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, 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 - 1,626,843 shares as of June 30, 1999
INDEX
COMMONWEALTH BANKSHARES INC. AND SUBSIDIARY
NORFOLK, VIRGINIA
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- June 30, 1999 and December 31,
1998.
Condensed consolidated statements of income -- Three months ended June 30,
1999 and 1998; six months ended June 30, 1999 and 1998.
Condensed consolidated statements of comprehensive income -- Six
months ended June 30, 1999 and 1998
Condensed consolidated statements of cash flows -- Six months ended June 30,
1999 and 1998.
Notes to condensed consolidated financial statements -- June 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 I. FINANCIAL INFORMATION
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30 December 31
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,000 $ 5,383
Federal funds sold 32 7,379
Investment securities:
Available for sale 17,141 17,333
Held to maturity 4,897 5,665
------- -------
TOTAL INVESTMENT SECURITIES 22,038 22,998
Loans:
Commercial 75,041 63,892
Residential Mortgage 21,154 19,576
Installment loans to individuals 6,136 5,564
Other 2,977 2,818
------- -------
GROSS LOANS 105,308 91,850
Unearned income (381) (274)
Allowance for loan losses (1,018) (969)
------- -------
NET LOANS 103,909 90,607
Premises and equipment 2,754 2,742
Real estate acquired in settlement of loans 854 999
Other assets 2,205 2,129
------- -------
$135,792 $132,237
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 14,140 $ 16,433
Interest bearing 103,255 99,737
------- -------
TOTAL DEPOSITS 117,395 116,170
Federal funds purchased and securities
sold under agreement to repurchase 4,301 2,483
Long-term debt 531 557
Other liabilities 1,692 1,447
------- -------
TOTAL LIABILITIES 123,919 120,657
SHAREHOLDERS' EQUITY
Common stock, par value $2.50 a share
Authorized--5,000,000 shares
Issued and outstanding 1,630,525
shares in 1999 and 1,084,153 issued
and outstanding in 1998. 4,076 2,710
Additional paid-in capital 3,853 5,176
Retained earnings 4,224 3,740
Accumulated other comprehensive loss (280) (46)
------- -------
11,873 11,580
------- -------
$135,792 $132,237
======= =======
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
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<CAPTION>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended Six months ended
June 30 June 30 June 30 June 30
1999 1998 1999 1998
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $2,272 $ 1,930 $4,361 $ 3,792
Securities 322 349 664 705
Other 11 54 39 142
----- ----- ----- -----
TOTAL INTEREST INCOME 2,605 2,333 5,064 4,639
Interest expense:
Deposits 1,264 1,177 2,505 2,358
Federal funds purchased
and securities sold under
agreement to repurchase 28 27 48 52
Other 7 8 14 16
----- ----- ----- -----
TOTAL INTEREST EXPENSE 1,299 1,212 2,567 2,426
----- ----- ----- -----
NET INTEREST INCOME 1,306 1,121 2,497 2,213
Provision for loan losses 20 20 50 50
----- ----- ----- -----
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,286 1,101 2,447 2,163
Other income:
Service charges on
deposit accounts 199 223 371 426
Other service charges
and fees 54 50 101 86
Realized gain on securities
available for sale 4 13 7 10
Realized loss on securities
held to maturity 0 (9) 0 (10)
Loss on sale of real estate
Acquired in settlement
of loans (27) (68) (27) (62)
Other income 48 54 101 108
----- ----- ----- -----
278 263 553 558
Other expenses:
Salaries and employee benefits 552 434 1,099 910
Net occupancy 102 103 210 210
Furniture and
equipment expenses 149 127 285 241
Other expenses 362 308 671 548
----- ----- ----- -----
1,165 972 2,265 1,909
----- ----- ----- -----
INCOME BEFORE INCOME TAXES 399 392 735 812
Applicable income taxes 109 120 193 252
----- ----- ----- -----
NET INCOME $ 290 $ 272 $ 542 $ 560
===== ===== ===== =====
Per share data (1):
Basic $ 0.18 $ 0.17 $ 0.33 $ 0.34
===== ===== ===== =====
Diluted $ 0.16 $ 0.15 $ 0.30 $ 0.31
===== ===== ===== =====
Cash dividends per share $ .035 $ .00 $ .035 $ .00
===== ===== ===== =====
Average shares outstanding (1):
Basic 1,626,843 1,626,107 1,626,843 1,626,107
========= ========= ========= =========
Diluted 1,786,222 1,781,986 1,786,222 1,781,986
========= ========= ========= =========
<FN>
(1) June 30, 1998 restated to reflect 1999 stock dividend.
See notes to condensed consolidated financial statements.
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<CAPTION>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Six months ended
June 30 June 30
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
Net income $ 542 $ 560
Other comprehensive income, net of tax:
Unrealized loss on securities
available for sale (234) (72)
----- -----
COMPREHENSIVE INCOME $ 308 $ 488
===== =====
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
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<CAPTION>
COMMONWEALTH BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended
June 30 June 30
1999 1998
---- ----
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 542 $ 560
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 50 50
Depreciation and amortization 189 169
Realized gain on securities
available for sale (3) (10)
Realized loss on securities
held to maturity 0 10
Loss on sale of real estate
acquired in settlement of loans 27 62
Increase in interest receivable (133) (55)
Increase (decrease) in interest payable 105 (25)
Loss (gain) on disposal of fixed assets 1 (5)
Other 345 (248)
----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,123 508
INVESTING ACTIVITIES
Net decrease in short term investments 7,347 6,301
Purchase of securities held to maturity 0 (500)
Purchase of securities available for sale (3,837) (7,321)
Proceeds from:
Maturity of securities
available for sale 1,752 2,369
Maturity of securities
held to maturity 744 3,187
Sale of securities available for sale 1,950 2,390
Sale of real estate acquired
in settlement of loans 115 656
Purchase of assets relating to
real estate acquired
in settlement of loans (17) (24)
Decrease from net change in loans (13,352) (7,070)
Purchases of premise and equipment (202) (441)
------ ------
NET CASH USED BY INVESTING ACTIVITIES (5,500) (453)
FINANCING ACTIVITIES
Increase (decrease) from net change in demand
deposits and savings accounts (1,357) 1,000
Increase (decrease) from net
change in certificate of deposit 2,575 (638)
Principal payments on long-term debt (26) (26)
Increase from net change in
short-term liabilities 1,817 573
Proceeds from sale of stock 21 0
Cash paid for dividends (36) (2)
----- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,994 907
----- -----
NET INCREASE (DECREASE) IN
CASH AND DUE FROM BANKS (1,383) 962
Cash and due from banks at January 1 5,383 4,348
----- -----
CASH AND DUE FROM BANKS AT JUNE 30 $4,000 $5,310
===== =====
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
COMMONWEALTH BANKSHARES INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 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 six months ended June 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 1999
and calculation of income per share is restated to reflect a 50% stock
dividend on May 27, 1999.
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, 1999 totaled $290,000,
as compared with $272,000 in the second quarter of 1998. On a per share
basis, second quarter 1999 income was 18 cents compared with 17 cents for
1998.
Net income for the six months ended June 30, 1999 totaled $542,000,
as compared to $560,000 for the six months ended June 30, 1998. On a per
share basis, net income equalled 33 cents for 1999 compared to 34 cents
for 1998. Total interest for the first six months of 1999 increased to
$5,064,000, a $425,000 or 9.2% increase over the first six months of 1998.
The items are discussed in more detail later in this report.
NET INTEREST INCOME
Net interest income was $1,306,000 for the quarter ended June 30, 1999,
an increase of $185,000 or 16.5% over the comparable period in 1998. For
the six months ended June 30, 1999, net interest income increased to
$2,497,000, an increase of $284,000 over 1998.
Total interest income was $2,605,000 for the quarter ended June 30, 1999,
an increase of $272,000 over the same period of 1998. Interest income
for the six months ended June 30, 1999 increased $425,000 over the same
period of 1998. This increase is mainly attributable to a 23.1% increase
in total loans when comparing June 30, 1999 to June 30, 1998.
Interest expense of $1,299,000 for the quarter ended June 30, 1999
represents an $87,000 increase from the comparable period in 1998. For
the six months ended June 30, 1999, interest expense increased by
$141,000 over the same period of 1998. This increase is attributable to
a 19.1% increase in interest bearing deposits when comparing June 30, 1999
to June 30, 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $50,000 for the first six months
of 1999 compared to $50,000 for the same period of 1998. Loan charge
offs for the six months ended June 30, 1999 totaled $9,000 and
recoveries for the same period totaled $8,000.
At June 30, 1999, Bank of the Commonwealth has a total allowance for
loan losses of $1,018,000 or .97% of total loans.
OTHER INCOME
Other income for the quarter ended June 30, 1999 was $278,000, an
increase of $15,000 from the $263,000 reported for the three months
ended June 30, 1998. For the six months ended June 30, 1999, other
income was $553,000 as compared to $558,000 for the six months ended
June 30, 1998. A decline of $55,000 in service charge on deposits
during the first six months of 1999 compared to the same period of
1998 contributed to the reduction in other income for 1999.
OTHER EXPENSES
Other expenses for the quarter ended June 30, 1999 totaled $1,165,000
an increase of $193,000 or 19.9% over the $972,000 recorded during the
quarter ended June 30, 1998. For the six months ended June 30, 1999
other expenses increased to $2,265,000 from the $1,909,000 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:
June 30, 1999 December 31, 1998
Loans past due 90 days or
more and still accruing $ 688,000 $ 202,000
Nonaccrual loans 1,234,000 1,109,000
Other real estate owned 854,000 999,000
--------- ---------
Total nonperforming $2,776,000 $2,310,000
========= =========
CAPITAL POSITION
Shareholders' Equity for the Corporation increased to $11,873,000 from
$11,580,000 or 2.5% from December 31, 1998 to June 30, 1999.
Shareholders' Equity for June 30, 1999 reflects a $280,000 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 Corporations's risk based capital was
11.2% as of June 30, 1999.
STOCK DIVIDEND
The Board of Directors, at their April 1999 meeting, voted to declare a
fifty percent stock dividend payable on May 27, 1999 to shareholders of
record of May 17, 1999. Fractional shares were paid in cash, based on
the book value of a whole share at March 31, 1999 of $10.86.
Additionally, at the April 1999 Board of Directors meeting a 3.5 cents
per share cash dividend was declared, payable on June 30, 1999 to
shareholders of record of June 14, 1999.
In connection with the commencement of cash dividends, the Board of
Directors approved a Dividend Reinvestment and Stock Purchase Plan.
Shares purchased from the company with reinvested dividends will be
issued at a five percent discount from the market value. The Plan also
permits optional cash payments of up to $20,000 per quarter for the
purchase of additional shares of common stock. These shares are issued
at the market value, without incurring brokerage commissions.
155 shareholders representing 642,239 shares participated in the
June 30, 1999 Dividend Reinvestment Plan and 34 shareholders participated
in the Stock Purchase Plan for a total of $11,955.00.
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. 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. However, 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 $99,600 as of June 30, 1999;
approximately $70,600 of which constituted software and hardware upgrades;
$10,000 for software testing, employee training, and contingency planning;
and $19,000 of which was personnel costs. Additional expenditures of
approximately $10,400 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. Board approval is scheduled for August 1999.
Testing of this plan is planned for third quarter 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. 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 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 June 30, 1999, 71.3% of the Bank's loan portfolio consists of
commercial loans which are considered to provide higher yields, but also
generally carry a greater risk. It should be noted that 75.0% of these
commercial loans are collateralized with real estate, and accordingly do
not represent an unfavorable risk. At June 30, 1999, 73.5% 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.
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, 1999.
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 6, 1999
E. J. Woodard, Jr., CLBB, Chairman
of the Board, President & CEO
Date: August 6, 1999
John H. Gayle
Executive Vice President
and Cashier
[ARTICLE] 9
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-END] JUN-30-1999
[CASH] 4000
[INT-BEARING-DEPOSITS] 0
[FED-FUNDS-SOLD] 32
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 17141
[INVESTMENTS-CARRYING] 4897
[INVESTMENTS-MARKET] 4881
[LOANS] 105308
[ALLOWANCE] 1018
[TOTAL-ASSETS] 135792
[DEPOSITS] 117395
[SHORT-TERM] 4301
[LIABILITIES-OTHER] 1692
[LONG-TERM] 531
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 4076
[OTHER-SE] 7797
[TOTAL-LIABILITIES-AND-EQUITY] 135792
[INTEREST-LOAN] 4361
[INTEREST-INVEST] 664
[INTEREST-OTHER] 39
[INTEREST-TOTAL] 5064
[INTEREST-DEPOSIT] 2505
[INTEREST-EXPENSE] 2567
[INTEREST-INCOME-NET] 2497
[LOAN-LOSSES] 50
[SECURITIES-GAINS] 7
[EXPENSE-OTHER] 2265
[INCOME-PRETAX] 735
[INCOME-PRE-EXTRAORDINARY] 735
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 542
[EPS-BASIC] .33
[EPS-DILUTED] .30
[YIELD-ACTUAL] .08
[LOANS-NON] 1234
[LOANS-PAST] 688
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 1262
[ALLOWANCE-OPEN] 969
[CHARGE-OFFS] 9
[RECOVERIES] 8
[ALLOWANCE-CLOSE] 1018
[ALLOWANCE-DOMESTIC] 1018
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
</TABLE>
