared
to a $46,000 net unrealized loss as of December 31, 1998.
Bank Holding Companies are required to meet a 7.3% risk-based capital standard.
The Corporation's risk based capital was 10.7% as of September 30, 1999.
STOCK DIVIDEND
At the September 1999 Board of Directors' meeting, a 3.5 cents per share cash
dividend was declared, payable on September 30, 1999 to shareholders of record
on September 27, 1999.
237 shareholders representing 654,845 shares participated in the September 30,
1999 Dividend Reinvestment Plan and 15 shareholders participated in the Stock
Purchase Plan for a total of $2,000.
YEAR 2000 STATEMENT
The Company and the Bank have considered the impact of Year 2000 issues on
their computer systems and applications. The Year 2000 issue is the result of
most computer programs being issued using two digits, rather than four, to
define the applicable year. As a result, these computer programs may not
recognize the correct date after December 31, 1999. In addition, other systems
and equipment that are not traditional computers also may contain embedded
hardware or software that have a similar problem.
The Company first began assessing its Year 2000 readiness in 1997, when the
Board began an awareness program. Since that time, an inventory and analysis
of the various systems has been performed. The Company (and Bank) formed a Year
2000 Committee in July 1997 (the "Committee"), consisting of the Bank's
corporate officers, representing all areas of the Bank. The Committee, which
has the complete support of the Board, regularly reports to the Company's Board
of Directors.
The Committee established a test plan in accordance with the Federal Financial
Institution Examination Counsel ("FFIEC Guidelines"), which plan and
implementation are subject to examination by the Federal Reserve Board.
The Committee inventoried and analyzed all of the Company's and Bank's various
computer systems, first concentrating on mission critical systems, and then
reviewing all other computer-related systems. The Company developed a
remediation plan, implementation and conversion activities, and testing of
mission critical systems, all of which were fully complete at June 30,1999.
The Company plans to continue testing these systems throughout the remainder of
the year. In addition, the Company has reviewed all non-information technology
systems that may contain embedded dates. Non-compliant systems have been
corrected through renovation or replacement.
The Company has evaluated the state of readiness of all of its critical
vendors, and believes that they will be prepared for the Year 2000. Testing of
the computer systems with which the Bank's systems interact to service the
Bank's customers, including automated teller machines, was complete by June
1999.
The Bank has evaluated its significant customers to determine that their
systems will be Year 2000 compliant within the appropriate timeframe. In
September 1998, the Bank surveyed its largest 200 loan customers to assess
their Year 2000 readiness and determine whether or not the Bank needed to
create additional reserves in the event any of these customers are not able to
pay their loans due to the Year 2000 issue. As a result of the Bank's survey,
the Company did not believe it was necessary to increase its allowance for loan
losses. The Bank continues to monitor these customers.
The Year 2000 project cost an aggregate of $106,000 as of September 30, 1999;
approximately $74,000 of which constituted software and hardware upgrades;
$12,000 for software testing, employee training, and contingency planning; and
$20,000 of which was personnel costs. Additional expenditures of approximately
$4,000 are budgeted to complete the Year 2000 project. While these expenditures
have not required deferment of any additional information technology efforts,
the Company has delayed introduction of any new initiatives until the Year 2000
project is completed.
As of June 30, 1999, the Committee prepared a formal contingency plan to
address continuity of business on January 1, 2000 in the event that some or all
of its systems fail. The Board of Directors approved the plan in August 1999.
The plan was tested on September 9, 1999. Another test is scheduled in
November 1999. Contingency plans include a combination of alternative methods
to perform a job, including manual procedures and incorporating the Bank's
existing disaster recovery plan. The Bank has addressed the adequacy of its
cash reserves and related security concerns. A formal contingency plan for
cash reserves was developed during the first quarter of 1999 and approved by
the Board of Directors in April 1999 and again in September 1999. The policy
addresses additional cash requirements and related procedures.
The potential impact of Year 2000 will depend not only on the Company's efforts
but also on the year 2000 readiness of entities, on which the Company depends,
including public utility companies and phone companies. Dependence on these
vendors subjects the Company to a risk, for which the Company cannot completely
prepare.
The Company believes that the most likely worst case Year 2000 scenario would
not have material adverse effect on the Company's results of operations and
financial conditions for the year ending December 31, 2000. The Company's
assessment is limited by the Company's legal right to demand information and
assurances, the willingness and ability of third parties to provide such
information, and the reliability of the information provided. In addition, the
Company believes that no entity can address the unlimited number of possible
circumstances relating to the Year 2000 issue, including risks outside the
Company's marketplace.
Certain information in the above discussion constitute forward-looking
statements about the Company's Year 2000 readiness that involve risks and
uncertainties that may be adversely affected due to third party vendors' and
customers' failure to resolve the Year 2000 issue, despite their prior
representations, the ability of public utilities to operate and similar factors
beyond the control of the Company.
SUMMARY
As of September 30, 1999, 71.2% 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 75.6% of these
commercial loans are collateralized with real estate, and accordingly do not
represent an unfavorable risk. At September 30, 1999, 74.4% 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.
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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, 1999.
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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 9, 1999 ------------------------------------
E. J. Woodard, Jr.
Chairman of the Board,
President & CEO
Date: November 9, 1999 ------------------------------------
John H. Gayle
Executive Vice President &
Cashier
[ARTICLE] 9
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<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-END] SEP-30-1999
[CASH] 4838
[INT-BEARING-DEPOSITS] 385
[FED-FUNDS-SOLD] 187
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 16559
[INVESTMENTS-CARRYING] 4787
[INVESTMENTS-MARKET] 4631
[LOANS] 113675
[ALLOWANCE] 1048
[TOTAL-ASSETS] 144941
[DEPOSITS] 121792
[SHORT-TERM] 8828
[LIABILITIES-OTHER] 1739
[LONG-TERM] 531
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 4101
[OTHER-SE] 7950
[TOTAL-LIABILITIES-AND-EQUITY] 144941
[INTEREST-LOAN] 6794
[INTEREST-INVEST] 982
[INTEREST-OTHER] 44
[INTEREST-TOTAL] 7820
[INTEREST-DEPOSIT] 3805
[INTEREST-EXPENSE] 3933
[INTEREST-INCOME-NET] 3887
[LOAN-LOSSES] 80
[SECURITIES-GAINS] 7
[EXPENSE-OTHER] 3546
[INCOME-PRETAX] 1147
[INCOME-PRE-EXTRAORDINARY] 1147
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 848
[EPS-BASIC] .52
[EPS-DILUTED] .47
[YIELD-ACTUAL] .08
[LOANS-NON] 1005
[LOANS-PAST] 467
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 822
[ALLOWANCE-OPEN] 969
[CHARGE-OFFS] 9
[RECOVERIES] 8
[ALLOWANCE-CLOSE] 1048
[ALLOWANCE-DOMESTIC] 1048
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
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