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 March 31, 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 Identification No.)
incorporation or organization)
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 March 31, 1999
INDEX
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
NORFOLK, VIRGINIA
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- March 31, 1999 and December 31,1998.
Condensed consolidated statements of income -- Three months ended
March 31, 1999 and 1998.
Condensed consolidated statements of comprehensive income -- Three months
ended March 31, 1999 and 1998.
Condensed consolidated statements of cash flows -- Three months ended
March 31, 1999 and 1998.
Notes to condensed consolidated financial statements -- March 31, 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
PART I. FINANCIAL INFORMATION
<PAGE>
<TABLE>
<CAPTION>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31 December 31
1999 1998
---- ----
<S> <C> <C>
ASSETS (Dollars in Thousands)
Cash and due from banks $ 5,885 $ 5,383
Federal funds sold 59 7,379
Investment securities:
Available for sale 17,926 17,333
Held to maturity 5,354 5,665
------- -------
TOTAL INVESTMENT SECURITIES 23,280 22,998
Loans:
Commercial 70,084 63,892
Residential Mortgage 19,604 19,576
Installment loans to individuals 5,513 5,564
Other 2,841 2,818
------- -------
GROSS LOANS 98,042 91,850
Unearned income (321) (274)
Allowance for loan losses (1,001) (969)
------- -------
NET LOANS 96,720 90,607
Premises and equipment 2,727 2,742
Real estate acquired in settlement of loans 993 999
Other assets 2,065 2,129
------- -------
$131,729 $132,237
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $13,918 $16,433
Interest bearing 99,553 99,737
------- -------
TOTAL DEPOSITS 113,471 116,170
Federal funds purchased and securities
sold under agreement to repurchase 4,258 2,483
Long-term debt 531 557
Other liabilities 1,691 1,447
------- -------
TOTAL LIABILITIES 119,951 120,657
SHAREHOLDERS' EQUITY
Common stock, par value $2.50 a share
Authorized--5,000,000 shares
Issued and outstanding 1,084,153
Shares 2,710 2,710
Additional paid-in capital 5,176 5,176
Retained earnings 3,992 3,740
Accumulated other comprehensive loss (100) (46)
------- -------
11,778 11,580
------- -------
$131,729 $132,237
======= =======
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended
March 31 March 31
1999 1998
---- ----
<S> <C> <C>
Interest income: (Dollars in thousands)
Loans, including fees $ 2,089 $ 1,862
Investment securities 342 356
Other 28 88
------ ------
TOTAL INTEREST INCOME 2,459 2,306
Interest expense:
Deposits 1,241 1,181
Federal funds purchased 20 25
Other 7 8
------ ------
TOTAL INTEREST EXPENSE 1,268 1,214
------ ------
NET INTEREST INCOME 1,191 1,092
Provision for loan losses 30 30
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,161 1,062
Other income:
Service charges on deposit accounts 172 203
Other service charges and fees 47 36
Realized gain (loss) on securities available for sale 3 (3)
Realized loss on securities held to maturity 0 (1)
Gain on sale of real estate acquired in settlement of loans 0 6
Other income 53 54
------ ------
275 295
Other expenses:
Salaries and employee benefits 547 476
Net occupancy 108 107
Furniture and equipment expenses 136 114
Other expenses 309 240
------ ------
1,100 937
------ ------
INCOME BEFORE INCOME TAXES 336 420
Applicable income taxes 84 132
------ ------
NET INCOME $252 $288
====== ======
Per share data (1):
Basic $0.23 $0.27
====== ======
Diluted $0.21 $0.25
====== ======
Dividends per share $ .00 $ .00
====== ======
Average shares outstanding (1):
Basic 1,084,153 1,084,153
========= =========
Diluted 1,188,072 1,170,552
========= =========
<FN>
(1) Restated to reflect 1998 stock dividend.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three months ended
March 31 March 31
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Net income $252 $288
Other comprehensive income, net of income tax:
Unrealized loss on securities available for sale (54) (18)
---- ----
COMPREHENSIVE INCOME $198 $270
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three months ended
March 31 March 31
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 252 $ 288
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Provision for loan losses 30 30
Depreciation and amortization 91 77
Realized loss (gain) on securities available for sale (3) 3
Realized loss on securities held to maturity 0 1
Loss (gain) on sale of real estate acquired
in settlement of loans 0 (6)
Increase in interest receivable (106) (39)
Increase (decrease) in interest payable 55 (1)
Loss of disposal of fixed assets 1 0
Other 414 (245)
----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 734 108
INVESTING ACTIVITIES
Net decrease (increase) in short term investments 7,320 (1,858)
Purchase of securities held to maturity 0 (297)
Purchase of securities available for sale (3,587) (2,081)
Proceeds from:
Maturity of securities available for sale 1,202 1,250
Maturity of securities held to maturity 300 1,027
Sale of securities available for sale 1,725 0
Sale of real estate acquired in settlement of loans 0 472
Purchase of assets relating to real estate acquired
in settlement of loans (14) (8)
Decrease from net change in loans (6,143) (2,871)
Purchases of premises and equipment (77) (188)
----- -----
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 726 (4,554)
FINANCING ACTIVITIES
Increase (decrease) from net change in demand
deposits and savings accounts (2,147) 1,697
Increase (decrease) from net change in
certificate of deposit (559) 3,521
Principal payments on long-term debt (26) (26)
Increase (decrease) from net change in
short-term liabilities 1,774 (1,071)
----- -----
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (958) 4,121
----- -----
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 502 (323)
Cash and due from banks at January 1 5,383 4,348
----- -----
CASH AND DUE FROM BANKS AT MARCH 31 $5,885 $4,025
===== =====
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 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 representation have been included. Operating results for the
three months ended March 31, 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 8% stock dividend paid on
April 30, 1998.
<PAGE>
PART I
ITEM 2. Management's discussion and analysis of financial
conditions and results of operations.
EARNINGS SUMMARY
Net income for the three months ended March 31, 1999 totaled $252,000, as
compared with $288,000 for the first three months of 1998. On a per share
basis, net income equaled 23 cents for 1999 compared to 27 cents for 1998.
Total interest for the first three months of 1999 increased to $2,459,000,
a $153,000 or 6.6% increase over the first three months of 1998. The items
are discussed in more detail later in this report.
NET INTEREST INCOME
Net interest income was $1,191,000 for the quarter ended March 31, 1999, an
increase of 9.1% over the comparable period in 1998.
Total interest income was $2,459,000 for the quarter ended March 31, 1999
representing a 6.6% increase from the comparable period in 1998. This
increase is mainly attributable to a 20.6% increase in total loans when
comparing March 31, 1999 to March 31, 1998.
Interest expense of $1,268,000 for the quarter ended March 31, 1999
represents a 4.4% increase from the comparable period in 1998. This increase
is attributable to a 9.2% increase in interest bearing deposits when
comparing March 31, 1999 to March 31, 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $30,000 for the first three months of 1999
as compared to $30,000 for the first quarter of 1998. At March 31, 1999,
Bank of the Commonwealth had a total allowance for loan losses of $1,001,000
or 1.0% of total loans.
OTHER INCOME
Other income for the quarter ended March 31, 1999 was $275,000, a decrease of
$20,000 from the $295,000 reported for the three months ended March 31, 1998.
OTHER EXPENSES
Other expenses for the quarter ended March 31, 1999 was $1,100,000, an
increase of $163,000 from the $937,000, for the quarter ended March 31, 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.
<PAGE>
NONPERFORMING ASSETS
The Bank's nonperforming assets consisted of the following:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Loans past due 90 days or
more and still accruing $ 211,000 $ 202,000
Nonaccrual loans 1,153,000 1,109,000
Other real estate owned 993,000 999,000
--------- ---------
Total nonperforming $2,357,000 $2,310,000
========= =========
</TABLE>
CAPITAL POSITION
Shareholders' Equity for the Corporation increased to $11,778,000 from
$11,580,000 or 1.7% from December 31, 1998 to March 31, 1999. Shareholders'
Equity for March 31, 1999 reflects a $100,000 net unrealized loss on
securities available for sale in accordance with FASB115, as compared to a
$46,000 net unrealized loss as of December 31, 1998.
Bank Holding Companies are required to meet a 7.25% risk-based capital
standard. The Corporation's risk based capital was 11.5% as of March 31, 1999.
STOCK DIVIDEND
No dividends have been declared for 1999 as of March 31, 1999. The last
dividends the Board of Directors declared was 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.
<PAGE>
YEAR 2000 ISSUE
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 developed a
remediation plan, implementation and conversion activities are in progress
and testing of mission critical systems was substantially complete at
December 31, 1998. Management anticipates the testing of mission critical
systems will be fully completed by the end of the second quarter 1999,
however, the Company plans to continue testing these systems throughout the
remainder of the year. 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 has 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. 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.
Computer systems with which the Bank's systems interact to service the Bank's
customers, such as automated teller machines, will be tested, and management
anticipates that this testing will be completed by the end of the second
quarter 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.
As of December 31, 1998, the Year 2000 project has cost an aggregate of
$98,550, approximately $57,000 of which constituted software upgrades,
$25,000 of which was personnel costs projected through the Year 2000, and the
remainder of which constituted a variety of other costs, including hardware
replacement. Additional expenditures of approximately $11,500 are budgeted
to complete the Year 2000 project. While these expenditures have not
required deferment of any additional Year 2000 efforts, the Company has delayed
introduction of any new initiatives until the Year 2000 project is completed.
The Company is in the process of establishing contingency plans to address
continuity of business on January 1, 2000 in the event that some or all of
its systems fail. Management anticipates that these contingency plans will
be completed by second quarter 1999. 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 and approved by the
Board of Directors in April 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 in 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 effected 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.
<PAGE>
SUMMARY
As of March 31, 1999, 71.5% 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 74.6% of these
commercial loans are collateralized with real estate, and accordingly do not
represent an unfavorable risk. At March 31, 1999, 73.3% 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 March 31, 1999.
<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: May 10, 1999
----------------- -----------------------------------
E. J. Woodard, Jr., Chairman of the
Board, President & CEO
Date: May 10, 1999
----------------- -----------------------------------
John H. Gayle
Executive Vice President and Cashier
[ARTICLE] 9
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-END] MAR-31-1999
[CASH] 5880
[INT-BEARING-DEPOSITS] 5
[FED-FUNDS-SOLD] 59
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 17926
[INVESTMENTS-CARRYING] 5354
[INVESTMENTS-MARKET] 5314
[LOANS] 98042
[ALLOWANCE] 1001
[TOTAL-ASSETS] 131729
[DEPOSITS] 113471
[SHORT-TERM] 4259
[LIABILITIES-OTHER] 1691
[LONG-TERM] 531
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 2710
[OTHER-SE] 9068
[TOTAL-LIABILITIES-AND-EQUITY] 131729
[INTEREST-LOAN] 2089
[INTEREST-INVEST] 342
[INTEREST-OTHER] 28
[INTEREST-TOTAL] 2459
[INTEREST-DEPOSIT] 1241
[INTEREST-EXPENSE] 1268
[INTEREST-INCOME-NET] 1191
[LOAN-LOSSES] 30
[SECURITIES-GAINS] 3
[EXPENSE-OTHER] 1100
[INCOME-PRETAX] 336
[INCOME-PRE-EXTRAORDINARY] 336
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 252
[EPS-PRIMARY] .23
[EPS-DILUTED] .21
[YIELD-ACTUAL] 8.76
[LOANS-NON] 1153
[LOANS-PAST] 211
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 1338
[ALLOWANCE-OPEN] 969
[CHARGE-OFFS] 0
[RECOVERIES] 2
[ALLOWANCE-CLOSE] 1001
[ALLOWANCE-DOMESTIC] 1001
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
</TABLE>
