SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1999
Commission file number 01-17377
Commonwealth Bankshares, Inc.
(Exact name of registrant as specified in its charter)
Virginia 54-1460991
State or other jurisdiction of incorporated (I.R.S. Employer Identification No.)
or organization)
403 Boush Street
Norfolk, Virginia 23510
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (757) 446-6900
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class
on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $2.50 Par Value
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 14, 2000: $8,979,321 (In calculating the aggregate
market value, we have used the sale price of common stock as listed by Bloomberg
Financial Markets Commodities News as of March 14, 2000 of $6.875 per share and
voting stock held by non-affiliates of the registrant at March 14, 2000 of
1,659,406 shares)
Common Stock, $2.50 Par Value - 1,659,406 shares - $4,148,515
<PAGE>
1999 10-K
Part I
Item 1. Descrpition of Business
The Company and the Bank. The sole business of Commonwealth Bankshares, Inc.
(the "Corporation") is to serve as a holding company for Bank of the
Commonwealth (the "Bank"). The Corporation was incorporated as a Virginia
corporation on June 6, 1988, and on November 7, 1988 it acquired the Bank.
Bank of the Commonwealth was formed on August 28, 1970 under the laws of
Virginia. Since the Bank opened for business on April 14, 1971, its main
banking and administrative office has been located in Norfolk. The Bank
currently operates two branches in Norfolk and four branches in Virginia Beach.
The Bank has obtained approval for a branch in Chesapeake. The building is
currently under construction with an anticipated opening date of May 2000.
Principal Market Area. The Bank concentrates its marketing efforts in the
cities of Norfolk, Virginia Beach, Portsmouth and Chesapeake, Virginia. The
Corporation's present intention is to continue concentrating its banking
activities in its current market, which the Corporation believes is an
attractive area in which to operate.
Banking Service. Through its network of banking facilities, the Bank provides a
wide range of commercial banking services to individuals and small and medium
sized businesses. The Bank conducts substantially all of the business
operations of a typical independent, commercial bank, including the acceptance
of checking and savings deposits, and the initiating of commercial, real estate,
personal, home improvement, automobile and other installment and term loans.
The Bank also offers other related services, such as home banking, trust,
travelers' checks, safe deposit, lock box, depositor transfer, customer note
payment, collections, notary public, escrow, drive-in facility and other
customary banking services.
Competition
The Bank encounters strong competition for its banking services within its
primary market area. There are thirteen commercial banks actively engaged in
business in the cities of Norfolk, Virginia Beach, Portsmouth and Chesapeake,
Virginia, including six major state-wide banking organizations. The Bank is the
oldest independent bank in its market area. Finance companies, mortgage
companies, credit unions and savings and loan associations also compete with the
Bank for loans and deposits. In addition, in some instances, the Bank must
compete for deposits with money market mutual funds that are marketed
nationally. Most of the Bank's competitors have substantially greater resources
than the Bank.
Employees
As of December 31, 1999, the Bank had 85 full-time equivalent employees.
Management of the Corporation and the Bank considers its relations with
employees to be excellent. No employees are represented by a union or any
similar group, and the Bank has never experienced any strike or labor dispute.
<PAGE>
Regulation and Supervision
Commonwealth Bankshares, Inc.
In order to acquire the shares of the Bank and thereby become a bank holding
company within the meaning of the Bank Holding Company Act, the Corporation was
required to obtain approval from, and register as a bank holding company with
the Federal Reserve Board (the "Board"), and it is subject to ongoing
regulation, supervision and examination by the Board. As a condition to its
approval, the Board required the Corporation to agree that it would obtain
approval of the Federal Reserve Bank of Richmond prior to incurring any
indebtedness. The Corporation is required to file with the Board periodic and
annual reports and other information concerning its own business operations and
those of its subsidiaries. In addition, the Bank Holding Company Act requires a
bank holding company to obtain Board approval before it acquires, directly or
indirectly, ownership or control of any voting shares of a second or subsequent
bank if, after such acquisition, it would own or control more than 5% of such
shares, unless it already owns or controls a majority of such voting shares.
Board approval must also be obtained before a bank holding company acquires all
or substantially all of the assets of another bank or merges or consolidates
with another bank holding company. Any acquisition by a bank holding company of
more than 5% of the voting shares, or of all or substantially all of the assets,
of a bank located in another state may not be approved by the Board unless such
acquisition is specifically authorized by the laws of that second state.
A bank holding company is prohibited under the Bank Holding Company Act, with
limited exceptions, from acquiring or obtaining direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a bank,
or from engaging in any activities other than those of banking or of managing or
controlling banks or furnishing services to or performing services for its
subsidiaries. An exception to these prohibitions permits a bank holding company
to engage in, or acquire an interest in a company which engages in, activities
which the Board, after due notice and opportunity for hearing, by regulation or
order has determined is so closely related to banking or of managing or
controlling banks as to be proper incident thereto. A number of such activities
have been determined by the Board to be permissible.
A bank holding company may not, without providing prior notice to the Board,
purchase or redeem its own stock if the gross consideration to be paid, when
added to the net consideration paid by the Corporation for all purchases or
redemptions by the Corporation of its equity securities within the preceding 12
months, will equal 10% or more of the Corporation's consolidated net worth.
The ability of the Corporation to pay dividends depends upon the amount of
dividends declared by the Bank. Regulatory restrictions exist with respect to
the Bank's ability to pay dividends. See Note 7 to Consolidated Financial
Statements included in this report.
The Bank
The Bank, as a member bank of the Federal Reserve System, is subject to
regulation and examination by the Virginia State Corporation Commission and the
Board. In addition, the Bank is subject to the rules and regulations of the
Federal Deposit Insurance Corporation, which currently insures the deposits of
each member bank to a maximum of $100,000 per depositor.
The commercial banking business is affected by the monetary policies adopted by
the Board. Changes in the discount rate on member bank borrowing, availability
of borrowing at the "discount window," open market operations, the imposition of
any changes in reserve requirements against member banks' deposits and certain
borrowing by banks and their affiliates, and the limitation of interest rates
which member banks may pay on deposits are some of the instruments of monetary
policy available to the Board. Taken together, these controls give the Board a
significant influence over the growth and profitability of all banks. Management
of the Bank is unable to predict how the Board's monetary policies (or the
fiscal policies or economic controls imposed by Federal or state governments)
will affect the business and earnings of the Bank or the Corporation, or what
those policies or controls will be.
The references in this section to various aspects of supervision and regulation
are brief summaries which do not purport to be complete and which are qualified
in their entirety by reference to applicable laws, rules and regulations.
<PAGE>
<TABLE>
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential
Year Ended December 31,
1999 1998 1997
<CAPTION>
Average Average Average
Balance Interest Yld/Rate Balance Interest Yld/Rate Balance Interest Yld/Rate
ASSETS (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets
(taxable-equivalent
basis (1)) :
Loans (net of unearned
discount (2) $106,664 $9,514 8.95% $84,917 $7,839 9.25% $71,481 $6,776 9.48%
Investment securities 22,443 1,296 6.43 22,829 1,372 6.47 24,414 1,560 6.39
Federal funds sold 1,053 51 4.84 6,122 330 5.39 4,006 219 5.47
------- ----- ---- ------- ------ ---- ------ ----- ----
Total interest
earning assets 130,160 10,861 8.48 113,868 9,541 8.47 99,901 8,555 8.56
Non-interest earning
assets:
Cash and due from
banks 4,735 4,276 4,408
Premises and equipment 2,784 2,595 2,415
Other assets 1,880 1,715 2,166
------- ------- ------
TOTAL $139,559 $122,454 $108,890
======= ======= =======
<FN>
(1) Tax equivalent adjustments (using 34% federal tax rates) have been made in calculating yields on tax
- -free loans and investments. Virginia banks are exempt from state income tax.
(1) For the purposes of these computations, nonaccruing loans are included in the daily average loan
amounts outstanding.
</TABLE>
<PAGE>
<TABLE>
Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential
continued
<CAPTION> Year Ended December 31,
1999 1998 1997
Average Average Average
Balance Interest Yld/Rate Balance Interest Yld/Rate Balance Interest Yld/Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES &
SHAREHOLDERS'
EQUITY
Interest bearing liabilities:
Savings and time deposits $105,560 $5,263 4.99% $92,823 $4,907 5.29% $81,580 $4,236 5.19%
Short term debt 4,798 209 4.36 2,854 121 4.23 3,165 140 4.42
Long term debt 531 30 5.65 557 32 5.75 583 34 5.83
------- ----- ------ ----- ------ -----
Total interest bearing
liabilities 110,889 5,502 4.96 96,234 5,060 5.26 85,328 4,410 5.17
Non-interest bearing
liabilities
Demand deposits 14,946 13,500 12,204
Other 1,724 1,564 1,399
------- ------- ------
Total liabilities 127,559 111,298 98,931
Common shareholders'
equit y 12,000 11,156 9,959
------- ------- ------
TOTAL $139,559 $122,454 $108,890
======= ======= =======
Net interest earnings $5,359 $4,481 $4,145
===== ===== =====
Net margin on interest
earning assets on a taxable
equivalent basis 4.25 4.04 4.21
Average interest spread
(taxable equivalent basis) 3.52 3.21 3.39
</TABLE>
<PAGE>
As the largest component of income, net interest income represents the amount
that interest and fees earned on loans and investments exceeds the interest
costs of funds used to support these earning assets. Net interest income is
determined by the relative levels, rates and mix of earning assets and
interest-bearing liabilities. The following table attributes changes in net
interest income either to changes in average volume or to changes in interest
due to both rate and volume has been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of the change
in each.
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) in: Increase Increase
(decrease) due Net (decrease) due Net
to change in: Increase to change in: Increase
Volume Rate (decrease) Volume Rate (decrease)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Investment securities $ (23) $(53) $ (76) $(98) $(90) $(188)
Federal funds sold (249) (30) (279) 114 (3) 111
Loans 1,930 (255) 1,675 1,235 (172) 1,063
----- ---- ----- ----- ---- -----
1,658 (338) 1,320 1,251 (265) 986
----- ---- ----- ----- ---- -----
INTEREST EXPENSE
Savings and time
Deposits 607 (251) 356 592 79 671
Short term debt 85 3 88 (13) (6) (19)
Long term debt (1) (1) (2) (1) (1) (2)
----- ---- ----- ----- ---- -----
691 (249) 442 578 72 650
----- ---- ----- ----- ---- -----
Increase (Decrease) in
Net Interest Income $ 967 $ (89) $ 878 $ 673 $(337) $ 336
===== ==== ===== ===== ==== =====
</TABLE>
<PAGE>
<TABLE>
Investment Portfolio
The following table shows the book value (carrying value) of the Corporation's
investment securities at December 31 of the years indicated below.
<CAPTION>
December 31,
1999 1997 1997
(In thousands)
<S> <C> <C> <C>
U. S. Government and its Agencies $14,029 $16,125 $20,048
State and Municipals 5,934 6,370 2,465
Other Securities 230 7 7
Federal Home Loan Bank Stock 396 352 0
Federal Reserve Bank Stock 144 144 144
------ ------ ------
$20,733 $22,998 $22,664
====== ====== ======
</TABLE>
<TABLE>
The maturity distribution, par value, market value, and yield of the investment
portfolio at December 31, 1999, is presented in the following
table.
<CAPTION>
December 31, 1999
Par Value Market Value Yield
(In thousands)
<S> <C> <C> <C>
Within 3 months $ 324 $ 307 5.89%
After 3 but within 12 months 269 262 5.96
After 1 but within 5 years 5,838 5,665 5.96
After 5 but within 10 years 9,614 9,305 6.30
After 10 years 4,780 4,285 6.56
Other Securities 258 230 9.25
Federal Home Loan Bank Stock 396 396 4.83
Federal Reserve Bank Stock 144 144 6.00
------- -------
$21,623 $20,594 6.31
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Loan Portfolio
The table below classifies loans, net of unearned income, by major category and percentage distribution at
December 31 for each of the past three years:
December 31
1999 1998 1997
(In thousands)
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Commercial $23,307 18.64% $15,990 17.46% $ 13,861 17.71%
Commercial mortgage 67,698 54.14 47,902 52.31 36,691 46.89
Residential mortgage 25,146 20.11 19,576 21.37 19,836 25.35
Installment loans to
individuals 6,077 4.86 5,290 5.78 4,681 5.98
Other 2,817 2.25 2,818 3.08 3,182 4.07
------ ----- ------ ----- ------ -----
TOTAL $125,045 100.00% $91,576 100.00% $78,251 100.00%
======= ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
The following table shows the maturity of loans outstanding as of December 31, 1999. Also provided are the
amounts due after one year classified according to the sensitivity to changes in interest rates. Loans are
classified based upon the period in which the final payment is due.
December 31, 1999
Maturing
After One
Within But Within After
One Year Five Years Five Years Total
(In thousands)
<S> <C> <C> <C> <C>
Commercial $ 4,877 $ 4,760 $ 13,670 $ 23,307
Commercial mortgage 7,065 5,033 55,600 67,698
Residential mortgage 2,151 2,558 20,437 25,146
Installment loans to
Individuals 667 3,460 2,411 6,538
Other 2,016 731 70 2,817
------- ------- ------- -------
TOTAL $16,776 $16,542 $92,188 $125,506
Loans maturing after one
year with:
Fixed interest rates $ 10,686 $25,093
Variable interest rates 5,856 67,095
------- ------
TOTAL $16,542 $92,188
</TABLE>
<PAGE>
Non-performing Loans
Non-performing loans consist of loans accounted for on a non-accrual basis (as
judgmentally determined by management based upon anticipated realization of
interest income) and loans which are contractually past due 90 days or more as
interest and/or principal payments. The following table presents information
concerning non-performing loans for the periods indicated:
<TABLE>
December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Non-accrual:
Real estate loans $ 881 $1,054 $1,343
Installment loans 184 41 28
Credit cards and related plans 0 0 0
Commercial (time and demand) and
all other loans 44 14 79
Lease financing receivables 0 0 0
----- ----- -----
$1,109 $1,109 $1,450
Contractually past - due
90 days or more:
Real estate loans $ 0 $ 0 $ 0
Installment loans 13 10 7
Credit cards and related plans 22 57 41
Commercial (time and demand)
and all other loans 38 135 76
Lease financing receivables 0 0 0
----- ----- -----
Total Non-performing $1,182 $1,311 $1,574
===== ===== =====
</TABLE>
It is management's practice to cease accruing interest on loans when payments
are 120 days delinquent. However, management may elect to continue the accrual
of interest when the estimated net realizable value of collateral is sufficient
to cover the principal balance and accrued interest, and the loan is in the
process of collection.
If nonaccruing loans had been performing fully, these loans would have
contributed an additional $84.3 thousand to interest income in 1999, $101.0
thousand in 1998, and $123.9 thousand in 1997.
<PAGE>
Summary of Loan Loss Experience
The allowance for loan losses is increased by the provision for loan losses and
reduced by loans charged off, net of recoveries. The allowance for loan losses
is established and maintained at a level judged by management to be adequate to
cover any anticipated loan losses to be incurred in the collection of
outstanding loans. In determining the adequate level of the allowance for loan
losses, management considers the following factors: (a) loan loss experience;
(b) problem loans, including loans judged to exhibit potential charge-off
characteristics, loans on which interest is no longer being accrued, loans
which are past due and loans which have been classified in the most recent
regulatory examination; and (c) anticipated economic conditions and the
potential impact these conditions may have on individual classifications of
borrowers.
The following table presents the Corporation's loan loss experience for the
past five years:
<TABLE>
Year ended December 31,
1999 1998 1997 1996 1995
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amount of loans
outstanding at end
of year (net of unearned
income) $125,045 $91,576 $78,251 $65,835 $61,373
======= ====== ====== ====== ======
Average amount of loans
Outstanding (net of
unearned income) $106,664 $84,917 $71,481 $65,710 $59,459
======= ====== ====== ====== ======
Balance of allowance for loan losses
at beginning of year $ 969 $ 969 $ 932 $1,256 $1,208
Loans charged off:
Commercial 49 21 0 59 0
Real estate 0 32 0 174 0
Installment 53 41 27 62 7
Credit cards and other consumer 55 11 4 43 6
---- ---- ---- ---- ----
Total loans charged off 157 105 31 338 13
---- ---- ---- ---- ----
Recoveries of loans previously
charged off:
Commercial 0 0 1 3 0
Real estate 2 0 11 1 0
Installment 7 2 3 6 6
Credit cards and other consumer 0 1 3 4 2
---- ---- ---- ---- ----
Total recoveries 9 3 18 14 8
---- ---- ---- ---- ----
Net loans charged off 148 102 13 324 5
Additions to allowance charged
to expense 110 102 50 0 53
---- ---- ---- ---- ----
Balance at end of year $ 931 $ 969 $ 969 $ 932 $1,256
==== ==== ==== ==== =====
Ratio of net charge-offs to average
loans outstanding 0.14% 0.12% 0.02% 0.49% 0.01%
</TABLE>
Allocation of the Allowance for Loan Losses
<TABLE>
<CAPTION>
The following table provides an allocation of the allowance for loan losses as
of December 31, 1999:
December 31, 1999
Percent of Loans
on each category
Amount to total loans
(Dollars in Thousands)
<S> <C> <C>
Commercial $ 332 57.14%
Commercial mortgage 177 30.46
Residential mortgage 47 8.09
Installment loans to individuals 3 0.52
Other 22 3.79
Unallocated 350 N/A
Total $ 931 100.00%
</TABLE>
<PAGE>
Deposits
<TABLE>
<CAPTION>
The breakdown of deposits at December 31 for the years indicated is as follows:
December 31,
1999 1998 1997
(In Thousands)
<S> <C> <C> <C>
Noninterest-bearing demand deposits $ 15,072 $ 16,433 $12,083
Interest-bearing demand deposits 18,243 16,896 18,011
Savings deposits 4,659 5,304 4,874
Certificates of deposit:
Less than $100,000 80,994 61,006 57,066
$100,000 or more 19,390 16,531 8,726
-------- -------- --------
$138,358 $116,170 $100,760
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
The average daily amount of deposits and rates paid on such deposits is
summarized for the periods indicated in the following table:
December 31,
1999 1998 1997
Amount Rate Amount Rate Amount Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
Deposits $14,946 0.00% $13,500 0.00% $12,204 0.00%
Interest-bearing demand
Deposits 18,479 2.42 17,027 2.93 17,416 2.97
Savings deposits 6,288 2.30 6,082 2.98 5,055 2.97
Certificates of deposit:
Less than $100,000 64,119 5.76 57,110 6.04 52,882 6.04
$100,000 or more 16,674 5.59 12,605 5.85 6,227 5.63
------- ------- -------
$120,506 $106,324 $93,784
======= ======= ======
</TABLE>
Remaining maturities of certificates $100,000 or more at December 31, 1999 as
follows:
<TABLE>
Maturity Amount
(In Thousands)
<S> <C>
3 months or less $ 2,996
Over 3 through 12 months 4,361
Over 12 months 12,033
-------
$19,390
======
</TABLE>
<PAGE>
Interest Rate Sensitivity Analysis
The following table provides the maturities of investment securities, loans,
and deposits at December 31, 1999, and measures the interest rate
sensitivity gap for each range of maturity indicated:
<TABLE>
<CAPTION>
December 31, 1999
Maturing
Non-
Interest
Earning/
After Bearing
one but Assets/
Within Within After Liabili-
One Five Five ties and
Year Years Years Equity Total
(In Thousands)
<S> <C> <C> <C> <C> <C>
Assets
Investment securities $ 516 $ 3,060 $17,157 $ 0 $ 20,733
Loans 16,776 16,542 92,188 0 125,506
Other assets 0 0 0 10,777 10,777
------ ------ ------ ------ -------
Total Assets 17,292 19,602 109,345 10,777 157,016
Liabilities and
Shareholders' Equity
Demand deposits-noninterest 0 0 0 15,072 15,072
All interest-bearing deposits 64,847 58,439 0 0 123,286
Other liabilities 4,156 0 531 1,744 6,431
Shareholders' equity 0 0 0 12,227 12,227
------ ------ ------ ------ ------
Total liabilities and
Shareholders' equity 69,003 58,439 531 29,043 157,016
------ ------ ------ ------ ------
Interest rate
sensitivity gap $(51,711) $(38,837) $108,814 $(18,266) $ 0
</TABLE>
<PAGE>
Return on Equity and Assets
The following table highlights certain ratios for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Net income to:
Average total assets .83 .90 .85
Average shareholders' equity 9.63 9.91 9.35
Dividend payout ratio (dividends declared per
share divided by net income per share) 14.79 .00 .00
Average shareholders' equity to average total
assets ratio 8.60 9.11 9.13
</TABLE>
Item 2. Description of Properties
The headquarters building (the "Headquarters") of the Corporation and the Bank,
located at the corners of Freemason and Boush Streets, Norfolk, Virginia, was
completed in 1986 and is a three story building of masonry construction, with
approximately 21,000 square feet of floor space. The Bank utilizes two floors
and leases the third floor to others. The office operates nine teller windows,
including two drive-up facilities, one walk-up facility and a 24 hour teller
machine.
The Bank has entered into a lease with Boush Bank Building Associates, a
limited partnership (the "Partnership"), to rent the Headquarters. The lease
requires the Bank to pay all taxes, maintenance and insurance. The term of the
lease is twenty-three years and eleven months, and began on December 19, 1984.
In connection with this property, the lessor has secured financing in the form
of a $1,600,000 industrial development revenue bond from the Norfolk
Redevelopment and Housing Authority payable in annual installments, commencing
on January 1, 1987, at amounts equal to 3% of the then outstanding principal
balance through the twenty-fifth year, when the unpaid balance will become due.
Interest on this bond is payable monthly, at 68.6% of the prime rate of Crestar
Bank in Richmond, Virginia. Monthly rent paid by the Bank is equal to interest
on the above bond, plus any interest associated with secondary financing
provided the lessor by the Bank. The Bank has the right to purchase, at its
option, an undivided interest in the property at undepreciated original cost,
and is obligated to purchase in each January after December 31, 1986 an
undivided interest in an amount equal to 90% of the legal amount allowed by
banking regulations for investments in fixed properties, unless the Bank's
return on average assets is less than seven-tenths of one percent. Under this
provision the Bank purchased 19.7% of this property for $362,201 in 1987. At
the time of the 1987 purchase the Bank assumed $305,744 of the above-mentioned
bond. Pursuant to the purchase option contained in the lease agreement, the
Bank recorded an additional interest of $637,410 (34.7%) in the leased property
as of December 31, 1988 by assuming a corresponding portion ($521,888) of the
unpaid balance of the related revenue bond and applying the difference of
$115,522 to amounts due from the lessor.
Accordingly the Bank now owns 54.4%, of the Headquarters property. No
purchases have been made after 1988.
The general partner of the Partnership is Boush Bank Building Corporation. All
of the limited partners of the Partnership, namely Messrs. Woodard, Burton and
Kellam, are directors of the Bank and the Corporation. The terms of the lease
are not less favorable than could be obtained from a non-related party.
Prior to executing the lease, the shareholders of the Bank owning a majority of
Bank common stock, consented to the foregoing lease. Additionally, formal
shareholder approval of the lease, due to the above described interest of the
Bank's directors, was obtained during the Bank's 1985 Annual Meeting of
Shareholders.
The Bank operates a branch office in Norfolk at 4101 Granby Street and four
branches in Virginia Beach at 225 South Rosemont Road, 2712 North Mall Drive,
1124 First Colonial Road and 1870 Kempsville Road. One of the locations is
owned by the Bank and the remaining four are leased under long-term operating
leases with renewal options, at total annual rentals of approximately $108,000
paid to unrelated parties. The Bank has obtained approval for a branch in
Chesapeake. The building is currently under construction with an anticipated
opening date of May 2000. The Chesapeake branch at 1245 Cedar Road will be
leased under a long term operating lease with renewal options at an approximate
annual rent of $73,000.
<PAGE>
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Securities
Holders
None
PART II
Item 5. MARKET PRICE OF COMMON STOCK AND RELATED MATTERS
Commonwealth Bankshares, Inc. had 1,644,743 shares of capital stock outstanding
on December 31, 1999. On that date, shareholders of record totaled 523 and
resided in 24 states and 1 foreign country.
The Corporations common stock is traded on the NASDAQ Bulletin Board. Please
refer to the table below entitled Common Stock Performance for a breakdown of
the trades reported by BLOOMBERG FINANCIAL MARKETS COMMODITIES NEWS for the
four quarters of 1999 and four quarters of 1998.
The Corporation paid a $0.035 cash dividend on June 30, September 30, and
December 31, 1999. There were no cash dividends declared in 1998 or 1997. The
Corporation issued a fifty (50%) percent stock dividend on May 27, 1999, an
eight (8%) percent stock dividend during the first quarter of 1998, and a six
(6%) percent stock dividend during the first quarter of 1997.
Common Stock Performance
<TABLE>
<CAPTION>
Common Stock Prices
1999 1998(1)
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $10.25 $9.83 $9.88 $9.12
Second Quarter $10.25 $9.50 $10.50 $9.50
Third Quarter $10.25 $8.00 $10.67 $9.67
Fourth Quarter $9.50 $8.00 $10.33 $9.83
<FN>
(1) Adjusted to reflect 1999 50% stock dividend.
</TABLE>
<PAGE>
Item 6. Selected Consolidated Financial Data
The following table sets forth certain selected consolidated financial data for
the past five years.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997 1996 1995
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Amounts:
Gross interest income $10,861 $9,547 $8,553 $7,744 $6,859
Gross interest expense 5,502 5,060 4,410 4,201 3,632
Net interest income 5,359 4,487 4,143 3,543 3,227
Provision for possible loan losses 110 102 50 1 53
------ ------ ------ ------ ------
Net interest income after
Provision 5,249 4,385 4,093 3,542 3,174
Noninterest income 1,209 1,186 869 871 810
Noninterest expense 4,857 3,984 3,605 3,213 2,866
Income before income
taxes and other items 1,601 1,587 1,357 1,200 1,118
Income taxes 446 482 427 364 282
------ ------ ------ ------ ------
Net income $1,155 $1,105 $ 930 $ 836 $ 836
Per Share Data (1):
Net income per share - basic $0.71 $0.68 $0.57 $0.51 $0.51
Cash dividends per share .105 0 0 0 0
Book value (at year end) 7.43 7.12 6.48 5.88 5.39
Balance Sheet Amounts:
(at year end)
Total assets $157,016 $132,237 $116,106 $106,170 $95,037
Total loans (net of unearned income) 125,045 91,576 78,251 65,833 61,373
Total deposits 138,358 116,170 100,760 90,262 82,256
Long-term debt 531 557 583 609 684
Total equity 12,227 11,580 10,531 9,568 8,770
<FN>
(1) Adjusted to reflect 1999, 1998, 1997 and 1996 stock dividends.
</TABLE>
<PAGE>
Management's Discussion and Analysis
Of Operations and Financial Condition
This section of the Annual Report should be read in conjunction with the
statistical information, Financial Statements and related Notes and the
selected financial data appearing elsewhere in the Report.
In addition to historical information, the following discussion contains
forward looking statements that are subject to risks and uncertainties that
could cause Commonwealth's actual results to differ materially from those
anticipated. These forward looking statements include, but are not limited to,
statements regarding management's expectations that the Bank will continue to
experience growth in core operating earnings, improved credit quality and
increased service fee income. Readers are cautioned not to place undue
reliance on these forward looking statements, which reflect management's
analysis only as of the date hereof.
New Accounting Standards
In June 1998 the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards for derivative financial
instruments and other similar financial instruments and for hedging activities.
The Statement also allows securities classified as held to maturity to be
transferred to the available for sale category at the date of initial
application of this standard. Statement 133 is effective for all fiscal years
beginning after June 15, 1999. Management is currently reviewing this
Statement to determine the impact, if any, it will have since the Bank does not
currently employ such derivative instruments and does not intend to do so in
the future.
Year 2000 Issue
Thank you for your trust. As much as the banking industry did to prepare for
Y2K, your trust was essential to a smooth transition.
We are extremely pleased to announce that January 1, 2000 was especially
notable this year because... nothing happened. The Bank's operations staff
monitored the computer systems throughout the night on December 31, 1999 and no
service interruptions were experienced during the critical rollover period to
January 1, 2000. Results have been verified, and at this time, we have
declared our Year 2000 efforts of the past three years a complete success!
Of course, succeeding in such a complex mission was not accidental, nor did it
happen overnight. Bank of the Commonwealth's staff, along with thousands of
individuals throughout our industry, followed through with their commitment to
insure that January 1, 2000 would be uneventful. This personal investment
enabled your Bank to deliver its goal of assuring no disruption in financial
services and maintaining the historic safety and security of your deposits.
Preparations at Bank of the Commonwealth actually began in July 1997 when a
Year 2000 Committee consisting of the Bank's executive staff was formed to
oversee the Year 2000 Readiness Project. Over the course of the following
three years, all assessment guidelines and preparation goals designed and
mandated by federal regulatory agencies were met. Our budget of $110,000 was
adequate, and allowed for the continuation of testing through the year 2000.
We will continue to monitor the critical dates throughout the year 2000,
documenting and reporting all findings to the Board of Directors and regulatory
authorities, as we have in the past.
Financial Condition and Results of Operations
Commonwealth Bankshares, Inc. and Subsidiary
This commentary provides an overview of Commonwealth Bankshares, Inc.'s
financial condition, changes in financial condition and results of operations
for the years 1997 through 1999. The following discussions should assist
readers in their analysis of the accompanying consolidated financial statements
and supplemental financial information. It should be read in conjunction with
the statistical information.
Earnings Overview
Net income in 1999 of $1.155 million represented a 4.53% increase over the
$1.105 million reported for the year 1998. This earnings record, the highest
in the Bank's history, reflects the Bank's continued growth in core operating
earnings, improved credit quality, record loan growth and positive trends which
are expected to continue into 2000.
Net income for 1998 of $1.105 million represented an 18.85% increase over the
$930 thousand reported in 1997.
<PAGE>
Commonwealth's core earnings, defined by the Corporation as pre-tax earnings
exclusive of the provision for loan losses and nonrecurring items such as
securities gains, have improved steadily since 1993.
The key profitability measures of return on average assets (ROA) and return on
average total shareholders' equity (ROE) reflected little change in 1999 when
compared with 1998 and 1997 primarily due to a substantial growth in total Bank
assets. This growth continues to be fueled by the migration of many small to
medium sized businesses to Bank of the Commonwealth from regional financial
institutions serving the Hampton Roads community. ROA equaled .83% in 1999
compared with .90% in 1998 and .85% in 1997. ROE equaled 9.63% in 1999
compared with 9.91% in 1998 and 9.35% in 1997. These ratios, along with other
significant earnings and balance sheet information for each of the years in the
five-year period ended December 31, 1999, are shown in Table 1 as follows:
<TABLE>
<CAPTION>
Table 1 - Selected Financial Information
(Dollars in thousands, except per share data)
Results of Operations (for the year): 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Income From Earning Assets $10,861 $9,547 $8,553 $7,744 $6,859
Net Interest Income 5,359 4,487 4,143 3,543 3,227
Provision for Loan Losses 110 102 50 1 53
Net Income 1,155 1,105 930 836 836
Earnings Per Share:
Net Income - Basic (1) $0.71 $0.68 $0.57 $0.51 $0.51
Average Shares Outstanding (1) 1,631,684 1,626,107 1,626,107 1,626,107 1,626,107
Financial Condition (at December 31):
Total Assets $157,016 $132,237 $116,106 $106,170 $95,037
Total Equity 12,227 11,580 10,531 9,568 8,770
Selected Ratios (for the year):
Return on Average Common
Shareholders' Equity 9.63% 9.91% 9.35% 8.85% 10.17%
Return on Average Assets 0.83% 0.90% 0.85% 0.79% 0.94%
Net Interest Margin 3.95% 3.81% 3.99% 3.75% 3.92%
<FN>
(1) Adjusted to reflect 1999, 1998, 1997, & 1996 stock dividends.
</TABLE>
Earnings per share increased 4.4% during 1999 reaching $0.71 per share or $0.03
per share over the $0.68 per share reported in 1998.
Earnings per share increased 19.3% during 1998 reaching $0.68 per share or
$0.11 per share over the $0.57 per share reported in 1997. Significant items
affecting the change in earnings per share for 1999, 1998 and 1997 are
summarized as follows:
1999 1998
vs. vs.
1998 1997
Interest on loans and 13.76% increase 11.62% increase
investments and loan fees
Interest on deposits and 8.73% increase 14.74% increase
short-term borrowings
Net interest income 19.44% increase 8.30% increase
Provision for loan losses $8.1 thousand increase $52.0 thousand increase
<PAGE>
Net Interest Income and Net Interest Margin
A fundamental source of Commonwealth's earnings, net interest income, is
defined as the difference between income on earning assets and the cost of
funds supporting those assets. Significant categories of earning assets are
loans and securities, while deposits and short-term borrowings represent the
major portion of interest-bearing liabilities. The level of net interest
income is impacted primarily by variations in the volume and mix of these
assets and liabilities, as well as changes in interest rates when compared to
previous periods of operations.
The net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets, and represents the Corporation's net yield
on its earning assets.
In 1999 the net interest margin of 3.95% represented an increase of 14 basis
points over the net interest margin of 3.81% recorded in 1998. The increase in
net interest margin of 3.68% was brought about by a more rapid increase in the
rate of return on the loans and securities portfolios when compared with the
increased cost in the Bank's sources of funding.
The net interest margin for 1998 was 3.81% compared to 3.99% for 1997. The
decrease in net interest margin during this period of 4.51% was brought about
by a more rapid decline in the rate of return on loans and securities
portfolios, when compared with the rate of decline in the Bank's sources of
funding. The performance reported herein is reflected in Commonwealth's
earning assets yield of 8.32% in 1999 compared with 8.37% in 1998, and 8.55% in
1997. Commonwealth's average cost of deposits decreased 19 basis points in
1999 to 4.57% when compared with an increase of 9 basis points in 1998 from
1997. The substantial decreases in nonperforming assets of $527 thousand to
$1.78 million in 1999, $797 thousand to $2.3 million at the end of 1998, and
$858 thousand to $3.1 million at the end of 1997, will result in a favorable
impact on the net interest margin during future periods since the major
reductions in nonperforming assets occurred at year end 1997, 1998, and 1999.
The level of nonperforming assets negatively impacted earnings during 1999,
1998 and 1997 in the amounts of $84.3 thousand, $101.0 thousand, and $123.9
thousand, respectively.
Average interest earning assets increased $16.4 million in 1999, $14.0 million
in 1998, and $8.7 million in 1997. Average net loans increased $21.7 million
in 1999, $13.4 million in 1998, and $5.8 million in 1997. Average investment
securities decreased by $386.1 thousand in 1999, $1,584.6 thousand in 1998 and
increased $480.4 thousand during 1997.
Provision and Allowance for Loan Losses
The provision for loan losses is the annual cost of maintaining an allowance
for inherent credit losses. The amount of the provision each year and the
level of the allowance are matters of judgement and are impacted by many
factors, including actual credit losses during the period, the prospective view
of credit losses, loan performance measures and trends (such as delinquencies
and charge-offs), and other factors, both internal and external that may affect
the quality and future loss experience of the credit portfolio.
On a quarterly basis, Commonwealth's management evaluates the adequacy of the
allowance for loan losses, and based on such review, establishes the amount of
the provision for loan losses. For large commercial and real estate exposure,
a detailed loan-by-loan review is performed. The remainder of the commercial
and real estate portfolio is analyzed utilizing a formula-based determination
of the allowance. The formula is impacted by the risk rating of the loan,
historical losses and expectations. Loan loss allowances for the various
consumer credit portfolios are based on historical and anticipated losses and
the current and projected characteristics of the various portfolios. In
addition, consideration of factors such as economic conditions, underwriting
standards, and compliance and credit administration practices may impact the
level of inherent credit loss. Management's evaluation and resulting provision
and allowance decisions are reviewed by the Board of Directors quarterly.
A continuing strong economy, combined with the Corporation's continued loan
workout activities resulted in a modest contribution to the provision for loan
losses during 1999, 1998 and 1997, respectively. The Corporation made
provisions for loan losses of $109.8 thousand in 1999, $101.7 thousand in 1998
and $49.8 thousand in 1997. Details of the activity in the allowance for loan
losses for the past three years are shown in Note 4 to the Consolidated
Financial Statement.
Net charge-offs during 1999 were $148 thousand compared with $102 thousand
reported in 1998, and $13 thousand reported in 1997. The level of charge-offs
for 1999 reflected normal increases as a result of the continued growth in the
loan portfolio and remained relatively unchanged as a percentage of total
loans. Total charge-offs for both 1999 and 1998 represented a modest one-tenth
of one percent of total loans outstanding. Current expectations are that total
net charge-offs in 2000 will be comparable with the Bank's experience during
1999 and 1998. This expectation is based upon assumptions regarding the
general economic climate in Commonwealth's trade area and the performance
characteristics of the loan portfolio, including Commonwealth's continued
success in working out remaining nonperforming loans. Changes in these
conditions could create different results.
The allowance for loan losses at December 31, 1999 was $931 thousand, compared
with $969 thousand at December 31, 1998 and December 31, 1997. This
represented 0.7% of year-end gross loans at December 31, 1999 compared with
1.06% of year-end gross loans at December 31, 1998 and 1.24% of year-end gross
loans at December 31, 1997.
The tables on the following pages provide an analysis of the activity in the
Corporation's nonperforming assets and allowance for loan losses for each of
the last three years. Based on current expectations relative to portfolio
characteristics and performance measures including loss projections, management
considers the level of the allowance to be adequate.
<PAGE>
Nonperforming loans at December 31, 1999 declined $129 thousand to $1.18
million when compared with the $1.31 million at year-end 1998. During 1998,
nonperforming loans declined $263 thousand when compared with 1997.
Nonperforming loans continue to be centered in a relatively small number of
loans with large balances. Based on the Bank's current workout plans, we
expect to return each of these loans to an accrual status during 2000 with
minimum losses to the Bank. Each of the loans are fully secured and represent
minimal risk.
The Corporation continues to allocate significant resources to the expedient
disposition and collection of nonperforming and other lower quality assets. As
a part of this workout process, the Corporation routinely reevaluates all
reasonable alternatives, including the sale of these assets. Individual action
plans have been developed for each nonperforming asset.
The amount of loans past due 90 days or more that were not classified as
nonaccrual loans totaled $73 thousand at December 31, 1999, $202 thousand at
December 31, 1998, and $124 thousand at December 31, 1997.
The following table reflects the trends discussed herein:
Nonperforming Assets
December 31 1999 1998 1997
90 Days delinquent and still accruing $ 73,000 $ 202,000 $ 124,000
Nonaccrual 1,109,000 1,109,000 1,450,000
Foreclosed properties 601,000 999,000 1,533,000
--------- --------- ---------
Total Nonperforming Assets $1,783,000 $2,310,000 $3,107,000
========= ========= =========
Asset Quality Review and Credit Risk Management
In conducting business activities, the Corporation is exposed to the
possibility that borrowers or counterparties may default on their obligations
to the Corporation. Credit risk arises through the extension of loans, leases,
certain securities, and financial guarantees. To manage this risk, the
Corporation establishes policies and procedures to manage both on and off-
balance sheet risk and communicates and monitors the application of these
policies and procedures throughout the Corporation.
Loan Portfolio
The Corporation's credit risk is centered in its loan portfolio which on
December 31, 1999 totaled $125.5 million, or 85.8% of total earning assets
compared with $91.9 million or 75.1% of total earning assets at year end 1998
and $78.4 million or 72.9% total earning assets at year end 1997. The
Corporation's overall objective in managing loan portfolio risk is to minimize
the adverse impact of any single event or set of occurrences. To achieve this
objective, the Corporation strives to maintain a loan portfolio that is diverse
in terms of loan type, industry concentration, geographic distribution and
borrower concentration.
For commercial loans, loan officers prepare proposals supporting the extension
of credit. These proposals contain an analysis of the borrower and an
evaluation of the ability of the borrower to repay the potential credit. The
proposals are subject to varying levels of approval by senior line and credit
policy management prior to the extension of credit. Commercial loans receive
an initial risk rating by the originating loan officer. This rating is based on
the amount of credit risk inherent in the loan and reviewed for appropriateness
by senior line and credit policy personnel for deterioration in a borrower's
financial condition which would impact the borrower's ability to repay the
credit. Risk ratings are adjusted as necessary.
For consumer loans, approval and funding is conducted in various locations with
the majority of loans being approved at the Corporation's headquarters
facility.
An independent credit review group conducts ongoing reviews of the loan
portfolio, reexamining on a regular basis risk assessments for loans and
overall compliance with policy.
To limit credit exposure, the Corporation obtains collateral to support credit
extensions and commitments when deemed necessary. The most significant
categories of collateral are real and personal property, cash on deposit and
marketable securities. The Corporation obtains real property as security for
some loans that are made on the basis of the general creditworthiness of the
borrower and whose proceeds were not used for real estate related purposes.
Senior level management is devoted to the management and/or collection of
certain nonperforming assets as well as certain performing loans. Aggressive
collection strategies and a proactive approach to managing overall credit risk
has expedited the Corporation's disposition, collection and renegotiation of
nonperforming and other lower-quality assets and allowed loan officers to
concentrate on generating new business.
<PAGE>
As the volume of past due loans declines, it is anticipated that the level of
nonaccrual loans will be reduced. It should be noted that of all loans on
nonaccrual, the majority are making regular monthly payments. All loans for
the most part are fully secured with workout arrangements currently in place.
If nonaccruing loans had been performing fully, these loans would have
contributed an additional $84.3 thousand to interest income in 1999, $101.0
thousand in 1998, and $123.9 thousand in 1997.
The Corporation's Other Real Estate Owned (OREO) at December 31, 1999 declined
to $601 thousand following a decline in 1998 of $534 thousand from the $1.53
million reported at December 31, 1997. Of the $601 thousand, two of the
properties representing $440 thousand are generating income under operating
leases. The balance representing $161 thousand are in various stages of
liquidation.
During the last three years, there have been additions to and liquidations of
other real estate owned. There was one addition in 1999, one addition during
1998, and no additions during 1997. Proceeds from the properties disposed of
during 1999 equaled $434.2 thousand compared with $670.0 thousand and $302.5
thousand in 1998 and 1997, respectively.
During 1999, 1998 and 1997, there were net losses on the sale of other real
estate of $65.6 thousand, $61.6 thousand and $22.5 thousand, respectively.
The Bank has developed individual action plans for each property for the
ultimate liquidation of these properties. The objectives are diligently
pursued by management and reviewed with the Board of Directors monthly.
Noninterest Income
Total noninterest income increased slightly in 1999 to $1.21 million compared
with $1.19 million reported in 1998, a 1.9% increase. Total noninterest income
increased significantly in 1998 to 1.18 million compared with $869.0 thousand
reported in 1997, a 36.6% increase. The increases during the three year period
was primarily attributable to the significant increase in service charges and
fees on deposits which is indicative of the recent trend in commercial banking
to generate additional income from services not related to the lending
function.
In each of the three years mentioned, income from OREO properties equaled $85.1
thousand, $82.9 thousand, and $88.6 thousand, respectively.
Noninterest Expense
Total noninterest expense increased to $4.86 million in 1999 or 21.9% following
increases of 10.5% and 12.2% in 1998 and 1997, respectively. This represents a
moderate increase when compared with the Bank's overall growth. These results
reflect management's continued emphasis and commitment to the management of
this area of the Bank's operations. Salaries and employee benefits, the
largest component of other expenses increased by 23.0% in 1999 following
increases of 8.9% in 1998 and 11.3% in 1997. Again, this increase is a result
of the Bank's overall growth. Net occupancy expense increased $28.7 thousand
in 1999, $14.8 thousand in 1998, and $120.1 thousand in 1997. The increases in
1999, 1998 and 1997 reflect necessary modifications and improvements to the
Bank's physical facilities. Other noninterest operating expenses, which
include a grouping of numerous transactions relating to normal banking
operations, increased $354.7 thousand or 31.2% in 1999 compared with an
increase of $144.9 thousand or 14.6% in 1998, and an increase of $59.3 thousand
or 6.4% in 1997. Again, when compared with the increase in the Corporation's
noninterest income during the past three years, the increase in noninterest
expense is considered nominal and reflects normal increases for outside
services.
Liquidity and Interest Sensitivity
Bank liquidity is a measure of the ability to generate and maintain sufficient
cash flows to fund operations and to meet financial obligations to depositors
and borrowers promptly and in a cost-effective manner. Asset liquidity is
provided primarily by maturing loans and investments, and by cash received from
operations. Other sources of asset liquidity include readily marketable
assets, especially short-term investments, and longer-term investment
securities that can serve as collateral for borrowings. On the liability side,
liquidity is affected by the timing of maturing liabilities and the ability to
generate new deposits or borrowings as needed.
Commonwealth's Asset/Liability Management Committee (ALCO) is responsible for
formulating liquidity strategies, monitoring performance based on established
objectives and approving new liquidity initiatives. ALCO's overall objective
is to optimize net interest income within the constraints of prudent capital
adequacy, liquidity needs, the interest rate and economic outlook, market
opportunities, and customer requirements. General strategies to accomplish
this objective include maintaining a strong balance sheet, achieving solid core
deposit growth, taking on manageable interest rate risk, adhering to
conservative financial management on a daily basis, monitored regularly by ALCO
and reviewed periodically with the Board of Directors.
<PAGE>
The Bank's funding requirements are supplied from a wide range of traditional
sources, including various types of demand deposits, money market accounts,
certificates of deposit and short-term borrowings. Large certificates of
deposit, over $100,000 accounted for 12.4%, 14.2%, and 8.1% of the Bank's
total deposits at December 31, 1999, 1998, and 1997, respectively. As a
percentage of average assets, core deposits increased to 84.5% in 1997,
decreased to 82.1% in 1998, and increased to 86.9% in 1999. Management seeks
to ensure adequate liquidity to fund loans, deposit withdrawals, and the Bank's
financial requirements and opportunities. To provide liquidity for current,
ongoing and unanticipated needs, the Bank maintains a portfolio of marketable
investment securities, structures and monitors the flow of funds from these
securities and from maturing loans, and maintains access to short-term funding
sources, including a federal funds line of credit with its correspondent banks
and the ability to borrow from the Federal Reserve System and the Federal Home
Loan Bank.
The Corporation's loan portfolio net of unearned income and allowance for loan
losses increased by 37.0% to $124.1 million in 1999, compared with a 17.2%
increase in 1998 to $90.6 million from the $77.3 million at year end 1997.
Balances in a number of loan categories also increased. Total commercial loans
increased 42.4% to $91.0 million in 1999, compared with an increase of 26.9% to
$63.9 million in 1998, and a 21.3% increase in 1997 to $50.6 million. These
increases reflect a continuing exodus of commercial customers from the area's
regional institutions to Bank of the Commonwealth, the oldest community bank in
Southside Hampton Roads. Consumer loans increased $974 thousand or 17.5% in
1999 following increases of $689 thousand or 14.1% in 1998, and $274 thousand
or 6.0% in 1997.
Sources of Funds
Purchased liabilities are composed of Fed Funds purchased, certificates of
deposit of $100,000 and over (large CDs) and balances held in "sweep accounts"
for customers. Purchased funds at December 31, 1999 equaled $21.3 million or a
17.7% increase in short-term borrowings during 1999 following a $7.2 million
increase to $18.1 million during 1998, as compared with the $10.9 million
reported in 1997. At December 31, 1999, 1998 and 1997, approximately 100% of
Commonwealth's purchased funds consisted of funds invested by local customers
which, as such, are less volatile than other categories of purchased funds or
brokered deposits. On both an average and year-end basis, the composition of
purchased funds continued to shift in 1999, 1998 and 1997 from the balance
sheet category of large CDs to short-term borrowings. This shift in mix
coincided with liquidity needs and balance sheet management strategies in a low
interest rate environment.
Uses of Funds
Total earning assets at December 31, 1999 increased 19.6% from year-end 1998
compared with 1998's increase of 13.6% from year-end 1997's increase of 12.8%.
The increase in earning assets over the last three years has been primarily
attributable to the increase in the loan portfolio which has increased from
$78.4 million in 1997 to $125.5 million in 1999.
The composition of long-term investment securities as of December 31, 1999 and
1998 is presented in Note 3 to the Consolidated Financial Statements.
At year-end 1999, 1998 and 1997, investment securities totaled $20.2 million,
$22.5 million and $22.5 million respectively.
In managing the investment securities portfolio, management's philosophy has
been to provide the maximum return over the long term on funds invested while
giving consideration to risk and other Corporate objectives. During periods of
increasing interest rates, the market value of the investment portfolio
declines in relation to book value.
Decisions to acquire investments of a particular type are based on an
assessment of economic and financial conditions, including interest rate risk,
liquidity, capital adequacy, the type of incremental funding available to
support such assets, and an evaluation of alternative loan or investment
instruments.
Investment securities are purchased with the ability to hold until maturity and
with the intent to hold for the foreseeable future. Management reevaluates
asset and liability strategies when economic and financial conditions fluctuate
in a magnitude that might adversely impact the Company's overall interest rate
risk, liquidity, or capital adequacy positions. Reassessment may alter
management's intent to hold certain securities for the foreseeable future and
result in repositioning a portion of the investment portfolio. Often, security
sales are required to implement a change in strategy.
The total investment in the securities portfolio at December 31, 1999 was
approximately $20.2 million.
The portfolio is well diversified among several market sectors as summarized
below:
Sector %
Municipals 30.3
Fixed Agency 21.8
Floating MBS 19.9
Floating CMO 10.1
Fixed MBS 9.3
Fixed CMO 5.0
Floating Agency 3.6
<PAGE>
The overall portfolio is currently projected to yield 6.35% on a fully taxable
equivalent basis. It has a weighted average life of 7.53 years, a weighted
average repricing term of 5.9 years, and 66% of total holdings are invested in
fixed rate securities. 77% of the portfolio has been placed in the Available
For Sale (AFS) category for FAS 115 purposes. Given the upcoming FAS 115
Holiday (done in conjunction with adoption of FAS 133) and the recently adopted
Risk Management regulations, the Bank will continue to place a higher
percentage of its investments in the AFS portfolio. The portfolio currently
contains an unrealized loss on sale of $938 thousand.
The portfolio has a short repricing distribution with 32.8% repricing within
the next twelve months. Adjustable rate securities total $6.8 million par
value and represent 33% of the total portfolio. These securities are well
diversified among a variety of indices. The diversity in indices results in a
consistent performing adjustable rate portfolio regardless of the direction or
level of interest rates. Currently, the adjustable rate securities portfolio
is projected to yield 6.13% with a weighted average months-to-roll of 5.47
months.
Fixed rate, U.S. Agency securities total $5.25 million par value and represent
25.6% of total holdings. The portfolio is diversified among various call types
as 47.6% are continuously callable (i.e. anytime after the first call date),
and 52.4% are discretely callable (i.e. on coupon payment dates).
Municipal holdings total $6.235 million par value, or 30.3% of total holdings,
and have a taxable equivalent yield to the effective maturity date of 6.47%.
These issues have excellent credit quality, as 98% of the portfolio is AA-rated
or higher. The two largest states represented in the portfolio include New
York at 22% and Pennsylvania at 15%. The average duration date of the
municipal portfolio is approximately 7.93 years.
Fixed rate CMOs total $983 thousand par value, or 4.8% of total holdings, and
are well diversified among a variety of structures and maturities. Overall,
the portfolio is relatively short with 24.5% having an expected average life of
between three to five years. The portfolio is currently projected to yield
6.5% with an expected average life of 2.6 years based on the historical
one-month prepayment rate.
Fixed rate mortgage pools total $1.87 million par value, or 9.3% of total
holdings. These securities are invested in a variety of Balloon, 15-
year, 20-year, and 30-year final maturity pools and is well diversified among
coupon rates. Overall, the portfolio is projected to yield 6.71% with a
projected average life of 7.39 years based on the one-month historical
prepayment rate.
Management frequently assesses the performance of the investment portfolio to
ensure its yield and cash flow performances are consistent with the broad
strategic plan of the entire Bank. Flexibility is one of the hallmarks of the
Bank's ability to meet the dynamic banking needs of its customers.
Year-end total loans net of unearned income increased $33.5 million or 36.5% in
1999 following a $13.3 million or 17.0% increase in 1998, and an increase of
18.9% or $12.4 million at year end 1997. The results were largely due to the
efforts of the Bank's officers to develop new loan relationships with customers
from the area's regional institutions combined with an improved economic
environment.
Loans represented the largest category of earning assets and the Bank will
continue with its efforts to develop creditable loan relationships in order to
enhance its earnings opportunities while simultaneously strengthening its
underwriting criteria. The policies, procedures and lending guidelines
implemented during the past two years have been reported to shareholders in
detail in previous quarterly and annual reports.
A number of measures have been taken by Commonwealth over the past several
years to reduce overall exposure and earnings vulnerability in the real estate
sectors of the Corporation's trade area, including strengthening real estate
underwriting, management review policies and practices, and reducing higher
risk concentrations within the real estate portfolio. Commonwealth's real
estate portfolio is comprised of loans to customers located within the
Corporation's established marketplace. Diversification of the loan portfolio
continues.
During the past three years, a considerable volume of new loan relationships
has been developed with "old line and well-established" local businesses, which
have transferred their relationships to Commonwealth from other "regional
financial institutions" that are experiencing further consolidation. This has
been an excellent source of new business for the Bank. We intend to
aggressively continue to target these relationships in future periods.
Further explanations regarding the changes in the volume of outstanding loans
are included in Management's Discussion and Analysis of Financial Condition and
Results Operations, under the section entitled "Liquidity".
Dividends and Dividend Policy
The Corporation's Board of Directors determines the amount of and whether or
not to declare dividends. Such determinations by the Board take into account
the Corporation's financial condition, results of operations, and other
relevant factors. The Corporation's only source of funds for cash dividends
are dividends paid to the Corporation by the Bank.
Based on the Corporation's earnings record for 1999, the Corporation paid a
$0.035 cash dividend on June 30, September 30, and December 31, 1999. There
were no cash dividends declared during 1998 or 1997. The Corporation issued a
fifty (50%) percent stock dividend on May 27, 1999, an eight (8%) percent stock
dividend during the first quarter of 1998, and a six (6%) percent stock
dividend during the first quarter of 1997.
<PAGE>
Income Taxes
Corporations are required to pay the greater of the regular corporate income
tax or the alternative minimum tax (AMT). In 1999, income tax expense was
$446.4 thousand, down from $482.3 thousand in 1998, and up from the $427.7
thousand in 1997. The decrease in income tax expense in 1999 was a result of
increased investment in municipal bonds, which resulted in a lower tax
liability.
Inflation
The Corporation carefully reviews Federal Reserve monetary policy in order to
insure an appropriate position between the cost and utilization of funds.
The effect of changing prices on financial institutions is typically different
than on non-banking companies since virtually all of a bank's assets and
liabilities are monetary in nature. In particular, interest rates are
significantly affected by inflation, but neither the timing nor magnitude
of the changes are directly related to price level indices. Therefore, the
Corporation can best counter inflation over the long term by managing net
interest income and controlling net increases in noninterest income and
expenses.
Capital Resources and Adequacy
Average shareholders' equity increased at the rate of 7.6% in 1999 compared
with 12% in 1998, and 9.4% in 1997. During these periods, the primary source
of capital to the Bank has been internally generated retained earnings.
The Federal Reserve Board, the Office of the Controller of the Currency, and
the FDIC have issued risk-based capital guidelines for U.S. banking
organizations. These guidelines provide a capital framework that is sensitive
to differences in risk profiles among banking companies.
Risk-based capital ratios are another measure of capital adequacy. At December
31, 1999, the Bank's risk-adjusted capital ratios were 9.9% for Tier 1 and
10.7% for total capital, well above the required minimums of 4.0% and 8.0%
respectively, as compared with 11.8% and 12.8%, respectively at December 31,
1998, and 12.5% and 13.7% at December 31, 1997. These ratios are calculated
using regulatory capital (either Tier 1 or total capital) as the numerator and
both on and off-balance sheet risk-weighted assets as the denominator. Tier 1
capital consists primarily of common equity less goodwill and certain other
intangible assets. Total capital adds certain qualifying debt instruments and
a portion of the allowance for loan losses to Tier 1 capital. One of four risk
weights, primarily based on credit risk, is applied to both on and off-balance
sheet assets to determine the asset denominator. Under Federal Deposit
Insurance Corporation (FDIC) rules, Commonwealth was considered "Well-
capitalized", the highest category of capitalization defined by the regulators
allowing the lowest level of FDIC insurance premium rates, as of December 31,
1999, 1998, and 1997.
The Bank's capital is adequate to support the present level of assets and to
provide for some future growth.
At December 31, 1999, shareholders' equity stood at $12.2 million as compared
with $11.6 million at year-end 1998, and $10.5 million at year-end 1997. These
increases were brought about by a net profit of $1.155 million in 1999, a net
profit of $1.105 million in 1998, and a net profit of $930 thousand in 1997.
In order to maintain a strong equity capital position, to protect against the
risks of loss, in the investment and loan portfolios and on other assets,
management will continue to monitor the Bank's capital position. Several
measures have been or will be employed, to maintain the Bank's capital
position, including but not limited to:
Continuing its efforts to return all nonperforming assets to performing
status,
Monitoring the Bank's growth, and
Continued utilization of its formal asset/liability policy.
Once again, it should be noted that the Bank's capital position has always
exceeded and continues to exceed the minimum standards established by the
regulatory authorities.
<PAGE>
<TABLE>
<CAPTION>
Five-Year Summary Consolidated Balance Sheets
December 31
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $6,320,567 $5,383,384 $4,347,967 $5,655,944 $5,135,875
Investment securities:
Available for sale 15,478,387 16,828,831 11,682,058 9,438,596 5,824,275
Held to maturity 4,706,761 5,665,833 10,830,242 14,072,217 11,290,140
Equity securities, restricted 548,078 503,678 151,678 151,678 143,900
Federal funds sold -- 7,378,500 6,440,417 5,718,439 5,131,844
Loans:
Commercial 23,306,635 15,990,112 13,861,467 11,078,914 8,889,880
Commercial construction 1,711,924 1,522,464 1,600,521 1,867,926 1,470,129
Commercial mortgage 65,985,847 46,379,110 35,090,563 28,796,673 25,795,631
Residential mortgage 25,146,370 19,576,529 19,836,295 17,206,173 18,668,317
Installment loans to individuals 6,538,126 5,564,235 4,874,850 4,600,931 3,970,015
Other 2,816,716 2,817,787 3,181,766 2,448,714 2,809,860
----------- ----------- ----------- ----------- -----------
GROSS LOANS 125,505,618 91,850,237 78,445,462 65,999,331 61,603,832
Less: Unearned income (460,527) (274,472) (194,100) (164,724) (231,186)
Allowance for loan losses (931,000) (969,000) (969,000) (932,000) (1,256,000)
----------- ----------- ----------- ----------- -----------
124,114,091 90,606,765 77,282,362 64,902,607 60,116,646
Premises and equipment 2,822,142 2,742,015 2,325,677 2,442,691 2,340,746
Other assets 3,025,581 3,128,238 3,045,336 3,788,054 5,053,931
----------- ----------- ----------- ----------- -----------
$157,015,607 $132,237,244 $116,105,737 $106,170,226 $95,037,357
=========== =========== =========== =========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $15,071,902 $16,433,391 $12,083,459 $10,686,956 $13,147,115
Interest bearing 123,286,067 99,736,424 88,676,591 79,575,499 69,109,244
----------- ----------- ----------- ----------- -----------
TOTAL DEPOSITS 138,357,969 116,169,815 100,760,050 90,262,455 82,256,359
Short-term borrowings 4,156,193 2,483,725 2,760,068 3,573,350 2,290,477
Long-term debt 530,944 557,056 583,168 609,280 684,019
Other liabilities 1,743,903 1,446,903 1,470,963 2,156,671 1,036,116
----------- ----------- ----------- ----------- -----------
TOTAL LIABILITES 144,789,009 120,657,499 105,574,249 96,601,756 86,266,971
SHAREHOLDERS' EQUITY
Common stock 4,111,858 2,710,383 2,510,235 2,368,752 2,235,258
Additional capital 5,274,788 5,175,939 4,536,468 4,106,361 3,715,666
Retained earnings 3,367,585 3,740,072 3,477,142 3,121,362 2,811,562
Accumulated other
comprehensive income (loss) (527,633) (46,649) 7,643 (28,005) 7,900
----------- ----------- ----------- ----------- -----------
12,226,598 11,579,745 10,531,488 9,568,470 8,770,386
----------- ----------- ----------- ----------- -----------
$157,015,607 $132,237,244 $116,105,737 $106,170,226 $95,037,357
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Five-Year Summary of Consolidated Operations
Year Ended December 31
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Interest on loans and
investments and loan fees $10,860,577 $9,546,891 $8,553,087 $7,744,380 $6,858,537
Interest on deposits and
short-term borrowings 5,501,577 5,060,073 4,409,992 4,201,221 3,631,792
----------- ----------- ----------- ----------- -----------
Net Interest Income 5,359,000 4,486,818 4,143,095 3,543,159 3,226,745
Provision for loan losses 109,823 101,738 49,762 529 52,932
----------- ----------- ----------- ----------- -----------
Net Interest Income
After Provision
for Loan Losses 5,249,177 4,385,080 4,093,333 3,542,630 3,173,813
Noninterest Income
Security gains 7,106 5,084 10,077 3,570 28,430
Gains (loss) on sale of
real estate (65,550) (61,561) (22,459) (12,744) 8,668
Other noninterest income 1,267,640 1,243,147 881,401 879,795 772,963
----------- ----------- ----------- ----------- -----------
Total Noninterest Income 1,209,196 1,186,670 869,019 870,621 810,061
Noninterest Expenses:
Salaries and employee benefits 2,290,700 1,862,484 1,709,545 1,535,427 1,354,088
Occupancy expenses (net) 464,458 435,770 420,943 300,844 276,531
Furniture and equipment expenses 609,499 548,691 481,917 443,316 432,693
Other noninterest expenses 1,491,902 1,137,214 992,290 932,974 802,897
----------- ----------- ----------- ----------- -----------
Total Noninterest Expenses 4,856,559 3,984,159 3,604,695 3,212,561 2,866,209
----------- ----------- ----------- ----------- -----------
Income Before Income Taxes 1,601,814 1,587,591 1,357,657 1,200,690 1,117,665
Applicable Income Tax Expense 446,424 482,339 427,692 364,264 282,148
----------- ----------- ----------- ----------- -----------
Net Income for Year $1,155,390 $1,105,252 $929,965 $836,426 $835,517
========== ========== ========== ========== ==========
Net Income per share - basic (1) $0.71 $0.68 $0.57 $0.51 $0.51
Net Income per share
assuming dilution (1) $0.64 $0.62 $0.53 $0.48 $0.50
Average shares outstanding (1) 1,631,684 1,626,107 1,626,107 1,626,107 1,626,107
Average shares - assuming
dilution (1) 1,804,201 1,788,986 1,755,776 1,727,267 1,687,222
<FN>
(1) Adjusted to reflect 1999, 1998, 1997, & 1996 stock dividends.
</TABLE>
<PAGE>
PART II
Item 7. Financial Statements.
Refer to the index to the Consolidated Financial Statements on Page F-1 for the
required information.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The following sets forth the names, ages and business experience of the
Corporation's executive officers.
Edward J. Woodard, Jr., 57
Chairman of the Board, President and Chief Executive Officer of the Corporation
and the Bank; Director and President of BOC Title of Hampton Roads, Inc.; and
Director and President of BOC Insurance Agency of Hampton Roads, Inc.
John H. Gayle, 61
Executive Vice President and Secretary of the Corporation and Executive Vice
President and Cashier of the Bank; Director, Vice President, Secretary and
Treasurer of BOC Title of Hampton Roads, Inc.; and Director, Vice President,
Secretary and Treasurer of BOC Insurance Agency of Hampton Roads, Inc.
Richard R. Early, 55
Senior Vice President and Senior Trust Officer of the Bank since September
1996. Prior to accepting the position with the Bank, Mr. Early was Senior Vice
President and Senior Trust Officer at Bank of Lancaster from May 1990 through
September 1996.
Simon Hounslow, 35
Senior Vice President and Commercial Loan Officer of the Bank.
Item 10. Executive Compensation.
Summary Executive Compensation Table
The following table sets forth the annual compensation paid or accrued by
the Corporation and its subsidiaries to Edward J. Woodard, Jr., CLBB, Chairman
of the Board, President and Chief Executive Officer of the Corporation and the
Bank for the past three fiscal years. Compensation for each other executive
officer of the Corporation or the Bank did not exceed $100,000 in 1999 and,
therefore, is not shown in the table.
Summary Compensation Table
Name and
Principal Position Annual Compensation
Year Salary(1) Bonus
Edward J. Woodard, Jr., 1999 $206,099 $18,500
CLBB 1998 191,300 15,000
Chairman of the Board 1997 177,100 10,000
President and Chief
Executive Officer
(1) Includes base salary and director fees.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Management
The following table sets forth as of March 14, 2000, certain information with
respect to each director including age, principal occupation, the year each
nominee or incumbent director first became a director, and each such person's
beneficial ownership of the Corporation's Common Stock. Unless otherwise
indicated, the business experience and principal occupation shown for each
nominee or incumbent director has extended five or more years. All of the
Corporation's directors and named executive officer receive mail at the
Corporation's offices.
<TABLE>
<CAPTION>
Number and
Served as Principal Occupation Percent of
Name Age Director During Past Shares Beneficially
Since Five Years Owned (1)(2)
<S> <C> <C> <C> <C>
George H. Burton, Jr. 89 1981 President of Burton 63,850(3)
Lumber Corp., a 3.52%
building materials
and supplies company
located in Chesapeake,
Virginia
Morton Goldmeier 76 1988 President of Hampton 72,350(4)
Roads Management 3.98%
Associates, Inc.
William P. Kellam 85 1971 Retired President of 32,826(5)
Kellam-Eaton Insurance 1.81%
Agency, Inc. (real estate
and insurance),
Virginia Beach, Virginia,
a position he held until
1986.
Thomas W. Moss, Jr. 72 1999 Attorney, President & 470
Sole Owner of Thomas *
W. Moss, Jr., P.C.
located in Norfolk,
Virginia.
William D. Payne, M.D. 64 1988 General, Laproscopic 17,424(6)
and Endoscopic Surgeon *
and President with Drs.
Payne, Ives & Holland, Inc.,
General, Laproscopic and
Endoscopic Surgery in
Norfolk, Virginia
Herbert L. Perlin 59 1987 President of Perlin 42,034(7)
Benefit Resources, Inc., 2.32%
a regional pension
administration company
located in Chesapeake,
Virginia.
Richard J. Tavss 60 1988 Senior counsel of 117,375(8)
Tavss, Fletcher, 6.47%
Maiden & King, P.C. in
Norfolk, Virginia.
Edward J. Woodard, Jr. 57 1973 Chairman of the Board, 37,505(9)
CLBB President and Chief 2.07%
Executive Officer of
the Corporation and
the Bank.
Kenneth J. Young 49 1999 President of Leisure 504
& Recreation Consultants, *
Inc., Tampa, Florida
Morton M. Zedd 64 1971 Real estate developer 92,762(10)
and investor in 5.11%
Richmond, Virginia.
All Directors and executive officers as Group (12 persons) 509,459
28.06%
<PAGE>
<FN>
*Percentage of ownership is less than 1% of the outstanding shares of
Common Stock of the Corporation.
(1)Beneficial ownership as reported in the above table has been determined
in accordance with Rule 13d-3 of the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended, and includes shares, where
applicable, which an individual has the right to acquire within 60 days through
the exercise of stock options.
(2)Based on 1,659,406 issued and outstanding shares of common stock as of
March 14, 2000 and stock options either currently exercisable or which will
become exercisable within sixty (60) days.
(3)Includes 11,176 shares which Mr. Burton has the right to acquire through the
exercise of stock options, (ii) 43,697 shares registered in the name of George
H. Burton Revocable Living Trust, and (iii) 8,200 shares registered in the name
of Clarice B. Burton Revocable Living Trust.
(4)Includes (i) 16,000 shares which Mr. Goldmeier has the right to acquire
through the exercise of stock options and (ii) 13,325 shares owned by Mr.
Goldmeier's wife, for which Mr. Goldmeier disclaims beneficial ownership.
(5)Includes (i) 16,000 shares which Mr. Kellam has the right to acquire through
the exercise of stock options and (ii) 16,092 shares registered in the name of
Mr. Kellam's wife, for which Mr. Kellam disclaims beneficial ownership.
(6)Includes (i) 16,000 shares which Dr. Payne has the right to acquire through
the exercise of stock options and (ii) 607 shares registered
in the name of Dr. Payne's wife, for which Dr. Payne disclaims beneficial
ownership.
(7)Includes (i) 16,000 shares which Mr. Perlin has the right to acquire through
the exercise of stock options, (ii) 18,210 shares registered in the name of
Herbert L. Perlin, Profit Sharing Trust, of which Mr. Perlin is Acting Trustee,
and (iii) 3,886 shares owned jointly by Mr. Perlin and his wife.
(8)Includes (i) 16,000 shares which Mr. Tavss has the right to acquire through
the exercise of stock options, (ii) 1,209 shares registered in the name of
Richard J. Tavss, Custodian for Bobbie J. Tavss, (iii) 745 shares registered in
the name of the Estate of Daniel J. Tavss c/o Richard J. Tavss, trustee under
the will, and (iv) 201 shares registered in the name of Richard J. Tavss,
Custodian for Sanders T. Schoolar V.
(9)Includes (i) 19,133 shares which Mr. Woodard has the right to acquire
through the exercise of stock options, (ii) 617 shares registered in the name
of E. J. Woodard, Jr., Custodian for Troy Brandon Woodard, (iii) 1,466 shares
registered in the name of E. J. Woodard, Jr. and Sharon W. Woodard, Custodians
of Troy Brandon Woodard, (iv) 2,022 shares held in trust, representing the
proceeds of a self directed Individual Retirement Account for the benefit of E.
J. Woodard, Jr., and (v) 3,886 shares owned jointly by Mr. Woodard and his
wife.
(10)Includes (i) 16,000 shares which Mr. Zedd has the right to acquire
through the exercise of stock options, (ii) 64,318 shares registered in the
name of Five Associates, a Virginia general partnership, of which Mr. Zedd is
managing partner, and (iii) 11,557 shares in the Maxwell Zedd Trust, of which
Mr. Zedd is the beneficiary.
<PAGE>
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information with respect to
beneficial ownership of the Corporation's Common Stock as of December 31, 1999
by each beneficial owner of more than 5% of the Corporation's Common Stock.
Name and Address
Of Holder Beneficial Ownerhship
Shares Percent
John Hancock Mutual Life 91,437 5.6%
Insurance Company
101 Huntington Avenue
Boston, Massachusetts 02199
<PAGE>
Item 12. Certain Relationships and Related Transactions.
Loans to Officers and Directors
Certain directors and officers of the Corporation and the Bank, members
of their immediate families, and corporations, partnerships and other entities
with which such persons are associated, are customers of the Bank. As such,
some of these persons engaged in transactions with the Bank in the ordinary
course of business during 1999, and will have additional transactions with the
Bank in the future. All loans extended and commitments to lend by the Bank to
such persons are made in the ordinary course of business during 1999, and will
have additional transactions with the Bank in the future. All loans extended
and commitments to lend by the Bank to such persons are made in the ordinary
course of business upon substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions
with unaffiliated persons and do not involve more than the normal risk of
collectability or present other unfavorable features.
As of December 31, 1999, the amount of loans from the Bank to all
officers and directors of the Corporation and the Bank, and entities in
which they are associated, was approximately $3.2 million. This amount
represented 26.3% of the total equity capital of the Bank as of December 31,
1999.
Business Relationships and Transactions with Management
In the ordinary course of its business, the Corporation and the Bank
engaged in certain transactions with their officers and directors in which such
officers and directors have a significant interest. All such transactions have
been made on substantially the same terms as those prevailing at the time for
comparable transactions with unaffiliated parties. The Bank has from time to
time retained the Norfolk, Virginia law firm of Tavss, Fletcher, Maiden and
King, P.C., of which Mr. Tavss, a director of the Corporation and the Bank, is
senior counsel, to perform certain legal services for the Corporation and the
Bank.
In 1984, the Bank entered into a lease with Boush Bank Building
Associates, a limited partnership (the "Partnership"), to rent the headquarters
building (the "Headquarters") of the Corporation and the Bank, which is located
at the corners of Freemason and Boush Streets, Norfolk, Virginia. The general
partner of the Partnership is Boush Bank Building Corporation. All of the
limited partners of the Partnership, namely Messrs. Woodard, Burton, and
Kellam, are directors of the Corporation and the Bank. The lease requires the
Bank to pay all taxes, maintenance and insurance. The term of the lease if
twenty-three years and eleven months, and began on December 19, 1984. In
connection with this property, the lessor has secured financing in the form of
a $1,600,000 industrial development revenue bond from the Norfolk Redevelopment
and Housing Authority payable in annual installments, commencing on January 1,
1987, at amounts equal to 3% of the then outstanding principal balance through
the twenty-fifth year, when the unpaid balance will become due. Interest on
this bond is payable monthly, at 68.6% of the prime rate of Crestar Bank in
Richmond, Virginia. Monthly rent paid by the Bank is equal to interest on the
above bond, plus any interest associated with secondary financing provided the
lessor by the Bank. The Bank has the right to purchase, at its option, an
undivided interest in the property at undepreciated original cost, and is
obligated to purchase in each January after December 31, 1986, an undivided
interest in an amount equal to 90% of the legal amount allowed by banking
regulations for investments in fixed properties, unless the Bank's return on
average assets is less than seven-tenths of one percent. Under this provision
the Bank has purchased 54.4% of this property for a total of $999,611. No
purchases have been made after 1988. The terms of the lease are not less
favorable than could be obtained from a non-related party.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) (3) Exhibits
3.1 Articles of Incorporation. Filed June 15, 1988, as Exhibit 3.1 to the
Registrant's Form S-4, and incorporated herein by reference.
3.2 By laws. Filed June 15, 1988, as Exhibit 3.2 to the Registrant's Form S-4,
and incorporated herein by reference.
3.3 Amendment to Articles of Incorporation dated July 28, 1989. Filed March
20, 1990, as Exhibit 3.3 to the Registrant's Form 10-K, and incorporated herein
by reference.
10.1 Lease. Filed June 15, 1988, as Exhibit 10.1 to theRegistrants Form S-4,
and incorporated herein by reference.
10.5 Employee Director's Deferred Compensation Plan. Filed March 21, 1989, as
Exhibit 10.5 to the Registrant's Form 10-K, and incorporated herein by
reference.
10.6 Non-Employee Director's Deferred Compensation Plan. Filed March 21, 1989,
as Exhibit 10.6 to the Registrant's Form 10-K, and incorporated herein by
reference.
10.7 Deferred Supplemental Compensation Agreement with Edward J. Woodard, Jr.
Filed March 21, 1989, as Exhibit 10.7 to the Registrant's Form 10-K, and
incorporated herein by reference.
10.8 Employment Agreement with Edward J. Woodard, Jr. Filed March 20, 1990, as
Exhibit 10.8 to Registrant's Form 10-K, and incorporated herein by reference.
10.9 Employment Agreement with John H. Gayle. Filed March 28, 1991, as Exhibit
10.9 to Registrant's Form 10-K, and incorporated herein by reference.
10.10 Amendment to Deferred Supplemental Compensation Agreement with Edward J.
Woodard, Jr. Filed March 30,1994, as Exhibit 10.10 to Registrant's Form 10-K,
and incorporated herein by reference.
10.11 Amendment to Employment Agreement with Edward J. Woodard, Jr. Filed
March 30, 1994, as Exhibit 10.11 to Registrant's Form 10-K, and incorporated
herein by reference.
10.12 Amendment to Employment Agreement with John H. Gayle. Filed March 30,
1994, as Exhibit 10.12 to Registrant's Form 10-K, and incorporated herein by
reference.
10.13 Non-Employee Director Stock Compensation Plan. Filed March 30, 1996, as
Exhibit 10.13 to Registrant's form 10-K, and incorporated herein by reference.
10.14 Second amendment to deferred supplemental agreement dated December 27,
1978, with Edward J. Woodard, Jr. Filed herein.
(b) Reports filed on Form 8-K for the quarter ended December 31, 1999.
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 29, 2000 By: /s/
E. J. Woodard, Jr., CLBB
Chairman of the Board
President & CEO
By: /s/
John H. Gayle
Executive Vice President &
Cashier (Principal Financial
Officer)
By: /s/
George H. Burton
Director
By: /s/
Morton Goldmeier
Director
By: /s/
William P. Kellam
Director
By: /s/
Thomas W. Moss, Jr.
Director
By: /s/
William D. Payne, M.D.
Director
By: /s/
Herbert L. Perlin
Director
By: /s/
Richard J. Tavss
Director
By: /s/
Kenneth J. Young
Director
By: /s/
Morton M. Zedd
Director
<PAGE>
ANNUAL REPORT ON FORM 10-KSB
ITEM 8,
LIST OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 1999
COMMONWEALTH BANKSHARES, INC.
<PAGE>
Commonwealth Bankshares, Inc.
List of Financial Statements
The following consolidated financial statements of Commonwealth Bankshares,
Inc. and subsidiary are included:
Consolidated balance sheets--December 31, 1999 and 1998.
Consolidated statements of income--Years ended December 31, 1999, 1998 and
1997.
Consolidated statements of stockholders' equity--Years ended December 31, 1999,
1998 and 1997.
Consolidated statements of cash flows--Years ended December 31, 1999, 1998 and
1997.
Notes to consolidated financial statements--December 31, 1999.
Schedules to the consolidated financial statements required by Article 9 of
Regulations S-X are not required under the related instructions or are
inapplicable, and therefore have been omitted.
<PAGE>
INDEX
PAGE
Independent Auditors' Report F-2
Financial Statements
Consolidated balance sheets F-3
Consolidated statements of income F-5
Consolidated statements of stockholders' equity F-6
Consolidated statements of cash flows F-7
Notes to consolidated financial statements F-8
F-1
<PAGE>
Independent Auditors' Report
Board of Directors
Commonwealth Bankshares, Inc.
Norfolk, Virginia
We have audited the accompanying consolidated balance sheets of Commonwealth
Bankshares, Inc. and its subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Commonwealth
Bankshares, Inc. and its subsidiary as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
POTI, WALTON & ASSOCIATES, PC
Richmond, Virginia
January 13, 2000
F-2
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 6,320,567 $ 5,383,384
Federal funds sold - 7,378,500
---------- ----------
Total cash and cash equivalents 6,320,567 12,761,884
Investment securities:
Available for sale 15,478,387 16,828,831
Held to maturity 4,706,761 5,665,833
Equity securities, restricted, at cost 548,078 503,678
Loans receivable:
Commercial 23,306,635 15,990,112
Commercial construction 1,711,924 1,522,464
Commercial mortgage 65,985,847 46,379,110
Residential mortgage 25,146,370 19,576,529
Installment loans to individuals 6,538,126 5,564,235
Other 2,816,716 2,817,787
----------- -----------
Gross loans 125,505,618 91,850,237
Unearned income (460,527) (274,472)
Allowance for loan losses (931,000) (969,000)
----------- -----------
Loans, net 124,114,091 90,606,765
Premises and equipment, net 2,822,142 2,742,015
Foreclosed real estate 601,101 998,697
Accrued interest receivable 1,044,211 856,458
Other assets 1,380,269 1,273,083
----------- -----------
$157,015,607 $132,237,244
=========== ===========
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
<S> <C> <C>
Liabilities:
Deposits:
Noninterest-bearing demand deposits $ 15,071,902 $ 16,433,391
Interest-bearing:
Demand deposits 18,241,708 16,895,521
Savings deposits 4,658,485 5,303,955
Other time deposits 100,385,874 77,536,948
----------- -----------
Total deposits 138,357,969 116,169,815
Short-term borrowings 4,156,193 2,483,725
Long-term debt 530,944 557,056
Accrued interest payable 550,917 381,067
Other liabilities 1,192,986 1,065,836
----------- -----------
Total liabilities 144,789,009 120,657,499
Stockholders' equity:
Common stock, par value $2.50, 5,000,000
shares authorized; 1,644,743 and
1,084,153 shares issued and
outstanding in 1999 and 1998,
respectively 4,111,858 2,710,383
Additional paid-in capital 5,274,788 5,175,939
Retained earnings 3,367,585 3,740,072
Accumulated other comprehensive loss (527,633) (46,649)
----------- -----------
Total stockholders' equity 12,226,598 11,579,745
----------- -----------
$157,015,607 $132,237,244
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial
Statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
<S> <C> <C> <C>
Interest income:
Loans, including fees $9,512,833 $7,837,677 $6,774,908
Investment securities 1,296,281 1,379,586 1,559,530
Other interest income 51,463 329,628 218,649
---------- --------- ---------
Total interest income 10,860,577 9,546,891 8,553,087
Interest expense:
Deposits 5,262,773 4,906,526 4,235,619
Other interest expense 238,804 153,547 174,373
---------- --------- ---------
Total interest expense 5,501,577 5,060,073 4,409,992
---------- --------- ---------
Net interest income 5,359,000 4,486,818 4,143,095
Provision for loan losses 109,823 101,738 49,762
---------- --------- ---------
Net interest income after
provision for loan losses 5,249,177 4,385,080 4,093,333
Noninterest income (loss):
Service charges on deposit
Accounts 842,240 824,827 526,540
Other service charges and fees 386,706 369,776 273,044
Other (19,750) (7,933) 69,435
---------- --------- ---------
Total noninterest income 1,209,196 1,186,670 869,019
Noninterest expenses:
Salaries and employee benefits 2,290,700 1,862,484 1,709,545
Net occupancy expense 464,458 435,770 420,943
Furniture and equipment expense 609,499 548,691 481,917
Other operating expense 1,491,902 1,137,214 992,290
---------- --------- ---------
Total noninterest expenses 4,856,559 3,984,159 3,604,695
---------- --------- ---------
Income before income taxes 1,601,814 1,587,591 1,357,657
Provision for income taxes 446,424 482,339 427,692
---------- --------- ---------
Net income $1,155,390 $1,105,252 $ 929,965
========== ========== ==========
Per share data:
Basic $ .71 $ .68 $ .57
========== ========== ==========
Diluted $ .64 $ .62 $ .53
========== ========== ==========
<FN>
The accompanying notes are an integeral part of these consolidated financial
Statements.
</TABLE>
F-5
<PAGE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Accumulated Other
Additional Comprehensive
Common Paid-in
Stock Capital Earnings Income (Loss) Total
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $2,368,752 $4,106,361 $3,121,362 $(28,005) $ 9,568,470
Comprehensive income:
Net income - - 929,965 - 929,965
Net change in unrealized
gain on securities
available for sale - - - 35,648 35,648
-----------
Total comprehensive income 965,613
6% stock dividend -
56,593 shares 141,483 430,107 (574,185) - (2,595)
----------- ---------- ---------- -------- -----------
Balance, December 31, 1997 2,510,235 4,536,468 3,477,142 7,643 10,531,488
Comprehensive income:
Net income - - 1,105,252 - 1,105,252
Net change in unrealized
loss on securities
available for sale - - - (54,292) (54,292)
-----------
Total comprehensive income 1,050,960
8% stock dividend -
80,059 shares 200,148 639,471 (842,322) - (2,703)
----------- ---------- ---------- -------- -----------
Balance, December 31, 1998 2,710,383 5,175,939 3,740,072 (46,649) 11,579,745
Comprehensive income:
Net income - - 1,155,390 - 1,155,390
Net change in unrealized
loss on securities
available for sale - - - (480,984) (480,984)
-----------
Total comprehensive income 674,406
Issuance of common stock -
18,636 shares 46,590 98,849 - - 145,439
50% stock dividend -
541,954 shares 1,354,885 - (1,354,885) - -
Cash dividend -
$.105 per share - - (172,992) - (172,992)
---------- ---------- ---------- -------- -----------
Balance, December 31, 1999 $4,111,858 $5,274,788 $3,367,585 $(527,633) $12,226,598
========== ========== ========== ========= ===========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, 1997
1999 1998 1997
<S> <C> <C> <C>
Operating activities:
Net income $1,155,390 $1,105,252 $ 929,965
Adjustments to reconcile
net income to net
cash from operating
activities:
Provision for loan losses 109,823 101,738 49,762
Depreciation and amortization 411,795 370,417 338,200
Other, net (15,477) 133,279 78,099
Net change in:
Accrued interest receivable (187,753) (55,545) (64,821)
Accrued interest payable 169,850 (22,772) 69,677
Other assets 362,897 (616,565) (217,407)
---------- ---------- ----------
Net cash from operating activities 2,006,525 1,015,804 1,183,475
Investing activities:
Purchase of securities held
to maturity - (992,619) (3,098,544)
Purchase of securities
available for sale (3,773,059) (12,599,300) (8,251,207)
Purchase of equity securities,
Restricted (44,400) (352,000) -
Net purchase of premises and
Equipment (494,140) (782,043) (221,881)
Net expenditures on foreclosed
real estate (30,448) (157,811) (138,820)
Net change in loans (33,692,449) (13,465,516) (12,429,517)
Proceeds from:
Maturities of securities held
to maturity 959,072 6,138,292 5,495,645
Sales and maturities of
securities available for sale 4,386,431 7,394,086 6,916,709
Sale of real estate acquired in
settlement of loans 434,194 670,000 302,534
---------- ---------- ----------
Net cash used in investing activities (32,254,799) (14,146,911) (11,425,081)
Financing activities:
Net change in:
Other time deposits 22,848,926 11,745,243 8,261,228
Demand, interest bearing demand
and savings deposits (660,772) 3,664,522 2,236,368
Short-term borrowings 1,672,468 (276,343) (813,282)
Other (53,665) (28,815) (28,707)
---------- ---------- ----------
Net cash from financing activities 23,806,957 15,104,607 9,655,607
---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents (6,441,317) 1,973,500 (585,999)
Cash and cash equivalents, January 1 12,761,884 10,788,384 11,374,383
---------- ---------- ----------
Cash and cash equivalents, December 31 $6,320,567 $12,761,884 $10,788,384
========== =========== ===========
Supplemental disclosure of cash paid during the year for:
Interest $5,331,577 $5,082,993 $4,340,315
Income taxes 562,366 631,174 433,635
<FN>
The accompanying notes are an integral part of these consolidated financial
Statements.
</TABLE>
F-7
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
Note 1 Summary of Significant Accounting Policies
The accounting and reporting policies of Commonwealth Bankshares, Inc. (the
Parent) and its subsidiary, Bank of the Commonwealth (the Bank) and its
subsidiaries, BOC Title of Hampton Roads, Inc. and BOC Insurance Agencies of
Hampton Roads, Inc., are in accordance with generally accepted accounting
principles and conform to accepted practices within the banking industry. A
summary of significant accounting policies is briefly described below.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Parent and the Bank and its
subsidiaries, collectively referred to as "the Company." All significant
intercompany balances and transactions have been eliminated in consolidation.
Nature of Operations - The Bank operates under a state bank charter and
provides full banking services, including trust services. As a state bank, the
Bank is subject to regulation of the Bureau of Financial Institutions and the
Federal Reserve System. The Bank serves Norfolk and Virginia Beach, Virginia
through its six banking offices.
Estimates - Management uses estimates and assumptions in preparing financial
statements. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities
and the reported revenue and expenses.
Investment Securities - Investment securities which the Bank intends to hold
until maturity or until called are classified as held to maturity. These
investment securities are stated at cost, adjusted for amortization of premiums
and accretion of discounts.
Investment securities which the Bank intends to hold for indefinite periods of
time, including investment securities used as part of the Bank's
asset/liability management strategy, are classified as available for sale.
These investment securities are carried at fair value. Net unrealized gains
and losses, net of deferred income taxes, are excluded from earnings and
reported as accumulated other comprehensive income (loss).
Gains and losses on the sale of investment securities are determined using the
specific identification method.
F-8
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Note 1 Summary of Significant Accounting Policies (Continued)
Loans Receivable - Loans receivable are intended to be held until maturity and
are shown on the balance sheet net of the allowance for loan losses. Interest
is computed by methods which generally result in level rates of return on
principal. Interest on past due and problem loans is accrued until serious
doubt arises as to the collectibility of the interest.
The Bank grants commercial, real estate, and consumer installment loans to its
customers. Collateral requirements for loans are determined on a loan by loan
basis depending upon the purpose of the loan and the financial condition of the
borrower.
In the normal course of business, to meet the credit needs of its customers,
the Bank has made commitments to extend credit. These commitments represent a
credit risk which is not recognized in the balance sheet. The Bank uses the
same credit policies in making commitments as it does for other loans.
Commitments to extend credit are generally made for a period of one year or
less and interest rates are determined when funds are disbursed. Collateral
and other security for the loans are determined on a case by case basis. Since
some of the commitments are expected to expire without being drawn upon, the
contract or notional amounts do not necessarily represent future cash
requirements.
Allowance for Loan Losses - The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, and current economic
conditions.
Foreclosed Real Estate - Foreclosed real estate is stated at the lower of cost
or estimated fair market value of the property, less estimated disposal costs,
if any. Cost includes loan principal and accrued interest. Any excess of
cost over the estimated fair market value at the time of acquisition is charged
to the allowance for loan losses. The estimated fair market value is reviewed
periodically by management and any write-downs are charged against current
earnings.
F-9
<PAGE>
COMMONWEALTH BANKSHARES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Note 1 Summary of Significant Accounting Policies (Continued)
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Deprecation is computed generally by the straight-
line method. It is the Company's policy to capitalize additions and
improvements and depreciate the cost thereof over the estimated useful lives as
follows:
Buildings and improvements 5 to 40 years
Furniture and equipment 3 to 10 years
Income Taxes - Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in
tax laws on rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
Per Share Data - In February 1997 the FASB issued Statement No. 128, "Earnings
per Share," which established standards for computing and presenting earnings
per share information. The Company adopted this new accounting standard as of
December 31, 1997 and there was no material impact on the consolidated
Financial statements.
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding. Diluted earnings per
share is computed by dividing net income by the weighted average common and
potential dilutive common equivalent shares outstanding, determined as follows:
1999 1998 1997
Weighted average shares
outstanding used to compute basic
earnings per share 1,631,684 1,626,107 1,626,107
Incremental shares issuable
upon the assumed exercise of
stock options 172,517 162,879 129,669
---------- ---------- ----------
Shares used to compute diluted
earnings per share 1,804,201 1,788,986 1,755,776
========== ========== ==========
On April 27, 1999, the Board of Directors declared a 3 for 2 stock split
effected in the form of a 50 percent stock dividend. Accordingly, outstanding
shares of common stock were increased by 541,954 shares and a transfer of
$1,354,885, representing the par value of additional shares issued, was made
from retained earnings to common stock. The Company's prior years per share
data has been restated to reflect the 1999 stock dividend
F-10
<PAGE>
COMMONWEALTH BANKSHARES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Note 1 Summary of Significant Accounting Policies (Continued)
Financial Instruments - In the ordinary course of business the Bank has entered
into off-balance sheet financial instruments consisting of commitments to
extend credit, commitments under credit card arrangements, commercial letters
of credit, and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or related fees are
incurred or received.
Fair Value of Financial Instruments - The carrying value of cash and cash
equivalents, accrued interest receivable, demand deposits, savings deposits,
and short-term borrowings approximates fair value. The fair value of
securities is based on quoted market prices. The remainder of the recorded
financial instruments were valued based on the present value of estimated
future cash flows, discounted at various rates in effect for similar
instruments at year end.
Fair values for off-balance sheet lending commitments approximate the contract
or notional value taking into account the remaining terms of the agreements and
the counterparties' credit standings.
Cash and Cash Equivalents - For purposes of the consolidated statements of cash
flows, cash and cash equivalents includes cash and due from banks and federal
funds sold.
Reclassifications - Certain prior year amounts have been reclassified to
conform to the 1999 presentation. These reclassifications have no effect on
previously reported net income.
Note 2 Concentrations of Credit Risk
At December 31, 1999, the Bank's cash and due from banks included three
commercial bank deposit accounts aggregating $2,618,422 in excess of the
Federal Deposit Insurance Corporation limit of $100,000 per institution.
F-11
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Note 3 Investment Securities
The carrying and market values of investment securities are as follows:
<TABLE>
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1999
Available for sale:
U.S. Government and agency
Securities $4,499,998 $ - $(291,551) $ 4,208,447
Mortgage-backed securities 7,084,258 2,026 (186,367) 6,899,917
State and municipal securities 4,443,575 - (296,052) 4,147,523
Other equities 250,000 - (27,500) 222,500
---------- ------ --------- ----------
$16,277,831 $2,026 $(801,470) $15,478,387
=========== ======= ========= ===========
Held to maturity:
U.S. Government and agency
Securities $ 750,000 $ - $(117,656) $ 632,344
Mortgage-backed securities 2,170,929 17,372 (34,647) 2,153,654
State and municipal securities 1,785,832 7,075 (11,166) 1,781,741
---------- ------ -------- ---------
$ 4,706,761 $24,447 $(163,469) $ 4,567,739
=========== ======= ========= ===========
December 31, 1998
Available for sale:
U.S. Government and agency
Securities $ 3,502,101 $ 13,305 $ (11,510) $ 3,503,896
Mortgage-backed securities 8,778,983 25,574 (68,973) 8,735,584
State and municipal securities 4,618,427 12,978 (42,054) 4,589,351
---------- ------- -------- ----------
$16,899,511 $51,857 $(122,537) $16,828,831
========== ======= ========= ===========
Held to maturity:
U.S. Government and agency
Securities $1,071,938 $ 2,215 $ (57,010) $ 1,017,143
Mortgage-backed securities 2,813,503 10,522 (23,472) 2,800,553
State and municipal securities 1,780,392 35,839 - 1,816,231
---------- -------- --------- ----------
$5,665,833 $48,576 $ (80,482) $ 5,633,927
========== ======= ========= ===========
</TABLE>
F-12
<PAGE>
Note 3 Investment Securities (Continued)
A maturity schedule of investment securities as of December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
Carrying Market Carrying Market
Amount Value Amount Value
<S> <C> <C> <C> <C>
Due:
In one year or less $249,998 $233,045 $ - $ -
After one year through
five years 420,726 394,009 1,912,133 1,786,404
After five years through
ten years 4,407,476 4,176,293 623,699 627,681
After ten years 3,865,373 3,552,623 - -
--------- --------- --------- ---------
8,943,573 8,355,970 2,535,832 2,414,085
Mortgage-backed securities 7,084,258 6,899,917 2,170,929 2,153,654
Equity securities 250,000 222,500 - -
--------- --------- --------- ---------
$16,277,831 $15,478,387 $4,706,761 $4,567,739
========== ========== ========= =========
</TABLE>
Securities with a carrying value of $20,667,040 and $10,472,897 and market
value of $19,757,340 and $10,381,425 at December 31, 1999 and 1998,
respectively, were pledged as collateral to secure public deposits and for
other purposes.
Note 4 Loans Receivable
Although the Bank has a diversified loan portfolio, a substantial portion of
the borrowers' ability to honor their contracts is dependent upon the
commercial real estate operators and hotel/motel sectors. The majority of
these loans are collateralized by a deed of trust on real estate. The
approximate outstanding balances of loans in these sectors are as follows:
December 31,
1999 1998
Commercial real estate operators $21,900,000 $13,700,000
Hotel/motel 13,200,000 6,800,000
F-13
<PAGE>
Note 4 Loans Receivable (Continued)
A summary of transactions in the allowance for loan losses follows:
1999 1998 1997
Balance at beginning of year $969,000 $969,000 $932,000
Provision charged to operating expense 109,823 101,738 49,762
Loan charge-offs (156,963) (105,218) (30,576)
Loan recoveries 9,140 3,480 17,814
-------- -------- -------
Balance at end of year $931,000 $969,000 $969,000
======== ======== ========
Note 5 Premises and Equipment
Premises and equipment are summarized as follows:
December 31,
1999 1998
Land $ 263,802 $ 263,802
Buildings and improvements 1,603,264 1,612,422
Leasehold improvements 370,853 338,576
Furniture and equipment 2,775,892 2,997,073
Construction in progress 220,301 71,398
---------- ----------
5,234,112 5,283,271
Less accumulated depreciation 2,411,970 2,541,256
---------- ----------
$2,822,142 $2,742,015
F-14 ========== ==========
<PAGE>
Note 6 Deposits
The aggregate amount of time deposits with minimum denominations of $100,000,
was approximately $17,205,000 and $15,636,000 at December 31, 1999 and 1998,
respectively.
At December 31, 1999, the scheduled maturities of certificates of deposit
included in other time deposits on the balance sheet are as follows:
2000 $39,235,088
2001 36,574,982
2002 3,008,287
2003 3,696,971
2004 10,160,472
Thereafter 17,192
-----------
$92,692,992
===========
Note 7 Dividend Limitations
Dividends may be paid to the Parent by the Bank under formulas established by
the appropriate regulatory authorities. These formulas contemplate that the
current earnings and earnings retained for the two preceding years may be paid
to the Parent without regulatory approval. In 2000, the Bank can initiate
dividend payments without said regulatory approvals of approximately $2,275,000
plus an additional amount equal to the Bank's net earnings for 2000 up to the
date of any such dividend declaration. Substantially all of the retained
earnings of the Parent are represented by undistributed earnings of the Bank.
Note 8 Short-Term Borrowings
Securities sold under agreements to repurchase generally mature within one to
three days from the transaction date. The maximum amount outstanding at the
end of a month was $5,412,468 and $3,948,091 during 1999 and 1998,
respectively. The average daily balance was $3,763,912 and $2,853,812 during
1999 and 1998, respectively. The securities underlying these agreements were
under the Bank's control.
F-15
<PAGE>
Note 9 Income Taxes
The current and deferred components of income tax expense are as follows:
1999 1998 1997
Current $540,657 $563,490 $492,714
Deferred (94,233) (81,151) (65,022)
-------- -------- --------
Provision for income taxes $446,424 $482,339 $427,692
======== ======== ========
A reconciliation between the provision for income taxes and the amount computed
by multiplying income by the current statutory 34% federal income tax rate is
as follows:
1999 1998 1997
Income tax expense at
statutory rates $544,617 $539,781 $461,603
Increase (decrease) due to:
Tax exempt income (98,220) (61,303) (42,684)
Other 27 3,861 8,773
-------- -------- --------
Provision for income taxes $446,424 $482,339 $427,692
======== ======== ========
Deferred income taxes result from timing differences between taxable income and
the income for financial reporting purposes. The only significant timing
difference relates to the provision for loan losses.
The net deferred tax asset consists of the following:
December 31,
1999 1998
Deferred tax asset $1,060,531 $705,173
Deferred tax liability (165,757) (152,754)
---------- --------
Net deferred tax asset $ 894,774 $552,419
========== ========
F-16
<PAGE>
Note 10 Related Parties
During the year, officers, directors, principal stockholders, and their
affiliates (related parties) were customers of and had transactions with the
Bank in the ordinary course of business. In management's opinion these
transactions were made on substantially the same terms as those prevailing for
other customers for comparable transactions and did not involve more than
normal risks. Loan activity to related parties is as follows:
1999 1998
Beginning of year $2,493,226 $2,553,484
Additional borrowings 1,724,906 1,476,197
Curtailments (1,056,743) (1,536,455)
---------- ----------
End of year $3,161,389 $2,493,226
========== ==========
Note 11 Regulatory Matters
The Parent (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Parent's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Parent and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Parent and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1999 and 1998, that the Parent and the Bank met all capital adequacy
requirements to which they are subject.
F-17
<PAGE>
Note 11 Regulatory Matters (Continued)
As of December 31, 1999, the most recent notification from the Federal Reserve
Bank categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, an
institution must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the following tables. There are no conditions
or events since the notification that management believes have changed the
Bank's category. The Parent's and the Bank's actual capital amounts and ratios
as of December 31, 1999 and 1998 are also presented in the table.
<TABLE>
<CAPTION>
Minimum To Be
Well Capitalized
Under Prompt
Minimum Capital Corrective Action
Actual Requirements Provisions
---------------- ---------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total capital to risk weighted assets:
Consolidated $13,685 10.8% $10,136 8.0% N/A N/A
Bank 13,495 10.7 10,125 8.0 $12,656 10.0%
Tier I capital to risk weighted assets:
Consolidated 12,754 10.1 5,068 4.0 N/A N/A
Bank 12,564 9.9 5,063 4.0 7,594 6.0
Tier I capital to average assets:
Consolidated 12,754 8.3 6,133 4.0 N/A N/A
Bank 12,564 8.2 6,128 4.0 7,660 5.0
As of December 31, 1998:
Total capital to risk weighted assets:
Consolidated 12,595 13.0 7,750 8.0 N/A N/A
Bank 12,367 12.8 7,741 8.0 9,676 10.0
Tier I capital to risk weighted assets:
Consolidated 11,626 12.0 3,875 4.0 N/A N/A
Bank 11,398 11.8 3,870 4.0 5,806 6.0
Tier I capital to average assets:
Consolidated 11,626 8.9 5,235 4.0 N/A N/A
Bank 11,398 8.7 5,232 4.0 6,540 5.0
</TABLE>
F-18
<PAGE>
Note 12 Disclosures About Fair Value of Financial Instruments
Fair value and the carrying value of the Bank's recorded financial instruments
are as follows (in thousands):
December 31, 1999 December 31, 1998
Carrying Carrying
Amount Fair Value Amount Fair Value
Cash and cash equivalents $ 6,298 $ 6,298 $12,718 $12,718
Investment securities 20,185 20,047 22,494 22,461
Net loans 123,720 123,195 90,235 92,934
Deposits 138,430 138,408 116,280 118,356
Short-term borrowings 4,156 4,156 2,484 2,484
Long-term debt 531 476 557 535
The contract or notional amount of financial instruments with off-balance sheet
risk are as follows:
December 31,
1999 1998
Commitments to extend credit $20,590,217 $12,983,891
Standby letters of credit 440,941 568,456
Note 13 Year 2000 Statement
The Bank was successful in upgrading and modifying existing computer systems so
there were no problems in advancing into the year 2000. This project cost
approximately $110,000 and the Bank expects no problems in this area in the
future.
F-19
<PAGE>
Note 14 Parent Company Only Financial Information
COMMONWEALTH BANKSHARES, INC.
(PARENT COMPANY ONLY)
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
Cash on deposit with subsidiary $ 58,219 $ 104,197
Investment in subsidiary 12,035,915 11,351,747
Due from subsidiary 991 2,172
Premises 117,962 121,629
Prepaid expense 14,089 -
----------- -----------
$12,227,176 $11,579,745
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 578 $ -
Total stockholders' equity 12,226,598 11,579,745
----------- -----------
$12,227,176 $11,579,745
=========== ===========
F-20
<PAGE>
Note 14 Parent Company Only Financial Information (Continued)
COMMONWEALTH BANKSHARES, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
Income:
Rental income $ 6,500 $ 2,000 $ -
--------- --------- --------
Total income 6,500 2,000 -
Expenses:
Legal expense 12,232 4,277 3,539
Other 8,577 4,111 1,667
--------- --------- --------
Total expenses 20,809 8,388 5,206
--------- --------- --------
Loss before income taxes and equity
in undistributed net income of
subsidiary (14,309) (6,388) (5,206)
Income tax benefits 4,547 2,172 1,770
--------- --------- --------
Loss before equity in undistributed
net income of subsidiary (9,762) (4,216) (3,436)
Equity in undistributed net
income of subsidiary 1,165,152 1,109,468 933,401
--------- --------- --------
Net income $1,155,390 $1,105,252 $929,965
========== ========== ========
F-21
<PAGE>
Note 14 Parent Company Only Financial Information (Continued)
COMMONWEALTH BANKSHARES, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
Operating activities:
Net income $1,155,390 $1,105,252 $929,965
Adjustments to reconcile net
income to net cash used
in operating activities:
Depreciation 3,667 1,411 -
Equity in undistributed
net income of subsidiary (1,165,152) (1,109,468) (933,401)
Net change in:
Prepaid expenses (14,089) - -
Amount due from subsidiary 1,181 (2,172) -
Other liabilities 578 - -
Amount due to subsidiary - (3,436) 914
----------- ---------- --------
Net cash used in
operating activities (18,425) (8,413) (2,522)
Investing activity:
Purchase of premises - (123,040) -
Financing activity:
Proceeds from issuance
of common stock 145,439 - -
Dividends paid (172,992) (2,703) (2,595)
---------- --------- --------
Net cash used in
financing activities (27,553) (2,703) (2,595)
---------- --------- --------
Net decrease in cash on
deposit with subsidiary (45,978) (134,156) (5,117)
Cash on deposit with
subsidiary, January 1 104,197 238,353 243,470
---------- --------- --------
Cash on deposit with
subsidiary, December 31 $ 58,219 $ 104,197 $238,353
========== ========= ========
F-22
<PAGE>
