<PAGE>
As filed with the Securities and Exchange Commission on November __, 2000.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
<TABLE>
<S> <C>
COMMONWEALTH BANKSHARES, INC. COMMONWEALTH BANKSHARES CAPITAL TRUST I
(Exact Name of Registrant as Specified In Its Charter) (Exact Name of Registrant as Specified In Its Charter)
Virginia Delaware
(State or Other Jurisdiction of Incorporation or Organization) (State or Other Jurisdiction of Incorporation or Organization)
551111 551111
(Primary Standard Industrial Classification Code Number) (Primary Standard Industrial Classification Code Number)
54-1460991 51-6519143
(I.R.S. Employer Identification Number) (I.R.S. Employer Identification Number)
403 Boush Street 403 Boush Street
Norfolk, VA 23510 Norfolk, VA 23510
(757) 446-6900 (757) 446-6900
(Address, Including Zip Code, and Telephone Number, Including (Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices) Area Code, of Registrant's Principal Executive Offices)
Edward J. Woodard, Jr., CLBB Copies of Communications to:
403 Boush Street William R. Van Buren, III, Esq.
Norfolk, VA 23510 T. Richard Litton, Jr., Esq.
(757) 446-6900 Kaufman & Canoles, P.C.
(Name, Address, Including Zip Code, and Telephone Number, One Commercial Place
Including Area Code, of Agent For Service) P.O. Box 3037
Norfolk, VA 23514
(757) 624-3000
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] _________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _____________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Title of Each Class of Securities to Amount to be Proposed Maximum Proposed Maximum Aggregate Amount of
be Registered Registered Offering Price Per Unit Offering Price Registration Fee
====================================================================================================================================
<S> <C> <C> <C> <C>
Junior Subordinated Debt Securities of
Commonwealth Bankshares, Inc. (1)(2) $8,050,000 $25.00 $8,050,000 N/A
------------------------------------------------------------------------------------------------------------------------------------
Convertible Preferred Securities of
Commonwealth Bankshares Capital Trust
I(2) 322,000 $25.00 $8,050,000 $2,125.20
------------------------------------------------------------------------------------------------------------------------------------
Guarantee of Commonwealth Bankshares,
Inc. as to the Convertible Preferred
Securities (2)(3) N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------------
TOTAL $8,050,000(4) 100% $8,050,000 $2,125.20
====================================================================================================================================
</TABLE>
(1) Junior Subordinated Debt Securities to be purchased by Commonwealth
Bankshares Capital Trust I with the proceeds of the sale of the
Convertible Preferred Securities. No separate consideration will be
received from purchasers of Convertible Preferred Securities for the
Junior Subordinated Debt Securities.
(2) This Registration Statement is deemed to cover $8,050,000 aggregate
principal amount of Junior Subordinated Debt Securities, the rights of
holders of such debt securities under the related Indenture, the rights
of holders of the Convertible Preferred Securities under the Amended
and Restated Declaration of Trust of Commonwealth Bankshares Capital
Trust I, and the rights of holders of the Convertible Preferred
Securities under the Guarantee of Commonwealth Bankshares, Inc., which
taken together fully and unconditionally guarantee the obligations of
Commonwealth Bankshares Capital Trust I under the Convertible Preferred
Securities.
(3) No separate consideration will be received for the guarantee of
Commonwealth Bankshares, Inc.
(4) Such amounts represent the aggregate liquidation amount of Convertible
Preferred Securities to be issued hereunder and $8,050,000 aggregate
principal amount of Junior Subordinated Debt Securities to be issued
hereunder.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states
that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the
Registration Statement shall become effective on such date as the
Commission, acting pursuant to Section 8(a), may determine.
<PAGE>
Prospectus
__________, 2000
Subject to Completion - ___________, 2000
Commonwealth Bankshares Capital Trust I
Up To 280,000 $______ Convertible Preferred Securities
(Due January 15, 2031)
Commonwealth Bankshares Capital Trust
. Commonwealth Bankshares Capital Trust will use the proceeds from this
offering and the sale of all of its common securities to Commonwealth
Bankshares, Inc. to purchase the ____% junior subordinated debt securities
of Commonwealth Bankshares, Inc.
. Commonwealth Bankshares Capital Trust's only assets will be the ___% junior
subordinated debt securities of Commonwealth Bankshares, Inc.
The Offering
. Commonwealth Bankshares Capital Trust is offering to the public 280,000
convertible preferred securities, which will represent preferred interests
in its assets.
. Best efforts offering: The underwriter is not required to sell any minimum
number or dollar amount of convertible preferred securities, but will use
its best efforts to sell the convertible preferred securities offered.
. Closing: December __, 2000
Proposed Symbol and Market for Convertible Preferred Securities
. CWBSP/Over-the-Counter Bulletin Board.
The Convertible Preferred Securities
. Cash distributions of $____ per year will be paid quarterly on the
convertible preferred securities each year beginning on January 15, 2001.
We may defer distributions at any time for a period of up to five years.
You will be required to pay income taxes on deferred distributions even if
you are a cash basis taxpayer.
. The convertible preferred securities mature on January 15, 2031.
Commonwealth Bankshares Capital Trust may, however, redeem the convertible
preferred securities without the holders' consent at any time on or after
January 15, 2006, or earlier if a change in the tax or regulatory treatment
of Commonwealth Bankshares Capital Trust or the convertible preferred
securities occurs or is likely to occur.
. Holders of convertible preferred securities may convert their convertible
preferred securities into common stock of Commonwealth Bankshares, Inc. at
an initial conversion price of $____ per share of common stock. The
conversion price is subject to adjustment under certain conditions as
described in this prospectus. Commonwealth Bankshares, Inc. common stock is
traded on the Nasdaq National Market under the symbol CWBS. The closing
price of Commonwealth Bankshares' common stock on Nasdaq on December __,
2000 was $______ per share. We can cancel your conversion rights after
January 15, 2004 if the closing price of Commonwealth Bankshares common
stock on Nasdaq exceeds 115% of the conversion price for 20 of 30
consecutive trading days.
<TABLE>
<CAPTION>
Per Share Total
--------- ----------
<S> <C> <C>
Public offering price and proceeds to Commonwealth Bankshares
Capital Trust: $25.00 $7,000,000
</TABLE>
Commonwealth Bankshares, Inc. will pay the underwriter, McKinnon &
Company, Inc., $____ for each convertible preferred security sold, or a total of
$________ if all of the convertible preferred securities are sold, and the
expenses of the offering. If Commonwealth Bankshares Capital Trust exercises its
right to increase the size of the offering by up to $1.05 million, Commonwealth
Bankshares, Inc. will pay the underwriter additional compensation.
This investment involves risks. See "Risk Factors" beginning on Page 9.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities or determined
if this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
These securities are not deposits or other obligations of a bank and
are not insured by the Federal Deposit Insurance Corporation or any other
governmental agency.
McKinnon & Company, Inc.
<PAGE>
Bank of the Commonwealth
Branch Locations
[MAP OF BANK OF THE COMMONWEALTH BRANCH LOCATIONS]
The inside cover page will include a map of the state of Virginia, and a
separate map of Southeastern Virginia, each marked to indicate the location
of current and proposed Bank of the Commonwealth branch locations.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY.................................................................................................. 2
RATIO OF EARNINGS TO FIXED CHARGES.................................................................................. 7
SUMMARY FINANCIAL INFORMATION....................................................................................... 8
RISK FACTORS........................................................................................................ 9
WHERE YOU CAN FIND MORE INFORMATION................................................................................. 12
RECENT DEVELOPMENTS................................................................................................. 13
USE OF PROCEEDS..................................................................................................... 13
COMMONWEALTH BANKSHARES CAPITAL TRUST I............................................................................. 14
SELECTED HISTORICAL FINANCIAL INFORMATION........................................................................... 15
CAPITALIZATION...................................................................................................... 16
ACCOUNTING TREATMENT................................................................................................ 16
REGULATORY TREATMENT................................................................................................ 16
BUSINESS............................................................................................................ 16
MANAGEMENT'S DISCUSSION AND ANALYSIS................................................................................ 31
MANAGEMENT.......................................................................................................... 39
DESCRIPTION OF CONVERTIBLE PREFERRED SECURITIES..................................................................... 45
DESCRIPTION OF JUNIOR SUBORDINATED DEBT SECURITIES.................................................................. 61
DESCRIPTION OF GUARANTEE............................................................................................ 67
RELATIONSHIP AMONG THE CONVERTIBLE PREFERRED SECURITIES, THE JUNIOR SUBORDINATED DEBT SECURITIES AND THE
GUARANTEE.......................................................................................................... 69
DESCRIPTION OF COMMONWEALTH BANKSHARES, INC. COMMON STOCK........................................................... 70
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES....................................................................... 72
ERISA CONSIDERATIONS................................................................................................ 75
FORWARD LOOKING STATEMENTS.......................................................................................... 76
UNDERWRITING........................................................................................................ 77
VALIDITY OF SECURITIES.............................................................................................. 78
ACCOUNTANTS......................................................................................................... 78
INDEX TO FINANCIAL STATEMENTS....................................................................................... F-1
</TABLE>
1
<PAGE>
Prospectus Summary
This summary highlights some of the more detailed information appearing
elsewhere in this prospectus.
Commonwealth Bankshares, Inc.
Commonwealth Bankshares, Inc., a Virginia corporation, is headquartered in
Norfolk, Virginia. We own Bank of the Commonwealth, a Virginia-chartered
commercial bank. We conduct virtually all of our business through Bank of the
Commonwealth. Bank of the Commonwealth was organized in 1970 and began
operations in April 1971. It is the oldest independent bank in its market area.
In 1988, Commonwealth Bankshares was formed to acquire Bank of the Commonwealth.
Our market area is concentrated in the cities of Norfolk, Virginia Beach,
Portsmouth and Chesapeake, Virginia. Bank of the Commonwealth is currently
operating three branch offices in Norfolk, four branch offices in Virginia Beach
and one branch office in Chesapeake, as well as four off-premise ATMs. On July
29, 2000 we opened our first office in Chesapeake, and in August 2000 we opened
an office at Old Dominion University in Norfolk under a joint agreement with Old
Dominion University and the second largest bank in the United States. Bank of
the Commonwealth also plans to open branch offices in Franklin, Virginia and
Portsmouth in early 2001. At September 30, 2000 we had $184.8 million in assets,
$148.4 million in loans, and $13.2 million in equity.
We provide a wide range of commercial banking services to individuals and
small and medium-sized businesses, including the acceptance of checking and
savings deposits, and the initiation of commercial, real estate, personal, home
improvement, automobile and other installment and term loans. We also offer
related services such as home banking, trust, travelers checks, safe deposit,
lock box, depositor transfer, customer note payment, collections, notary public,
escrow, and other customary banking services.
We are having this offering because the convertible preferred securities will
be treated as capital for bank regulatory purposes. This means that we will be
able to grow our total assets faster than our anticipated retained earnings
would permit. The cash proceeds from this offering are not needed for our
operations or liquidity.
Except for increasing our regulatory capital, we do not obtain any business
advantage by creating Commonwealth Bankshares Capital Trust and selling the
junior subordinated debit securities to it. If we sold our junior subordinated
debt securities directly to the public, we would not be able to include any of
the proceeds in our tier 1 regulatory capital. By contrast, if we interpose
Commonwealth Bankshares Capital Trust as the purchaser of the junior
subordinated debt securities, we can include all of the proceeds from the sale
of the convertible preferred securities in our regulatory capital. Most of
these proceeds will qualify as tier 1 regulatory capital. There is no economic
distinction that explains the differing treatment.
We are a legal entity separate and distinct from Bank of the Commonwealth.
Our right, and thus your right, to receive any of the assets of Bank of the
Commonwealth is subject to the claims of creditors of Bank of the Commonwealth.
Our principal source of revenues is dividends from Bank of the Commonwealth.
Because we own a bank, Bank of the Commonwealth, we are known as a bank
holding company. As a bank holding company, we are registered with the Board of
Governors of the Federal Reserve System under the Bank Holding Company Act of
1956, as amended. Our executive offices and mailing address are 403 Boush
Street, Norfolk, VA 23510 and our telephone number is (757) 446-6900. This is
also the address and telephone number for Commonwealth Bankshares Capital Trust.
2
<PAGE>
Commonwealth Bankshares Capital Trust I
We formed Commonwealth Bankshares Capital Trust under Delaware law on
November 15, 2000. We and the trustees of Commonwealth Bankshares Capital Trust
will sign an agreement, which will contain the terms and conditions for
Commonwealth Bankshares Capital Trust to issue and sell its convertible
preferred securities, as well as its common securities. This agreement is
called the amended and restated declaration of trust and it also governs the
duties of the trustees.
Commonwealth Bankshares Capital Trust exists solely to:
. sell the convertible preferred securities and the common securities;
. use the money it receives from the sale of the convertible preferred
securities and common securities to purchase our junior subordinated
debt securities, which will be the only assets of Commonwealth
Bankshares Capital Trust; and
. engage in other activities that are related to these purposes.
We will purchase all of the common securities of Commonwealth Bankshares
Capital Trust. The common securities will entitle us to receive 3% of
Commonwealth Bankshares Capital Trust's cash distributions. The convertible
preferred securities will entitle you and the other owners to the remaining 97%
of Commonwealth Bankshares Capital Trust's cash distributions. If we default on
the junior subordinated debt securities, we will not receive cash distributions
on the common securities until you have received your cash distributions on the
convertible preferred securities.
Commonwealth Bankshares Capital Trust has a term of approximately 40 years,
but may be dissolved earlier if the convertible preferred securities are paid
off. We have appointed the following trustees to conduct Commonwealth
Bankshares Capital Trust's business and affairs:
. Wilmington Trust Company is the property trustee and the Delaware
trustee; and
. Two individuals who are employees and officers of Commonwealth
Bankshares, Inc., Edward J. Woodard, Jr. and John H. Gayle will be the
administrative trustees.
As the sole holder of the common securities, we can replace or remove any
of the trustees, unless we default on the junior subordinated debt securities. A
default, for example, would include failing to make required payments on the
junior subordinated debt securities. If we default and do not cure our default,
the property trustee and the Delaware trustee can only be replaced and removed
by the holders of at least a majority of the convertible preferred securities.
As owner of all of Commonwealth Bankshares Capital Trust's common securities,
only we can remove or replace the administrative trustees.
Commonwealth Bankshares Capital Trust has no separate financial statements.
The statements would not be meaningful to you because Commonwealth Bankshares
Capital Trust has no independent operations. It exists solely for the reasons
summarized above.
The Offering
Securities offered Commonwealth Bankshares Capital Trust is offering for
sale 280,000 convertible increase the number of
convertible preferred securities offered for sale to
322,000.
Offering price The offering price is $25.00 for each convertible
preferred security.
3
<PAGE>
Conversion Holders of convertible preferred securities
may convert their convertible preferred
securities into common stock of Commonwealth
Bankshares, Inc. at an initial conversion
price of $_____ per share of common stock.
The conversion price is subject to adjustment
under certain conditions as described in this
prospectus. Commonwealth Bankshares, Inc.
common stock is traded on the Nasdaq National
Market under the symbol CWBS. The closing
price of Commonwealth Bankshares' common
stock on Nasdaq on December __, 2000 was
$____ per share. If you want to convert a
convertible preferred security, the
conversion agent will exchange your
convertible preferred security for the
appropriate principal amount of junior
subordinated debt securities held by
Commonwealth Bankshares Capital Trust and
immediately convert the junior subordinated
debt securities into shares of Commonwealth
Bankshares, Inc. common stock. You will
receive cash in lieu of fractional shares.
However, you will not receive cash or
additional shares of Commonwealth Bankshares'
common stock to compensate you for any
accrued but unpaid distributions on the
convertible preferred securities through the
time of conversion. These accrued amounts
will be forfeited.
No interest on escrowed funds You will not receive interest on any funds
you deposit before this offering closes.
Quarterly distributions are You will be entitled to receive cash
payable to you on the distributions of $______ per year on each
convertible preferred convertible preferred security. Distributions
securities will be payable quarterly on the 15th of
January, April, July and October of each
year, beginning on January 15,2001. Your
first cash distribution will be less than the
regular quarterly amount because you are
buying your convertible preferred securities
after October 15, 2000.
We have the option to defer We have the right to defer interest
interest payments payments on the junior subordinated debt
securities for up to 20 consecutive quarters.
If we pay all deferred interest at the end of
an interest deferral period, we can begin a
new interest deferral period at any time. No
interest deferral period may last beyond
January 15, 2031. We may not defer interest
payments if we have defaulted on the junior
subordinated debt securities. However,
electing to defer interest payments, by
itself, is not a default.
If we defer interest payments, If we defer interest payments on the junior
cash distributions to you will subordinated debt securities, Commonwealth
be deferred Bankshares Capital Trust also will defer cash
distributions on your convertible preferred
securities. During any period when cash
distributions are deferred, your right to
receive cash distributions will accumulate.
You also will accumulate the right to receive
additional distributions at ____% per year,
compounded quarterly, on any deferred
distributions.
You will have taxable income You will be required to pay income taxes on
even if we defer cash deferred distributions even if you are a
distributions cash basis taxpayer.
Our obligations are We are unconditionally obligated to pay
unconditional distributions and all other amounts on the
convertible preferred securities. However,
this does not mean that we may not exercise
our right, as described above, to defer
interest payments on the junior subordinated
debt securities.
4
<PAGE>
Ranking of convertible If we default, payments to you on the
preferred securities convertible preferred securities will be
made before any payments to us on the common
securities. This does not give you any
significant protection, however, because the
common securities only are entitled to three
percent of the distributions by Commonwealth
Bankshares Capital Trust. As long as we are
not in default, payments on the convertible
preferred securities and common securities
will be made proportionately.
The junior subordinated debt The junior subordinated debt securities will
securities are unsecured and be unsecured and subordinate to all our
subordinate to all our senior senior debt. This means that there will be
debt no collateral for our obligations to you. It
also means that if we default, all of our
senior debt will be paid before you are paid.
At September 30, 2000, we had $505 thousand
of senior debt outstanding. Any additional
debts we incur in the future are likely to be
senior debt. There is no limit on the amount
of senior debt that we may incur. We will
guarantee that you will receive cash
distributions if Commonwealth Bankshares
Capital Trust has the funds to pay you. Our
guarantee also will be unsecured and
subordinate to all senior debt. In addition,
the junior subordinated debt securities and
the guarantee will be subordinate to all
existing and future liabilities of our
subsidiaries, including Bank of the
Commonwealth's deposit liabilities.
The junior subordinated debt We have fully, irrevocably and
securities are scheduled to unconditionally guaranteed on a subordinated
mature on January 15, 2031 basis that Commonwealth Bankshares Capital
Trust will pay you $25.00 per convertible
preferred security, plus accrued
distributions, when the junior subordinated
debt securities are paid-off at or before
maturity. The stated maturity of the junior
subordinated debt securities is January 15,
2031.
We can terminate your We have certain rights to terminate your
conversion rights under ability to convert convertible preferred
certain conditions securities into our common stock. We will
have this termination right at any time after
January 15, 2004 if the closing price of our
common stock on Nasdaq exceeds 115% of the
conversion price for 20 of 30 consecutive
trading days. To exercise our conversion
termination rights, we first must cause
Commonwealth Bankshares Capital Trust to
issue a press release announcing the date on
which the conversion rights will be
terminated. The press release must also state
the conversion price that is then applicable
and the closing price on the public markets
at that time for the convertible preferred
securities and our common stock. The date we
elect to terminate your conversion rights
cannot be less than 30 days or more than 60
days after the date that Commonwealth
Bankshares Capital Trust issues the press
release.
We can pay-off the junior We have the right at any time on or after
subordinated debt securities January 15, 2006 to pay-off the junior
any time after January 15, 2006 subordinated debt securities. We also have
the right at any time before January 15, 2006
to pay-off the junior subordinated debt
securities if any of three things happen. We
can pay-off the junior subordinated debt
securities before January 15, 2006 if tax law
changes prevent us from deducting interest
payments or if changes in banking regulations
prevent us from counting Commonwealth
Bankshares Capital Trust's assets as capital.
A change in the Investment Company Act of
1940 that requires Commonwealth Bankshares
Capital Trust to register under that law also
would permit us to pay-off the junior
subordinated debt securities before January
15, 2006.
Limited Voting Rights on the You will have no voting rights on the
convertible preferred convertible preferred securities, except in
securities limited circumstances.
No Rating We do not expect the convertible preferred
securities to be rated by any rating service.
None of the other securities that we issue
are so rated.
5
<PAGE>
ERISA Considerations Please carefully consider the information set
forth in "ERISA Considerations", which begins
on page 76.
Use of Proceeds Commonwealth Bankshares Capital Trust will
use all of the proceeds from the sale of the
common securities and convertible preferred
securities to purchase the junior
subordinated debt securities from us. We
intend to use the net proceeds from the sale
of the junior subordinated debt securities
for general corporate purposes, including
making advances to Bank of the Commonwealth
to support its continued growth. Pending any
such application, we may invest the net
proceeds in interest-bearing assets.
Proposed Nasdaq OTC Bulletin We have applied to have the convertible
Board Symbol preferred securities approved for quotation
on the Nasdaq OTC bulletin board under the
symbol "CWBSP."
Risk Factors An investment in the convertible preferred
securities involves a number of risks. Some
of these risks relate to the convertible
preferred securities and other risks relate
to us. We urge you to carefully consider the
information contained in "Risk Factors"
beginning on page 9 of this prospectus, as
well as the other information contained in
this prospectus, before you buy any
convertible preferred securities.
6
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The following table contains our consolidated ratios of earnings to
fixed charges for each of the periods indicated. For purposes of computing these
ratios, earnings represent net income, plus total taxes based on income, plus
fixed charges. Fixed charges include interest expense, the estimated interest
component of net rental expense and amortization of debt expense.
<TABLE>
<CAPTION>
Nine Months
Ended
Sept. 30, Year Ended December 31,
--------------------- ----------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
--------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges:
Excluding interest on deposits 5.35 8.45 7.04 9.82 7.79 6.50 7.11
Including interest on deposits 1.20 1.29 1.29 1.31 1.31 1.28 1.31
</TABLE>
7
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following consolidated summary contains selected financial data for
Commonwealth Bankshares, Inc. and its subsidiaries for the periods and at the
dates indicated. You should also read the detailed information and the financial
statements included elsewhere in this prospectus. All per share figures in this
prospectus have been adjusted to reflect the following stock splits and stock
dividends: (i) a 6% stock dividend on April 28, 1995, (ii) a 6% stock dividend
on April 30, 1996, (iii) a 6% stock dividend on April 30, 1997, (iv) an 8% stock
dividend on April 30, 1998, and (v) a 50% stock dividend on May 27, 1999.
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Year Ended December 31,
----------------------- --------------------------------------------------------
(Unaudited)
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Gross interest income $ 10,520 $ 7,820 $ 10,861 $ 9,547 $ 8,553 $ 7,744 $ 6,859
Gross interest expense 5,761 3,933 5,502 5,060 4,410 4,201 3,632
-------- -------- -------- -------- -------- -------- -------
Net interest income 4,759 3,887 5,359 4,487 4,143 3,543 3,227
Provision for loan losses 138 80 110 102 50 1 53
-------- -------- -------- -------- -------- -------- -------
Net interest income after provision
for loan losses 4,621 3,807 5,249 4,385 4,093 3,542 3,174
Non-interest income 894 886 1,209 1,186 869 871 810
Non-interest expense 4,362 3,546 4,856 3,984 3,605 3,213 2,866
-------- -------- -------- -------- -------- -------- -------
Income before income taxes 1,153 1,147 1,602 1,587 1,357 1,200 1,118
Income taxes 302 299 447 482 427 364 282
-------- -------- -------- -------- -------- -------- -------
Net income $ 851 $ 848 $ 1,155 $ 1,105 $ 930 $ 836 $ 836
======== ======== ======== ======== ======== ======== =======
Per Share Data:
Net income, basic $ 0.51 $ 0.52 $ 0.71 $ 0.68 $ 0.57 $ 0.51 $ 0.51
Net income, diluted 0.46 0.47 0.64 0.62 0.53 0.48 0.50
Cash dividends 0.105 0.070 0.105 0 0 0 0
Book value at period end 7.87 7.35 7.43 7.12 6.48 5.88 5.39
Period-End Balance Sheet Data:
Total assets $184,817 $144,941 $157,016 $132,237 $116,106 $106,170 $95,037
Total loans (net of unearned income) 148,435 113,255 125,045 91,576 78,251 65,835 61,373
Total deposits 161,077 121,792 138,358 116,170 100,760 90,262 82,256
Long-term debt 505 531 531 557 583 609 684
Stockholders' equity 13,201 12,051 12,227 11,580 10,531 9,568 8,770
Performance Ratios:
Return on average assets 0.66% 0.84% 0.83% 0.91% 0.85% 0.79% 0.94%
Return on average stockholders'
equity 8.91% 9.48% 9.63% 9.91% 9.35% 8.85% 10.17%
Average stockholders' equity to
average total assets 7.36% 8.84% 8.60% 9.11% 9.13% 8.91% 9.20%
Net interest margin 3.73% 3.96% 3.95% 3.81% 3.99% 3.75% 3.92%
Dividend payout ratio 20.59% 13.46% 14.79% -- -- -- --
Asset Quality Ratios:
Net charge-offs to average loans 0.05% 0.00% 0.14% 0.12% 0.02% 0.49% 0.01%
Allowance to period-end loans 0.68% 0.92% 0.74% 1.06% 1.23% 1.42% 2.05%
Allowance to nonperforming loans 61.16% 104.28% 78.76% 73.91% 61.56% 41.51% 67.78%
Nonaccrual loans to loans 1.10% 0.89% 0.89% 1.21% 1.85% 3.14% 2.70%
Nonperforming assets to loans and
foreclosed properties 1.30% 1.63% 1.36% 2.28% 3.74% 5.60% 7.90%
Capital Ratios:
Risk-based capital ratios
Tier 1 capital 8.98% 10.77% 10.10% 12.00% 12.82% 13.19% 13.38%
Total capital 9.65% 11.67% 10.80% 13.00% 14.00% 14.44% 14.63%
Leverage capital ratio 7.54% 8.88% 8.30% 8.90% 9.18% 9.10% 9.43%
Total equity to total assets 7.14% 8.31% 7.79% 8.76% 9.07% 9.01% 9.23%
</TABLE>
8
<PAGE>
RISK FACTORS
An investment in the convertible preferred securities involves a number
of risks. Some of these risks relate to the convertible preferred securities and
others relate to us. Please carefully consider the following information,
together with the other information in this prospectus before you buy any
convertible preferred securities.
Risks Related To The Convertible Preferred Securities
Because our obligations to you are unsecured and subordinated to senior
debt, if we have financial difficulties, any senior debt will have to be paid in
full before you receive any payment.
Our obligations under the junior subordinated debt securities and the
guarantee are unsecured and subordinate to all of our present and future senior
debt. This means that there will be no collateral for our obligations to you. It
also means that if we default, all of our senior debt will be paid before you
are paid. As of September 30, 2000, we had $505 thousand of senior debt
outstanding. Any additional debts we incur in the future are likely to be senior
debt. In particular, we anticipate borrowing between $3 million and $4 million
by the end of 2000 from the Federal Home Loan Bank to fund loan production.
There is no limit to our ability or Bank of the Commonwealth's ability to incur
additional debts, including senior debt. For additional information, please
refer to "Description of Junior Subordinated Debt Securities - What Does
Subordination Mean to You?", which begins on page 66.
The ability of Commonwealth Bankshares Capital Trust to make payments
on the convertible preferred securities depends solely upon our making payments
on the junior subordinated debt securities as and when required. If we default
on our obligation to make required payments on the junior subordinated debt
securities, Commonwealth Bankshares Capital Trust will not have sufficient funds
to make cash distributions to you. You will not be able to rely upon the
guarantee for payment of these amounts. Instead, you or the property trustee may
sue us directly for payment under the junior subordinated debt securities.
Our right, and thus your right, to receive any assets of Bank of the
Commonwealth is subject to the claims of Bank of the Commonwealth's creditors,
including depositors. At September 30, 2000 Bank of the Commonwealth had total
liabilities, including deposits, of $171.6 million. Because the junior
subordinated debt securities will be subordinated to all existing and future
liabilities of our subsidiaries, including Bank of the Commonwealth's deposit
liabilities, you should look only to our assets, and not assets of our
subsidiaries, for payments on the junior subordinated debt securities.
If banking regulations prohibit Bank of the Commonwealth from paying
dividends to us, we would probably defer interest payments on the junior
subordinated debt securities.
Because we own Bank of the Commonwealth, we are regulated by the Board
of Governors of the Federal Reserve System. The Federal Reserve also regulates
Bank of the Commonwealth. Almost all of our consolidated assets are owned by
Bank of the Commonwealth. We will rely almost entirely on dividends from Bank of
the Commonwealth to satisfy our obligations to pay principal and interest on the
junior subordinated debt securities. There are legal limits on the amount of
dividends that a bank such as Bank of the Commonwealth is permitted to pay. We
cannot assure you that Bank of the Commonwealth will be able to pay dividends at
past levels, or at all, in the future. For additional information, please refer
to "Description of Guarantee - General", which begins on page 68.
If we defer interest payments on the junior subordinated debt
securities, you will be required to pay taxes on distributions you have not
received.
As long as we do not default on the junior subordinated debt
securities, we have the right to defer interest payments on the junior
subordinated debt securities for up to 20 consecutive quarters. If we pay all
deferred interest at the end of an interest deferral period, we can begin a new
interest deferral period at any time. No interest deferral period may last
beyond January 15, 2031. If we defer interest payments on the junior
subordinated debt securities, Commonwealth Bankshares Capital Trust will defer
cash distributions on the convertible preferred securities until
9
<PAGE>
we resume interest payments. For additional information, please refer to
"Description of Convertible Preferred Securities - Distributions", which begins
on page 47.
If Commonwealth Bankshares Capital Trust defers distributions on the
convertible preferred securities, you will be required to pay income taxes on
the deferred distributions and accrue interest income even if you are a cash
basis taxpayer. That is, you must include the deferred interest in your gross
income for U.S. federal income tax purposes regardless of whether you receive
cash distributions. You will not receive the cash related to any accrued and
unpaid interest from Commonwealth Bankshares Capital Trust if you sell your
convertible preferred securities before all deferred distributions have been
brought current. Deferred distributions that are included in your gross income
will increase your tax basis in the convertible preferred securities. If you
sell your convertible preferred securities before all deferred distributions
have been brought current, your increased tax basis will decrease the amount of
any capital gain or will create a capital loss or increase the amount of any
capital loss that you realize on the sale. A capital loss, except in certain
limited circumstances, cannot be applied to offset ordinary income.
If we defer interest payments on the junior subordinated debt
securities, the market price of the convertible preferred securities is likely
to fall.
We have no current intention of exercising our right to defer interest
payments on the junior subordinated debt securities. However, if we exercise
this right in the future, the market price of the convertible preferred
securities is likely to be adversely affected, because many people will not want
to hold a security that is creating a tax liability, but yielding no cash. If
you sell your convertible preferred securities during a time when distributions
have been deferred, you may not receive the same return on your investment as
someone else who continues to hold the convertible preferred securities.
You have limited rights against us if we default on our obligations to
you.
If we default on our obligation to pay principal or interest on the
junior subordinated debt securities, Commonwealth Bankshares Capital Trust will
not have sufficient funds to make payments on the convertible preferred
securities. You would not be able to rely on the guarantee for payment. Instead,
if we default in the payment of the principal or interest on the junior
subordinated debt securities, then you may sue us directly to enforce payment.
Except as described in this prospectus, you will not be able to exercise
directly any other remedy available to holders of junior subordinated debt
securities. For additional information, please refer to "Description of Junior
Subordinated Debt Securities - Enforcement of Rights by Holders of Convertible
Preferred Securities", which begins on page 66.
If we cause an early redemption of the convertible preferred
securities, you may not be able to reinvest the proceeds at the same or a higher
rate of return.
We have the right to redeem the junior subordinated debt securities at
any time after January 15, 2006. Moreover, we also have the right at any time
before January 15, 2006 to pay off the junior subordinated debt securities if
any of three things happen. We can pay off the junior subordinated debt
securities before January 15, 2006 if tax law changes prevent us from deducting
interest payments or if changes in banking regulations prevent us from counting
Commonwealth Bankshares Capital Trust's assets as capital. A change in the
Investment Company Act of 1940 that requires Commonwealth Bankshares Capital
Trust to register under that law also would permit us to pay off the junior
subordinated debt securities before January 15, 2006.
Within 90 days of a redemption of the junior subordinated debt
securities, the convertible preferred securities also must be redeemed. It is
possible, perhaps likely, that we would not pay-off the junior subordinated debt
securities unless we could reborrow at a lower rate. If we can reborrow at a
lower rate, it is probable that you could reinvest only at a lower rate. For
additional information, please refer to "Description of Convertible Preferred
Securities - Events That Will Cause Redemption of Convertible Preferred
Securities", which begins on page 51.
10
<PAGE>
If we liquidate Commonwealth Bankshares Capital Trust and distribute
the junior subordinated debt securities to you, those securities might trade at
a lower price than you pay for your convertible preferred securities.
We will have the right at any time to terminate Commonwealth Bankshares
Capital Trust and cause the junior subordinated debt securities to be
distributed to you. Under current United States federal income tax law, a
distribution of junior subordinated debt securities would not be a taxable event
to you. If, however, Commonwealth Bankshares Capital Trust were taxable as a
corporation at the time of dissolution of Commonwealth Bankshares Capital Trust,
the distribution of the junior subordinated debt securities may be a taxable
event to you. For additional information, please refer to a "Description of
Convertible Preferred Securities - Liquidation of Commonwealth Bankshares
Capital Trust and Distribution of Junior Subordinated Debt Securities", which
begins on page 53.
We give no assurance about the market prices for convertible preferred
securities or junior subordinated debt securities that may be distributed in
exchange for convertible preferred securities if a liquidation of Commonwealth
Bankshares Capital Trust occurs. The convertible preferred securities or the
junior subordinated debt securities may trade at a discount to the price that
you pay to purchase the convertible preferred securities. Because you may
receive junior subordinated debt securities on a termination of Commonwealth
Bankshares Capital Trust, you are also making an investment decision about the
junior subordinated debt securities and should carefully review all the
information regarding the junior subordinated debt securities in this
prospectus.
Because you have limited voting rights, we can amend important
agreements in ways that adversely affect you without your consent.
As a holder of convertible preferred securities, you will have limited
voting rights. These voting rights will relate only to the modification of the
convertible preferred securities, the termination of Commonwealth Bankshares
Capital Trust, and the exercise of Commonwealth Bankshares Capital Trust's
rights as a holder of the junior subordinated debt securities. In general, only
we can replace or remove any of the trustees.
Even if it would affect you adversely, we and the trustees may modify
the amended and restated declaration of trust without your consent to ensure
that Commonwealth Bankshares Capital Trust will maintain the federal income tax
treatment that we desire. We also can modify the amended and restated
declaration of trust to ensure that Commonwealth Bankshares Capital Trust will
not be required to register as an "investment company" under the Investment
Company Act of 1940, as amended, even if such action adversely affects your
interests. You will have no voting rights on any matters submitted to a vote of
our stockholders. For additional information, please refer to "Description of
Convertible Preferred Securities - Voting Rights of Convertible Preferred
Securities; Amendment of the Declaration", which begins on page 56.
Because there has been no public market for the convertible preferred
securities, you cannot be sure that you will be able to sell your convertible
preferred securities at or above the price you pay.
There is no existing market for the convertible preferred securities.
We can give no assurance about the liquidity of any markets that may develop for
the convertible preferred securities, your ability to sell your convertible
preferred securities or at what price you will be able to sell your convertible
preferred securities. Future trading prices of the convertible preferred
securities will depend on many factors including, among other things, prevailing
interest rates, our operating results and the market for similar securities. The
underwriter has informed us that it intends to make a market in the convertible
preferred securities. However, the underwriter is not obligated to do so and any
such market making activity may be terminated at any time without notice to the
holders of the convertible preferred securities.
Because we can terminate your conversion rights, you may not always
have the ability to convert your convertible preferred securities into our
common stock.
We have the right to terminate your ability to convert the preferred
securities into our common stock at any time after January 15, 2004 if our
common stock trades at 115% or more of the conversion price that is then in
effect for 20 of 30 consecutive trading days. If we exercise this right, we will
issue a press release and you will have the
11
<PAGE>
ability to convert your preferred securities into our common stock for a period
of not less than 30 days and not more than 60 days after we issue the press
release, as determined by us. If we exercise our conversion termination rights,
you will lose your right to convert your preferred securities into our common
stock unless you make a decision to convert within the period specified by the
press release. For additional information, please refer to "Description of
Convertible Preferred Securities -Conversion Rights - Termination of Conversion
Rights," which begins on page 51.
Risks Related To Us
We are going to make an additional allowance for loan losses, which
will reduce our net income for the 2000 fiscal year and the book value of our
common stock.
Under state and federal banking laws, financial institutions such as
Bank of the Commonwealth are required to establish allowances for potential loan
losses. The amount of that allowance is typically subject to mutual agreement
between financial institutions and banking regulators based on the risks
associated with a particular financial institution's loan portfolio. Banking
regulators recently asked Bank of the Commonwealth to increase its loan loss
allowance. After discussions with these regulators, we agreed to take a one time
additional loan loss allowance of $1 million in the fourth quarter of 2000. This
will reduce our 2000 fiscal year net income by approximately $660,000 on an
after tax basis, will reduce the book value of our common stock by approximately
$0.39 per share and will reduce diluted earnings per share by $0.36.
Accordingly, this additional loan loss allowance will materially adversely
affect our financial results for our 2000 fiscal year and could also adversely
affect the trading price of our common stock.
We plan to grow rapidly and there are risks associated with rapid
growth.
We intend to expand our asset base. In particular, we hope to use the
funds raised in this offering to support anticipated increases in our deposits
and loans. Additional capital also would increase our legal lending limit under
federal law, which in turn would allow us to compete more actively in our market
area for larger loans. Our ability to manage growth successfully will depend on
our ability to maintain cost controls and asset quality while attracting
additional loans and deposits, as well as on factors beyond our control, such as
economic conditions and interest rate trends. If we grow too quickly and are not
able to control costs and maintain asset quality, growth could materially
adversely affect our financial performance.
If we lost the services of our senior management, it would adversely
affect our business.
Our future performance will depend largely on the contributions of a
few senior executive officers of Bank of the Commonwealth, including in
particular Edward J. Woodard, Jr., the Chairman of the Board, President and
Chief Executive Officer. The loss of the services of one or more of our senior
executive officers could have a material adverse effect on our business and
development.
WHERE YOU CAN FIND MORE INFORMATION
Commonwealth Bankshares, Inc., which we will refer to as we, us or our,
files annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document that we file at the Commission's public reference room facility
located at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices at 7 World Trade Center, 13th Floor, Suite 1300,
New York, New York 10048 and Suite 1400, Citicorp Center, 500 West Madison
Street, Chicago, Illinois 60661. Please call the Commission at 1-800-SEC-0330
for further information on the public reference room. The Commission maintains
an Internet site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding issuers, including
Commonwealth Bankshares, Inc., that file documents with the Commission
electronically through the Commission's electronic data gathering, analysis and
retrieval system known as EDGAR. Our common stock is traded on the Nasdaq
National Market under the symbol "CWBS." Our reports, proxy and information
statements may also be reviewed at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington D.C. 20006.
This prospectus is part of a registration statement filed by
Commonwealth Bankshares Capital Trust I and Commonwealth Bankshares, Inc. with
the Commission. Because the rules and regulations of the Commission allow
12
<PAGE>
us to omit certain portions of the registration statement from this prospectus,
this prospectus does not contain all the information contained in the
registration statement. You may review the registration statement and the
exhibits filed with the registration statement for further information regarding
us, Commonwealth Bankshares Capital Trust and the convertible preferred
securities being sold by this prospectus. The registration statement and its
exhibits may be inspected at the public reference facilities of the Commission
at the addresses mentioned above. The Commission's registration number for the
registration statement is File No. 333-_____.
You should rely only on the information provided in this prospectus or
any supplement. We have not authorized anyone else to provide you with different
information. Neither Commonwealth Bankshares, Inc. nor Commonwealth Bankshares
Capital Trust I is making an offer of the convertible preferred securities in
any state where the offer is not permitted. You should not assume that the
information in this prospectus or any supplement is accurate as of any date
other than the date on the front of those documents because our financial
condition and results may have changed since that date.
RECENT DEVELOPMENTS
We are currently negotiating to acquire a branch banking office in
Franklin, Virginia that is owned by another financial institution. We anticipate
that the purchase price for the branch will be approximately $2.0 million for
the real estate and fixed assets at the branch location. We would also pay a
premium for the branch's deposits equal to 6% of the deposits at the branch,
provided that under the current terms of the transaction the total deposit
premium payable by us cannot exceed $1.3 million. If the transaction closes on
the terms currently contemplated by us, we would assume deposit liabilities at
the branch of approximately $20.0 million. The closing of this branch purchase
is conditioned upon the closing of this offering. In addition, we will not be
able to complete this acquisition until a definitive agreement is signed,
regulatory approval is obtained and other customary closing conditions are
satisfied, including further due diligence by us. If we are able to close this
acquisition, we anticipate that the Franklin branch will begin operating under
Bank of the Commonwealth's name in early 2001. We cannot assure you that we will
be able to close this branch acquisition on the terms currently anticipated or
that we will be able to close the acquisition at all.
We are also opening a new branch banking office in Portsmouth, Virginia
on land that we own. We are currently renovating the building at this location
and anticipate that the branch will open by the end of March 2001. We have
obtained the necessary regulatory approval to open this branch.
USE OF PROCEEDS
Commonwealth Bankshares Capital Trust will use all of the proceeds from
the sale of the common securities and convertible preferred securities to
purchase the junior subordinated debt securities. We intend to apply the net
proceeds from the sale of the junior subordinated debt securities to our general
funds to be used for general corporate purposes, including, from time to time,
making advances to Bank of the Commonwealth to support its continued growth.
Pending any such application by us, the net proceeds may be invested in
interest-bearing assets.
Our intention is to grow our total assets faster than our capital base
and anticipated retained earnings for the next several years would permit. For
example, we may purchase branch offices and assume deposits from other banks or
open new branches, as described above in "Recent Developments". Transactions of
this type would increase our assets and our required regulatory capital while,
at the same time reducing our regulatory capital. We also plan to grow assets
through our existing branches as rapidly as we can, consistent with sound
banking principles. This offering is not contingent on completing the branch
purchase transaction we are currently negotiating, the opening of our new branch
or on any other transaction.
The convertible preferred securities will be treated as capital for
bank regulatory purposes, which means that the proceeds of this offering will
allow us to grow without selling additional shares of common stock. If we were
not having this offering, or if this offering is not successful, we might need
to sell additional common stock at a future time to obtain the regulatory
capital to support our growth. We do not want to sell additional common stock
because we think it will dilute our earnings per share.
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<PAGE>
If the convertible preferred securities were not treated as capital for
bank regulatory purposes, we would not be having this offering, because we can
raise cash to fund loans and investments at much lower rates of interest. We
expect that the interest rate on the junior subordinated debt securities will
exceed the rate of interest we can obtain by reinvesting the proceeds of this
offering. This offering can benefit us only because it will support asset growth
of 10 to 12 times the net proceeds. The interest margin earnings on the these
additional assets is expected to exceed the negative interest spread on the
junior subordinated debt securities.
COMMONWEALTH BANKSHARES CAPITAL TRUST I
We formed Commonwealth Bankshares Capital Trust under Delaware law on
November 15, 2000. Wilmington Trust Company is the Delaware trustee and the
property trustee. Edward J. Woodard, Jr. and John H. Gayle, officers of
Commonwealth Bankshares, Inc., will be the administrative trustees. Commonwealth
Bankshares Capital Trust exists for the exclusive purposes of:
. issuing and selling the common securities and convertible preferred
securities;
. using the proceeds from the sale of the common securities and
convertible preferred securities to purchase the junior
subordinated debt securities; and
. engaging in other activities that are related to these purposes.
The junior subordinated debt securities will be the sole assets of
Commonwealth Bankshares Capital Trust, and payments under the junior
subordinated debt securities will be the sole revenues of Commonwealth
Bankshares Capital Trust. All of the common securities will be owned by us. We
will receive distributions on the common securities in proportion to the
distributions that you and other holders receive on the convertible preferred
securities. However, if we default, our rights as holder of the common
securities to distributions and payments upon liquidation, redemption or
otherwise will be subordinated to the rights of the holders of the convertible
preferred securities.
We will acquire common securities in an aggregate liquidation amount
equal to 3% of the total capital of Commonwealth Bankshares Capital Trust.
Commonwealth Bankshares Capital Trust has a term of approximately 40 years, but
may terminate earlier as provided in the amended and restated declaration of
trust. Commonwealth Bankshares Capital Trust's business and affairs are
conducted by its trustees, each appointed by us as holder of the common
securities.
Wilmington Trust Company, as property trustee, will act as sole
indenture trustee under the amended and restated declaration of trust.
Wilmington Trust Company will also act as trustee under the guarantee agreement
and the indenture. The holder of the common securities, or the holders of a
majority in liquidation amount of the convertible preferred securities if we
default, will be entitled to appoint, remove or replace the property trustee
and/or Delaware trustee. In no event will the holders of the convertible
preferred securities have the right to vote to appoint, remove or replace the
administrative trustees. Such voting rights are ours exclusively. The duties and
obligations of each trustee are governed by the amended and restated declaration
of trust. We will pay all fees and expenses related to Commonwealth Bankshares
Capital Trust and the offering of the convertible preferred securities and will
pay, directly or indirectly, all ongoing costs, expenses and liabilities of
Commonwealth Bankshares Capital Trust. The address and telephone number of the
principal executive office of Commonwealth Bankshares Capital Trust is c/o:
Commonwealth Bankshares, Inc.
403 Boush Street
Norfolk, VA 23510
Attention: Edward J. Woodard, Jr.
(757) 446-6900
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SELECTED HISTORICAL FINANCIAL INFORMATION
The following consolidated summary sets forth selected financial data
for Commonwealth Bankshares, Inc. and its subsidiaries for the periods and at
the dates indicated. You should read the detailed information and the financial
statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Year Ended December 31,
----------------------- --------------------------------------------------------
(Unaudited)
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Gross interest income $ 10,520 $ 7,820 $ 10,861 $ 9,547 $ 8,553 $ 7,744 $ 6,859
Gross interest expense 5,761 3,933 5,502 5,060 4,410 4,201 3,632
-------- ------- -------- -------- -------- -------- --------
Net interest income 4,759 3,887 5,359 4,487 4,143 3,543 3,227
Provision for loan losses 138 80 110 102 50 1 53
-------- ------- -------- -------- -------- -------- --------
Net interest income after provision
for loan losses 4,621 3,807 5,249 4,385 4,093 3,542 3,174
Non-interest income 894 886 1,209 1,186 869 871 810
Non-interest expense 4,362 3,546 4,856 3,984 3,605 3,213 2,866
-------- ------- -------- -------- -------- -------- --------
Income before income taxes 1,153 1,147 1,602 1,587 1,357 1,200 1,118
Income taxes 302 299 447 482 427 364 282
-------- ------- -------- -------- -------- -------- --------
Net income $ 851 $ 848 $ 1,155 $ 1,105 $ 930 $ 836 $ 836
======== ======= ======== ======== ======== ======== ========
Per Share Data:
Net income, basic $ 0.51 $ 0.52 $ 0.71 $ 0.68 $ 0.57 $ 0.51 $ 0.51
Net income, diluted 0.46 0.47 0.64 0.62 0.53 0.48 0.50
Cash dividends 0.105 0.070 0.105 0 0 0 0
Book value at period end 7.87 7.35 7.43 7.12 6.48 5.88 5.39
Period-End Balance Sheet Data:
Total assets $184,817 $144,941 $157,016 $132,237 $116,106 $106,170 $ 95,037
Total loans (net of unearned income) 148,435 113,255 125,045 91,576 78,251 65,835 61,373
Total deposits 161,077 121,792 138,358 116,170 100,760 90,262 82,256
Long-term debt 505 531 531 557 583 609 684
Stockholders' equity 13,201 12,051 12,227 11,580 10,531 9,568 8,770
Performance Ratios:
Return on average assets 0.66% 0.84% 0.83% 0.91% 0.85% 0.79% 0.94%
Return on average stockholders'
equity 8.91% 9.48% 9.63% 9.91% 9.35% 8.85% 10.17%
Average stockholders' equity to
average total assets 7.36% 8.84% 8.60% 9.11% 9.13% 8.91% 9.20%
Net interest margin 3.73% 3.96% 3.95% 3.81% 3.99% 3.75% 3.92%
Dividend payout ratio 20.59% 13.46% 14.79% -- -- -- --
Asset Quality Ratios:
Net charge-offs to average loans 0.05% 0.00% 0.14% 0.12% 0.02% 0.49% 0.01%
Allowance to period-end loans 0.68% 0.92% 0.74% 1.06% 1.23% 1.42% 2.05%
Allowance to nonperforming loans 61.16% 104.28% 78.76% 73.91% 61.56% 41.51% 67.78%
Nonaccrual loans to loans 1.10% 0.89% 0.89% 1.21% 1.85% 3.14% 2.70%
Nonperforming assets to loans and
foreclosed properties 1.30% 1.63% 1.36% 2.28% 3.74% 5.60% 7.90%
Capital Ratios:
Risk-based capital ratios
Tier 1 capital 8.98% 10.77% 10.10% 12.00% 12.82% 13.19% 13.38%
Total capital 9.65% 11.67% 10.80% 13.00% 14.00% 14.44% 14.63%
Leverage capital ratio 7.54% 8.88% 8.30% 8.90% 9.18% 9.10% 9.43%
Total equity to total assets 7.14% 8.31% 7.79% 8.76% 9.07% 9.01% 9.23%
</TABLE>
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<PAGE>
CAPITALIZATION
The following table sets forth our consolidated capitalization at
September 30, 2000. This table is based on, and is qualified in its entirety by,
our historical consolidated financial statements, including the related notes
thereto, which are included in documents incorporated by reference herein, and
should be read in conjunction therewith.
<TABLE>
<CAPTION>
September 30, 2000
----------------------------
(amounts in thousands)
<S> <C>
Long-term debt $ 505
Capitalized lease obligations -
Shareholders' equity:
Common stock, $2.50 par value, 5,000,000
Shares authorized, 1,678,466 shares
outstanding 4,196
Capital in excess of par value 5,383
Retained earnings 4,044
Accumulated other comprehensive income (loss) (422)
-----------
Total shareholders' equity 13,201
----------
Total capitalization 13,706
==========
Consolidated capital ratios:
Equity to assets 7.14%
Tier I capital 8.98%
Total capital 9.65%
</TABLE>
ACCOUNTING TREATMENT
The financial statements of Commonwealth Bankshares Capital Trust will
be consolidated into our consolidated financial statements, with the convertible
preferred securities treated as debt and shown in our consolidated balance sheet
as "long-term debt." The distributions payable on the convertible preferred
securities will be treated as interest expense in the consolidated statements of
income. Our financial statement footnotes will reflect that the sole asset of
Commonwealth Bankshares Capital Trust will be the amount of the junior
subordinated debt securities maturing on January 15, 2031. All future reports we
file under the Securities Exchange Act of 1934 will present information
regarding Commonwealth Bankshares Capital Trust and any other similar trusts in
the manner described above.
REGULATORY TREATMENT
As a registered bank holding company, we are required by the Federal
Reserve to maintain certain levels of capital for bank regulatory purposes. We
expect that the convertible preferred securities will be treated as "tier 1
capital" for such purposes; provided that the convertible preferred securities
can only comprise 25% of our tier 1 capital. Based on our tier 1 capital at
September 30, 2000, approximately $4.5 million of the convertible preferred
securities would be initially included in tier 1 capital. To the extent that the
convertible preferred securities are not included in our tier 1 capital, they
will be included in our tier 2 capital.
BUSINESS
General
Bank of the Commonwealth was organized in 1970 and began operations in
April 1971. In 1988, Commonwealth Bankshares was formed to acquire Bank of the
Commonwealth. The only material activity of Commonwealth Bankshares is to own
and control all of the capital stock of Bank of the Commonwealth.
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<PAGE>
Headquartered in Norfolk, Virginia, we serve the retail and commercial
financial market as a deposit and loan specialist from seven full service branch
offices located in Norfolk, Virginia Beach and Chesapeake, Virginia and four
off-premises ATM locations. Bank of the Commonwealth also plans to open full
service branch offices in Franklin, Virginia and Portsmouth, Virginia in early
2001. Details regarding these planned branch openings are set forth in this
prospectus under "Recent Developments" beginning on page 13.
Our principal business is the acquisition of deposits from the general
public through our home and branch offices and use of these deposits to fund our
loan and investment portfolios. Bank of the Commonwealth is a full service
community bank that provides a wide variety of financial services to its small
and middle market business customers as well as to its retail customers. Our
commercial banking services include the acceptance of checking and savings
deposits and the initiation of commercial, real estate, personal, home
improvement, automobile and other installment and term loans. We also offer
related services such as home banking, trust, travelers checks, safe deposit,
lock box, deposits or transfer, customer note payment, collections, notary
public, escrow, and other customary banking services.
The principal sources of funds for our lending and investment
activities are deposits, amortization and repayment of loans, and other borrowed
money. Principal sources of revenue are interest and fees on loans and as well
as fees and service charges from the maintenance of deposit accounts. Our
principal expenses include interest paid on deposits and other borrowings and
operating expenses.
Lending Activities
Our lending focus and the composition of our loan portfolio have not
changed significantly over the past five years. However, the size of our loan
portfolio has increased significantly. The growth of our loan portfolio reflects
our focus on commercial mortgage lending and lending to small and middle size
businesses. During the four year period ended December 31, 1999, our total loans
increased from $60.1 million at December 31, 1995 to $124.1 million at December
31, 1999, an increase of $64 million or 106%. At September 30, 2000, our total
loans equaled $147.4 million.
Today, the principal lending activity of Bank of the Commonwealth is
the origination of commercial mortgage and non-mortgage loans to small and
medium-sized businesses, including loans through various lending programs of the
Small Business Administration. Bank of the Commonwealth is an active lender in
the Richmond District of the Small Business Administration. The Small Business
Administration 7(a) and 504 loan programs are economic development programs. The
504 loan program is used to finance long-term fixed assets, primarily real
estate and large/heavy equipment and is designed to create new jobs or retain
existing jobs. The credit structure of the 504 loan program gives borrowers
access to 90% of their financing needs for a particular project. Fifty percent
is provided by the financial institution in the form of a first lien position
and 40% is provided by the certified development company with a second lien
position. The borrower provides the remaining 10% of the funds required for the
project. Small Business Administration 7(a) loans may be used by start-up
businesses for the purchase of real estate, construction, renovation or
leasehold improvements, as well as machinery, equipment, furniture, fixtures,
inventory, and in some instances, working capital and debt refinancing. The
Small Business Administration guarantees up to 80% of the loan balance under the
7(a) program.
Bank of the Commonwealth also makes consumer home equity loans,
consumer loans and construction loans.
Commercial Real Estate Lending
Bank of the Commonwealth offers an extensive array of commercial real
estate loans in addition to the Small Business Administration programs described
above. Outstanding commercial real estate loans totaled $80.2 million at
September 30, 2000, which represented approximately 54% of our loans receivable.
Of these outstanding loans, $76.0 million were permanent and $4.2 million were
construction loans. These loans are secured by real estate with loan-to-values
averaging less than 70%. During the four year period ended December 31, 1999,
our total commercial real estate loans increased from $27.3 million at December
31, 1995 to $67.7 million at December 31, 1999, an increase of $40.4 million or
148%.
17
<PAGE>
Commercial Business Lending
In general, commercial business loans involve somewhat more credit risk
than do residential mortgage loans and real estate backed commercial loans and,
therefore, usually yield a higher return to Bank of the Commonwealth. The
increased credit risk for commercial loans is due to the type of collateral
securing the loans. The increased credit risk also derives from the expectation
that commercial loans generally will be serviced principally from the borrower's
business operations. If a borrower's operations do not meet expectations, there
is a significant chance the borrower will default on the loan. Historical trends
have shown these types of loans to have higher delinquencies than mortgage
loans. Therefore, Bank of the Commonwealth utilizes the Small Business
Administration 7(a) loan program to reduce the inherent risk associated with
this type of lending. Outstanding commercial business loans totaled $24.2
million at September 31, 2000, which represented approximately 16.4% of our
loans receivable. During the four year period ended December 31, 1999, our total
commercial business loans increased from $8.9 million at December 31, 1995 to
$23.3 million at December 31, 1999, an increase of $14.4 million or 162%.
Residential Lending
Bank of the Commonwealth makes fixed and adjustable rate, first and
second residential mortgage loans with terms up to 30 years with rate and call
options averaging 5 years from date of origination. Residential mortgage loans
are secured by single-family homes. Bank of the Commonwealth also makes
construction loans and permanent loans to retain in its own loan portfolio on
individual single family and other residential properties. Bank of the
Commonwealth does not underwrite residential mortgages for sale in the secondary
market. Construction loans generally have interest rates of prime plus one to
two percent and fees of one to two points, loan-to-value ratios of 80% or less
based on current appraisals and terms of generally twelve months or less. In the
case of conventional loans, Bank of the Commonwealth typically lends up to 80%
of the appraised value of single-family residences.
Outstanding residential mortgage loans totaled $31.2 million at
September 30, 2000, which represented approximately 21.2% of our loans
receivable. During the four year period ended December 31, 1999, our total
residential mortgage loans increased from $18.7 million at December 31, 1995 to
$25.1 million at December 31, 1999, an increase of $6.4 million or 34%.
Consumer Lending
Bank of the Commonwealth offers various types of secured and unsecured
consumer loans. These loans are offered as a convenience to our customer base
since these products are not the primary focus of our lending activities.
Outstanding consumer loans totaled $10.4 million at September 30, 2000, which
represented approximately 7.1% of our loans receivable. During the four year
period ended December 31, 1999, our total consumer loans increased from $4.0
million at December 31, 1995 to $6.5 million at December 31, 1999, an increase
of $2.5 million or 63%.
Income from Lending Activities
Income from loan origination fees and other fees are sources of income
which vary with the volume and type of loans and commitments made and with
competitive and economic conditions. Interest on loans and loan fees amounted to
approximately 92.2% of Bank of the Commonwealth's total revenue for the nine
months ended September 30, 2000.
18
<PAGE>
Loan Portfolio Composition
The following table sets forth the composition of Commonwealth
Bankshares' loan portfolio at the dates indicated:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
---------------------------------------- -------------------------------------------------------
2000 1999 1999 1998 1997
-------------------- ---------------- ----------------- ---------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 24,214 16.3% $ 20,497 18.0% $ 23,307 18.6% $ 15,990 17.4% $ 13,861 17.7%
Commercial Construction 4,195 2.8 1,122 1.0 1,712 1.4 1,522 1.7 1,601 2.0
Commercial Mortgage 76,025 51.0 59,286 52.2 65,986 52.6 46,379 50.5 35,091 44.7
Residential Mortgage 31,293 21.0 23,372 20.6 25,146 20.0 19,577 21.3 19,836 25.3
Installment Loans to
Individuals 10,441 7.0 6,506 5.7 6,538 5.2 5,564 6.1 4,875 6.2
Other 2,774 1.9 2,892 2.5 2,817 2.2 2,818 3.0 3,181 4.1
--------- ------- --------- ------- --------- ------- -------- ------- -------- -------
Gross loans 148,942 100.0% 113,675 100.0% 125,506 100.0% 91,850 100.0% 78,445 100.0%
====== ===== ===== ===== =====
Less:
Deferred fees 507 420 461 274 194
Allowance for loan losses 1,003 1,048 931 969 969
--------- --------- --------- -------- --------
Total loans $ 147,432 $ 112,207 $ 124,114 $ 90,607 $ 77,282
========= ========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996 1995
--------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(amounts in thousands)
<S> <C> <C> <C> <C>
Commercial $ 11,079 16.8% $ 8,890 14.4%
Commercial Construction 1,868 2.8 1,470 2.4
Commercial Mortgage 28,797 43.6 25,796 41.9
Residential Mortgage 17,206 26.1 18,668 30.3
Installment Loans to
Individuals 4,601 7.0 3,970 6.4
Other 2,448 3.7 2,810 4.6
-------- ------- -------- -------
Gross loans 65,999 100.0% 61,604 100.0%
======= =======
Less:
Deferred fees 164 231
Allowance 932 1,256
-------- --------
Total loans $ 64,903 $ 60,117
======== ========
</TABLE>
The following table sets forth the scheduled maturity of selected loans
as of September 30, 2000:
<TABLE>
<CAPTION>
Over 1 Year
Through 5 Years Over 5 Years
--------------- ------------
One Year Fixed Floating Fixed Floating
or Less Rate Rate Rate Rate Total
------- ---- ---- ---- ---- -----
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 6,164 $ 3,291 $ 2,627 $ 4,355 $ 7,777 $ 24,214
Commercial Construction 2,888 0 0 1,067 240 4,195
Commercial Mortgage 6,350 3,258 2,705 17,848 45,864 76,025
------- ------- ------- ------- ------- --------
TOTAL $15,402 $ 6,549 $ 5,332 $23,270 $53,881 $104,434
======= ======= ======= ======= ======= ========
</TABLE>
19
<PAGE>
Loan Underwriting Policies
Because of the credit risk associated with the extension of loans,
leases, certain securities, and financial guarantees, Bank of the Commonwealth
has established policies and procedures to manage both on and off-balance sheet
risk. The Bank of the Commonwealth communicates and monitors the application of
these policies and procedures throughout its organization. Our overall objective
in managing our loan portfolio risk is to minimize the adverse impact of any
single event or set of occurrences. In order to achieve this objective, Bank of
the Commonwealth continually 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. Detailed loan applications are obtained to determine the
borrower's ability to repay, and the more significant items on these
applications are verified through the use of credit reports, financial
statements and confirmations. 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. The rating is reviewed
for appropriateness by senior line and credit policy personnel for any
deterioration in a borrower's financial condition that would impact the
borrower's ability to repay the credit. These risk ratings are adjusted as
necessary. For consumer loans, approval and funding is conducted in various
locations with a majority of loans being approved at Bank of the Commonwealth'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, Bank of the Commonwealth
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. All property valuations are
performed by independent outside appraisers who are reviewed by the Vice
President of Real Estate Lending who reports his findings annually to Bank of
the Commonwealth's board of directors. Bank of the Commonwealth obtains real
property as security for some loans that are made on the basis of general credit
worthiness of a borrower and whose proceeds were not used for real estate
related purposes.
For loans secured by real estate, Bank of the Commonwealth's policy is
to retain a mortgage creating a valid lien on the real estate and to obtain a
title insurance policy that insures the property is free of encumbrances. Hazard
insurance is also required from the borrower. Flood insurance is required if the
property is in a flood plain as designated by the Department of Housing and
Urban Development. Most borrowers are also required to advance funds on a
monthly basis from which Bank of the Commonwealth makes disbursements for items
such as real estate taxes and hazard and flood insurance.
Bank of the Commonwealth has a standing credit committee comprised of
officers. The members of this committee have defined lending authorities as
individuals and in combination. These individual authorities are determined by
the Chief Executive Officer, subject to approval by our board of directors'
separate credit committee. The credit committee of the board, which consists of
two members of the board of directors and the Chief Executive Officer, is
responsible for the qualitative review of the loan portfolio and for assuring
compliance with all of the board's policies and procedures and applicable state
and federal laws, rules and regulations.
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 risks
have expedited Bank of the Commonwealth's disposition, collection and
renegotiation of nonperforming and other low-quality assets and allowed loan
officers to concentrate on generating new business. Interest rates charged by
Bank of the Commonwealth are affected primarily by competitive market factors.
These factors include general economic conditions, monetary policies of the
Federal Reserve Bank, legislative tax policies and government budgetary matters.
20
<PAGE>
When a borrower fails to make a required payment, Bank of the
Commonwealth attempts to cause the deficiency to be cured by contacting the
borrower. After 10 days, a reminder notice is sent indicating that a late charge
has been levied. After 30 days delinquency, the borrower is contacted by phone
and responses are documented. After 90 days, if the loan has not been brought
current or an acceptable arrangement is not worked out with the borrower, Bank
of the Commonwealth will institute measures to remedy the default, including
commencing foreclosure action with respect to mortgage loans and repossessions
of collateral in the case of consumer loans.
If foreclosure on real estate occurs, the property is sold at a public
auction in which Bank of the Commonwealth may participate as a bidder. If Bank
of the Commonwealth is the successful bidder, the acquired real estate property
is then included in its real estate owned account until it is sold. Such assets
are carried at the lower of cost or fair value net of estimated selling costs.
To the extent there is a decline in value, that amount is charged to operating
expense.
The aggregate amount of loans that Bank of the Commonwealth may make to
one borrower is limited to 15% of Bank of the Commonwealth's unimpaired capital
and surplus. At September 30, 2000, the maximum amount of loans to one borrower
was approximately $1.9 million. As of September 30, 2000, the largest aggregate
amount of loans to any one borrower was $1.9 million.
Past Due Loans and Nonperforming Assets
The following table sets forth information regarding past due loans and
nonperforming assets as of the periods indicated:
<TABLE>
<CAPTION>
At September 30, At December 31,
------------------ ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(Unaudited) (amounts in thousands)
Accruing Loans 90 Days or More(1) Delinquent:
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate $ - $ 77 $ - $ - $ - $ 102 $ 38
Installment 6 176 13 10 7 9 21
Credit Cards and Related Plans 9 68 22 57 41 20 37
Commercial (Time and Demand) and Other Loans 52 146 38 135 76 49 102
---------------------------------------------------------------------------
Total $ 67 $ 467 $ 73 $ 202 $ 124 $ 180 $ 198
===========================================================================
Non-Performing Loans:
Real Estate Loans $ 1,107 $ 878 $ 881 $ 1,054 $ 1,343 $ 1,869 $ 1,445
Installment Loans 191 61 184 41 28 16 62
Credit Cards and Related Plans - - - - - - -
Commercial (Time and Demand) and Other Loans 342 66 44 14 79 180 148
---------------------------------------------------------------------------
Subtotal 1,640 1,005 1,109 1,109 1,450 2,065 1,655
---------------------------------------------------------------------------
Real Estate Owned 295 855 601 999 1,533 1,720 3,467
---------------------------------------------------------------------------
Total Non-Performing Assets $ 1,935 $ 1,860 $ 1,710 $ 2,108 $ 2,983 $ 3,785 $ 5,122
===========================================================================
Non-Performing Assets to Total Assets 1.05% 1.40% 1.09% 1.59% 2.57% 3.57% 5.39%
===========================================================================
</TABLE>
(1) Includes Portion Guaranteed by The Small Business Administration
At September 30, 2000, loans totaling $1.21 million were classified as
potential problem loans that are not reported in the table above. The loans are
subject to management attention and their classification is reviewed on a
quarterly basis. At September 30, 2000, all of the potential problem loans were
adequately secured in the opinion of management.
Allowance for Loan Losses
Management evaluates the adequacy of the loan loss allowance at least
quarterly. As a result of that process, potential problem loans are categorized
as doubtful, substandard and/or special mention or loss. Each
21
<PAGE>
quarter the board of directors considers a review of the loans in Bank of the
Commonwealth's portfolio, conducts an evaluation of the credit quality and
reviews the adequacy of the loan loss provision, recommending changes as may
from time to time be required. In establishing the appropriate classification
for specific assets, management takes into account, among other factors, the
estimated value of the underlying collateral, the borrower's ability to repay,
the borrower's payment history and the current delinquent status. The remaining
loan portfolio is evaluated for potential loss exposure by examining the growth
and composition of the portfolio, previous loss experience, current delinquency
levels, industry concentration and general economic conditions.
The allowance for loan losses represents management's estimate of an
amount adequate to provide for potential losses inherent in the loan portfolio
in the normal course of business. However, there are additional risks of future
losses that cannot be quantified precisely or attributed to particular loans or
classes of loans. Because those risks include general economic trends as well as
conditions affecting individual borrowers, management's judgement of the
allowance necessary is approximate. Commonwealth Bankshares performs a detailed
loan review, including an assessment of the adequacy of the allowance for loan
losses. The allowance is also subject to regulatory examinations and
determination as to the adequacy of the allowance in comparison to peer
institutions identified by the regulatory agencies. After recent discussions
with banking regulators, Bank of the Commonwealth agreed to take a one time
additional loan loss allowance of $1 million in the fourth quarter of 2000. For
a discussion of the effect of this additional loan loss allowance on our
financial condition, please carefully read the Risk Factor titled "We are going
to make an additional allowance for loan losses, which will reduce our net
income for the 2000 fiscal year and the book value of our common stock," which
appears on page 12. If this additional loan loss allowance had been taken on
September 30, 2000, our ratio of allowance to loans at that date would have been
approximately 1.35%.
The following table summarizes activity in Commonwealth Bankshares'
allowance for loan losses during the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------------------- -----------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Allowance at Beginning of Period $ 931 $ 969 $ 969 $ 969 $ 932 $ 1,256 $ 1,208
========= =========== =========== ========= ========= ========= =======
Provision for Losses 138 80 110 102 50 - 53
Charge offs:
Commercial 12 9 49 21 0 59 0
Commercial Construction 0 0 0 0 0 0 0
Commercial Mortgage 0 0 0 32 0 174 0
Residential Mortgage 36 0 0 0 0 0 0
Installment Loans to Individuals 10 0 53 41 27 62 7
Other 13 0 55 11 4 43 6
--------- ----------- ----------- --------- --------- --------- -------
Total Charge-offs 71 9 157 105 31 338 13
--------- ----------- ----------- --------- --------- --------- -------
Recoveries:
Commercial 0 0 0 0 0 3 0
Commercial Construction 0 0 0 0 0 0 0
Commercial Mortgage 0 2 2 0 11 1 0
Residential Mortgage 0 0 0 0 0 0 0
Installment Loans to Individuals 5 6 7 2 3 6 6
Other 0 0 0 1 4 4 2
--------- ----------- ----------- --------- --------- --------- -------
Total recoveries: 5 8 9 3 18 14 8
--------- ----------- ----------- --------- --------- --------- -------
Net Charge-offs 66 1 148 102 13 324 5
--------- ----------- ----------- --------- --------- --------- -------
Allowance at end of period $ 1,003 $ 1,048 931 969 969 932 1,256
--------- ----------- ----------- --------- --------- --------- -------
Loans at end of period $ 148,435 $ 113,255 $ 125,045 $ 91,576 $ 78,251 $ 65,835 $61,373
========= =========== =========== ========= ========= ========= =======
Ratio of allowance to loans 0.68% 0.92% 0.74% 1.06% 1.23% 1.42% 2.05%
</TABLE>
22
<PAGE>
The following table summarizes the composition of the allowance for
loan losses.
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------------------------------------------------------------------------------------------------
2000 1999 1999 1998 1997 1996
---- ---- ------- ------ ------ ------
Amt % Amt % Amt % Amt % Amt % Amt %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 33 14.10% $ 372 50.54% $332 57.14% $262 31.64% $ 34 6.25% $ 12 16.83%
Commercial
construction 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00
Commercial
mortgage 187 79.91 244 33.15 177 30.46 420 50.73 222 40.81 249 46.58
Residential
mortgage 0 0.00 44 5.98 47 8.09 84 10.15 211 38.78 26 26.13
Installment loans
to individuals 5 2.14 8 1.09 3 0.52 5 0.60 36 6.62 10 6.74
Other 9 3.85 68 9.24 22 3.79 57 6.88 41 7.54 20 3.72
Unallocated 769 N/A 312 N/A 350 N/A 141 N/A 425 N/A 615 N/A
------ ------- ----- ------- ---- ------ ---- ------ ---- ------ ---- -------
Total $1,003 100.00% $1,048 100.00% $931 100.00% $969 100.00% $969 100.00% $932 100.00%
====== ====== ====== ====== ==== ====== ==== ====== ==== ====== ==== ======
<CAPTION>
At December 31,
--------------------
1995
--------------------
Amt %
<S> <C> <C>
Commercial $ 9,435 14.48%
Commercial
construction 0 0.00
Commercial
mortgage 319,710 44.43
Residential
mortgage 35,070 30.42
Installment loans to
individuals 15,520 6.09
Other 28,974 4.58
Unallocated 847,291 N/A
---------- ------
Total $1,256,000 100.00%
========== ======
</TABLE>
Commonwealth Bankshares has allocated the allowance according to the
amount deemed to be reasonably necessary to provide for losses incurred
within each of the above categories of loans. These figures are based on
gross loans. The allocation of the allowances as shown in the table above
should not be interpreted as an indication that loan losses in future years
will occur in the same proportions or that the allocation indicates future
loan loss trends. Furthermore, the portion allocated to each loan category
is not the total amount available for future losses that might occur within
such categories since the total allowance is a general allowance applicable
to the entire portfolio.
Investment Activities
The following table sets forth the investment portfolio as of the
periods indicated:
<TABLE>
<CAPTION>
September 30, December 31,
---------------- ----------------------------------------------
2000 1999 1998 1997
---- ---- ---- ----
(amounts in thousands)
<S> <C> <C> <C> <C>
Available-for-sale securities, at fair value:
U.S. Government and agency securities $ 4,291 $ 4,208 $ 3,504 $ 4,961
Mortgage-backed securities 5,994 6,900 8,736 6,032
State and municipal securities 4,288 4,148 4,589 689
Other debt securities 250 - - -
Other equities 210 222 - 152
--------- ---------- ---------- ----------
$ 15,033 $ 15,478 $ 16,829 $ 11,834
========= ========== ========== ==========
Held-to-maturity securities, at amortized cost:
U.S. Government and agency securities $ 750 $ 750 $ 1,072 $ 4,921
Mortgage-backed securities 1,871 2,171 2,814 4,132
State and municipal securities 1,790 1,786 1,780 1,777
--------- ---------- ---------- ----------
$ 4,411 $ 4,707 $ 5,666 $ 10,830
========= ========== ========== ==========
</TABLE>
Source of Funds
Deposits
Deposit accounts have been the primary source of funds for use in
lending, making other investments, and for other general business purposes.
In addition to deposits, Commonwealth Bankshares obtains funds from loan
repayments, maturing investments, loan sales, cash flows generated from
operations and Federal Home Loan Bank advances. Borrowings may be used as
an alternative source of lower costing funds or to fund the origination of
certain assets.
23
<PAGE>
The following tables show the average balances and rates, presented on
a monthly average basis, for Commonwealth Bankshares' deposits for the
periods indicated:
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Year Ended December 31,
--------------------- ------------------------------------------------------------------
2000 1999 1998 1997
---- ---- ---- ----
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ---- ------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 17,768 0.00% $ 14,946 0.00% $ 13,500 0.00% $ 12,204 0.00%
Interest-bearing demand deposits 19,274 2.32 18,479 2.42 17,027 2.93 17,416 2.97
Savings deposits 6,145 2.33 6,288 2.30 6,082 2.98 5,055 2.97
Certificates of deposit:
Less than $100,000 86,746 6.15 64,119 5.76 57,110 6.04 52,822 6.04
$100,000 or more 22,480 6.08 16,674 5.59 12,605 5.85 6,227 5.63
--------- --------- --------- ---------
$ 152,413 $ 120,506 $ 106,324 $ 93,784
========= ========= ========= =========
</TABLE>
The following table sets forth by time remaining until maturity
Commonwealth Bankshares' certificates of deposit of $100,000 or more at
September 30, 2000:
Time Deposits of
Maturity Period $100,000 or More
--------------- ----------------
(amounts in thousands)
Three months or less $2,996
Over three months through twelve months 4,361
Over twelve months 12,033
--------
Total $19,390
=======
Borrowings
Borrowings consist of short-term and long-term advances from the
Federal Home Loan Bank of Atlanta, repurchase agreements, and Fed Funds
purchased from correspondent banks. The following table sets forth
information regarding Commonwealth Bankshares' borrowings for the periods
indicated:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, Year Ended December 31,
-------------------- --------------------------------------------
2000 1999 1998 1997
---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Ending Balance $ 7,725 $ 4,156 $ $2,484 $ 2,760
Average Balance for the Period 5,402 4,798 2,854 3,165
Maximum Month-end Balance During the Period 7,725 10,008 3,948 4,359
Average Interest Rate for the Period 6.19% 6.57% 5.03% 4.75%
Weighted Average Interest Rate at the End of the Period 6.49% 4.36% 4.25% 4.43%
</TABLE>
Regulation
Set forth below is a brief description of the material laws and
regulations that affect Commonwealth Bankshares. The description of these
laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, is not necessarily complete and is qualified in
its entirety by reference to these laws and regulations.
24
<PAGE>
General
Commonwealth Bankshares is a bank holding company within the meaning of
the Bank Holding Company Act of 1956, as amended. As such, Commonwealth
Bankshares is supervised by the Board of Governors of the Federal Reserve
System. Commonwealth Bankshares is also subject to Virginia laws that regulate
banks and bank holding companies. Virginia's banking laws are administered by
the Bureau of Financial Institutions of the State Corporation Commission of
Virginia. Commonwealth Bankshares is also affected by rules and regulations of
the Federal Deposit Insurance Corporation. Commonwealth Bankshares is a member
of the Federal Reserve System and the Federal Home Loan Bank of Atlanta. The
various laws and regulations administered by the regulatory agencies affect
corporate practices, expansion of business, and provisions of services. Also,
monetary and fiscal policies of the United States directly affect bank loans and
deposits and thus may affect Commonwealth Bankshares' earnings. The future
impact of these policies and of the continuing regulatory changes in the
financial services industry cannot be predicted.
The supervision, regulation and examination of Bank of the Commonwealth
are intended primarily for the protection of depositors rather than holders of
Commonwealth Bankshares securities.
Bank Holding Company Regulation
Commonwealth Bankshares is required to file with the Federal Reserve
its periodic reports and any additional information the Federal Reserve may
require. The Federal Reserve examines Commonwealth Bankshares and may examine
its subsidiaries. The State Corporation Commission also may examine Commonwealth
Bankshares.
The Bank Holding Company Act requires prior Federal Reserve approval
for, among other things, the acquisition of direct or indirect ownership or
control of more than 5% of the voting shares or substantially all of the assets
of any bank, or a merger or consolidation of a bank holding company with another
bank holding company. A bank holding company may acquire direct or indirect
ownership or control of voting shares of any company that is engaged directly or
indirectly in banking or managing or controlling banks or performing services
for its authorized subsidiaries. A bank holding company also may engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve has determined by regulation or order to be so closely related to
banking as to be a proper incident thereto.
The activities permissible to bank holding companies and their
affiliates were substantially expanded by the Gramm-Leach-Bliley Act, which the
President signed on November 12, 1999. Gramm-Leach-Bliley repeals the anti-
affiliation provisions of the Glass-Steagall Act to permit the common ownership
of commercial banks, investment banks and insurance companies. Under
Gramm-Leach-Bliley, a bank holding company can elect to be treated as a
financial holding company. A financial holding company may engage in any
activity and acquire and retain any company that the Federal Reserve determines
to be financial in nature. A financial holding company also may engage in any
activity that is complementary to a financial activity and does not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally. The Federal Reserve must consult with the Secretary
of the Treasury in determining whether an activity is financial in nature or
incidental to a financial activity.
Commonwealth Bankshares is a legal entity separate and distinct from
Bank of the Commonwealth. Section 23A of the Federal Reserve Act restricts loans
from Bank of the Commonwealth to Commonwealth Bankshares. Section 23A defines
"covered transactions," which include loans, and limits a bank's covered
transactions with any affiliate to 10% of the bank's capital and surplus. It
also requires that all of a bank's loans to an affiliate be secured by
acceptable collateral, generally United States government or agency securities.
Commonwealth Bankshares and Bank of the Commonwealth also are subject to Section
23B of the Federal Reserve Act, which requires that transactions between Bank of
the Commonwealth and Commonwealth Bankshares or its other subsidiaries be on
terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to Bank of the Commonwealth as
those prevailing at the time for transactions with unaffiliated companies.
25
<PAGE>
Federal Reserve policy requires a bank holding company to act as a
source of financial strength and to take measures to preserve and protect bank
subsidiaries in situations where additional investments in a troubled bank may
not otherwise be warranted. As a result, a bank holding company may be required
to lend money to its subsidiaries in the form of capital notes or other
instruments which qualify as capital under regulatory rules. Any loans from the
holding company to such subsidiary banks likely will be unsecured and
subordinated to such bank's depositors and perhaps to other creditors of its
bank subsidiaries.
Bank Supervision
As a Virginia bank that is a member of the Federal Reserve System, Bank
of the Commonwealth is regulated and examined by the State Corporation
Commission and by its primary federal regulator, the Federal Reserve. The State
Corporation Commission and the Federal Reserve regulate and monitor all of Bank
of the Commonwealth's operations, including reserves, loans, mortgages, payments
of dividends and the establishment of branches.
Various statutes limit the ability of Bank of the Commonwealth to pay
dividends, extend credit or otherwise supply funds to Commonwealth Bankshares
and its non-bank subsidiaries. Dividends from Bank of the Commonwealth are
expected to constitute Commonwealth Bankshares' major source of funds.
Limits on Dividends and Other Payments
Virginia law restricts distributions of dividends to shareholders of
Commonwealth Bankshares. Commonwealth Bankshares shareholders are entitled to
receive dividends as declared by the Commonwealth Bankshares Board of Directors.
No distribution to Commonwealth Bankshares shareholders may be made if, after
giving effect to the distribution, Commonwealth Bankshares would not be able to
pay its debts as they become due in the usual course of business or its total
assets would be less than its total liabilities. There are similar restrictions
on stock repurchases and redemptions.
Banks have limits on all capital distributions, including cash
dividends, payments to repurchase or otherwise acquire shares, payments to
shareholders of another institution in a cash-out merger, and other
distributions charged against capital. As of September 30, 2000, Bank of the
Commonwealth had the capacity to pay no more than $3.0 million in total
dividends to its sole shareholder, Commonwealth Bankshares.
Bank of the Commonwealth may not make a capital distribution, including
the payment of a dividend, if, after the distribution, it would become
undercapitalized. The prior approval of the applicable Federal Reserve Bank is
required if the total of all dividends declared in any calendar year will exceed
the sum of the bank's net profits for that year and its retained net profits for
the preceding two calendar years. Federal Reserve Banks also may limit the
payment of dividends by any state member bank if it considers the payment an
unsafe or unsound practice. In addition, under Virginia law no dividend may be
declared or paid that would impair a Virginia chartered bank's paid-in capital.
The State Corporation Commission has general authority to prohibit payment of
dividends by a Virginia chartered bank if it determines that the limit is in the
public interest and is necessary to ensure the bank's financial soundness.
Regulatory Capital Requirements and FDIC Regulations
All banks are required to maintain minimum levels of regulatory
capital. The federal bank regulatory agencies have established substantially
similar risked based and leverage capital standards for banks that they
regulate. These regulatory agencies also may impose capital requirements in
excess of these standards on a case-by-case basis for various reasons, including
financial condition or actual or anticipated growth. Under the risk-based
capital requirements of these regulatory agencies, Commonwealth Bankshares and
Bank of the Commonwealth are required to maintain a minimum ratio of total
capital to risk-weighted assets of at least 8%. At least half of the total
capital is required to be tier 1 capital, which consists principally of common
and certain qualifying preferred shareholders' equity, less certain intangibles
and other adjustments. The remainder, tier 2 capital, consists of a limited
amount of subordinated and other qualifying debt and a limited amount of the
general loan loss allowance.
26
<PAGE>
In addition, the federal regulatory agencies have established a minimum
leverage capital ratio, tier 1 capital divided by tangible assets. These
guidelines provide for a minimum leverage capital ratio of 3% for banks and
their respective holding companies that meet certain specified criteria,
including that they have the highest regulatory examination rating and are not
contemplating significant growth or expansion. All other institutions are
expected to maintain a leverage ratio of at least 100 to 200 basis points above
that minimum. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
The Federal Deposit Insurance Corporation Improvements Act of 1991
required each federal banking agency to revise its risk-based capital standards
to ensure that those standards take adequate account of interest rate risk,
concentration of credit risk and the risks of non-traditional activities. Each
federal banking agency has issued regulations, specifying the levels at which a
financial institution would be considered "well capitalized", "adequately
capitalized", "under capitalized", "significantly under capitalized", or
"critically under capitalized", and to take certain mandatory and discretionary
supervisory actions based on the capital level of the institution. Those
supervisory actions become increasingly severe for banks that are under-
capitalized or worse.
Under the Federal Reserve's regulations implementing the prompt
corrective action provisions, an institution is considered well capitalized if
it has total risk-based capital of 10% or more, has a tier 1 risk-based capital
ratio of 6% or more, has a leverage capital ratio of 5% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure.
An adequately capitalized institution has a total risk-based capital
ratio of 8% or more, a tier 1 risk-based ratio of 4% or more and a leverage
capital ratio of 4% or more (3% under certain circumstances) and does not meet
the definition of well capitalized.
An undercapitalized institution has a total risk-based capital ratio
that is less than 8%, a tier 1 risk-based capital ratio that is less than 4% or
a leverage capital ratio that is less than 4% (3% in certain circumstances).
Undercapitalized banks are subject to growth limits and are required to submit a
capital restoration plan for approval. For a capital restoration plan to be
acceptable, the bank's parent holding company must guarantee that the bank will
comply with the capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of 5% of the bank's total assets at the
time it became undercapitalized and the amount necessary to bring the
institution into compliance with applicable capital standards. If a bank fails
to submit an acceptable plan, it is treated as if it is significantly
undercapitalized. If the controlling holding company fails to fulfill its
obligations and files (or has filed against it) a petition under the federal
Bankruptcy Code, the claim would be entitled to a priority in such bankruptcy
proceeding over third-party creditors of Commonwealth Bankshares.
A significantly undercapitalized institution has a total risk-based
capital ratio that is less than 6%, a tier I risk-based capital ratio that is
less than 3% or a leverage capital ratio that is less than 3%. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets, and
cessation of receipt of deposits from correspondent banks.
A critically undercapitalized institution has a ratio of tangible
equity to total assets that is equal to or less than 2%. A critically
undercapitalized bank is likely to be put in receivership and liquidated.
In addition, under certain circumstances, a federal banking agency may
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized institution
to comply with supervisory actions as if it were in the next lower category.
The Federal Deposit Insurance Corporation Improvements Act also
required federal banking regulators to draft standards in a number of other
important areas to assure bank safety and soundness, including internal
controls, information systems and internal audit systems, credit underwriting,
asset growth, compensation, loan documentation and interest rate exposure. The
Federal Deposit Insurance Corporation Improvements Act also required the
regulators to establish maximum ratios of classified assets to capital, and
minimum earnings sufficient to absorb losses without impairing capital. The
legislation also contained other provisions which restricted the
27
<PAGE>
activities of state-chartered banks, amended various consumer banking laws,
limited the ability of undercapitalized banks to borrow from the Federal
Reserve's discount window and required federal banking regulators to perform
annual onsite bank examinations.
The 1991 legislation also contains a variety of other provisions that
may affect the operations of Commonwealth Bankshares and Bank of the
Commonwealth, including new reporting requirements, regulatory standards for
estate lending, "truth in savings" provisions, the requirement that a depository
institution give 90 days' prior notice to customers and regulatory authorities
before closing any branch, and a prohibition on the acceptance or renewal of
brokered deposits by depository institutions that are not well capitalized or
are adequately capitalized and have not received a waiver from the FDIC.
The chart below sets forth Commonwealth Bankshares' regulatory capital
ratios at September 30, 2000 as well as various regulatory standards.
<TABLE>
<CAPTION>
Minimum Ratios
---------------------------------------------------------------------
Commonwealth Adequately
Bankshares Well Capitalized Capitalized Undercapitalized
---------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Tier 1 Capital Ratio 8.98% 6% 4% 3%
Total Capital Ratio 9.65% 10% 8% 6%
Leverage Capital Ratio 7.54% 5% 4% 3%
</TABLE>
Deposit Insurance
The deposits of Bank of the Commonwealth are currently insured to a
maximum of $100,000 per depositor, subject to certain aggregation rules. The
FDIC has implemented a risk-related assessment system for deposit insurance
premiums. All depository institutions have been assigned to one of nine risk
assessment classifications based on certain capital and supervisory measures.
Based on its current risk classifications, Commonwealth Bankshares pays the
minimum Bank Insurance Fund assessments.
Community Reinvestment Act
Commonwealth Bankshares and Bank of the Commonwealth are subject to the
provisions of the Community Reinvestment Act of 1977, as amended ("CRA"). Under
the Community Reinvestment Act, all banks have an obligation, consistent with
its safe and sound operation, to help meet the credit needs for their entire
communities, including low and moderate-income neighborhoods. The Community
Reinvestment Act does not establish specific lending requirements or programs
for financial institutions, nor does it limit an institution's discretion to
develop the types of products and services that it believes are best suited to
its particular community consistent with the Community Reinvestment Act. A
depository institution's primary federal regulator, in connection with its
examination of the institution, must assess the institution's record in
assessing and meeting the credit needs of the community served by that
institution, including low and moderate-income neighborhoods. The regulatory
agency's assessment of the institution's record is made available to the public.
Further, such assessment is required of any institution which has applied to
charter a national bank, obtain deposit insurance coverage for a newly chartered
institution, establish a new branch office that accepts deposits, relocate an
office or merge or consolidate with, or acquire the assets or assume the
liabilities of, a federally regulated financial institution. If a bank holding
company applies for approval to acquire a bank or other bank holding company,
the Federal Reserve will assess the records of each subsidiary depository
institution of the applicant bank holding company, and such records may be the
basis for denying the application. Following its Community Reinvestment Act
examination in November 1999, Bank of the Commonwealth received a "satisfactory"
Community Reinvestment Act rating.
Fiscal and Monetary Policy
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitutes the major portion of a bank's earnings. Thus,
the earnings and growth of
28
<PAGE>
Commonwealth Bankshares and Bank of the Commonwealth will be subject to the
influence of economic conditions generally, both domestic and foreign, and also
to the monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve. The Federal Reserve regulates the supply of
money through various means, including open market dealings in United States
government securities, the discount rate at which banks may borrow from the
Federal Reserve, and the reserve requirements on deposits. The nature and timing
of any changes in such policies and their effect on Commonwealth Bankshares and
Bank of the Commonwealth cannot be predicted.
Federal Home Loan Bank System
Commonwealth Bankshares is a member of the Federal Home Loan Bank
System, which consists of 12 district Federal Home Loan Banks with each subject
to supervision and regulation by the Federal Housing Finance Board. The Federal
Home Loan Banks provide a central credit facility for member institutions.
Commonwealth Bankshares, as a member of the Federal Home Loan Bank of Atlanta,
is required to acquire and hold shares of capital stock in that Federal Home
Loan Bank in an amount equal to at least 1% of the aggregate principal amount of
their unpaid residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of their borrowings from the
Federal Home Loan Bank of Atlanta, whichever is greater.
Advances from the Federal Home Loan Bank of Atlanta are secured.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the Federal Home Loan Bank of Atlanta and the purpose of the borrowing.
At September 30, 2000, Commonwealth Bankshares did not have any outstanding
borrowings from the Federal Home Loan Bank of Atlanta. However, we anticipate
borrowing between $3 million and $4 million by the end of 2000 from the Federal
Home Loan Bank to fund loan production.
Federal Reserve System
The Federal Reserve Board of Governors requires all depository
institutions to maintain reserves against their transaction accounts and non-
personal time deposits. Because required reserves must be maintained in the form
of vault cash or a noninterest-bearing account at a Federal Reserve Bank, the
effect of this reserve requirement is to reduce the earning assets of
Commonwealth Bankshares.
Competition
Commonwealth Bankshares experiences substantial competition in
attracting and retaining deposits and in lending funds. The primary factors in
competing for deposits are convenient office locations and rates offered. Direct
competition for deposits comes from other commercial banks and thrift
institutions. Additional significant competition for deposits comes from money
market mutual funds and corporate and government securities which may yield more
attractive interest rates than insured depository institutions are willing to
pay. The primary factors in competing for loans are interest rate and loan
origination fees and the range of services offered. Competition for origination
of real estate loans normally comes from other commercial banks, thrift
institutions, mortgage bankers, mortgage brokers and insurance companies.
Employees
At September 30, 2000, Commonwealth Bankshares employed 83 full-time
equivalent persons. Management considers its relations with its employees to be
good. None of the employees of Commonwealth Bankshares or Bank of the
Commonwealth is covered by a collective bargaining agreement.
Offices and Other Material Properties
At September 30, 2000, Commonwealth Bankshares conducted its business
from its main office in Norfolk, Virginia and from 7 branch offices and 4 remote
ATM locations. The following table sets forth certain information with respect
to the offices of Commonwealth Bankshares as of September 30, 2000:
29
<PAGE>
Home Office:
<TABLE>
<CAPTION>
Office Location Owned or Leased Lease Expiration Date Date Facility Opened
<S> <C> <C> <C>
Home Office:
-----------
403 Boush Street Owned* 11/08 2/86**
Norfolk, VA
Branch Offices:
--------------
4101 Granby Street Leased 9/04 4/79
Norfolk, VA
5201 Hampton Blvd. Leased 6/05 8/00
Norfolk, VA
1124 First Colonial Road Owned N/A 3/75
Virginia Beach, VA
2712 N. Mall Drive Leased 11/06 11/91***
Virginia Beach, VA
225 S. Rosemont Road Leased 6/02 7/82
Virginia Beach, VA
1870 Kempsville Road Leased 12/08 6/96
Virginia Beach, VA
1217 Cedar Road Leased 10/08 7/00
Chesapeake, VA
</TABLE>
_______________________________
*This facility is 54.4% owned by Commonwealth Bankshares, subject to a
leasehold interest and purchase option as further described in the section
titled "Certain Relationships and Related Transactions - Business
Relationships and Transactions with Management" which appears on page 45.
**The main office originally opened at a different location in Norfolk in
April 1971.
***This branch originally opened at a different location in Virginia Beach in
July 1983.
Legal Proceedings
Commonwealth Bankshares is not a party to, nor is any of its property
the subject of, any material pending legal proceedings incidental to its
business other than those arising in the ordinary course of business. Although
the amount of any ultimate liability with respect to such matters cannot be
determined, in the opinion of management, any such liability will not have a
material adverse effect on the consolidated financial position or results of
operations of Commonwealth Bankshares.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
Net Income. Net income for the nine months ended September 30, 2000 was
$851 thousand, a small increase of 0.4% from net income of $848 thousand for the
nine months period ended September 30, 1999. Diluted earnings per share were
$.46 for the nine months ended September 30, 2000, or a small decrease of 0.2%
from diluted earnings per share of $.47 in the nine months ended September 30,
1999. The average number of diluted shares outstanding increased from 1,800,739
in the nine months ended September 30, 1999 to 1,843,372 from the nine months
ended September 30, 2000, or 2.4%.
Balance Sheet. Total assets were $184.8 million at September 30, 2000,
an increase of 27.5% from $144.9 million at September 30, 1999. The increase in
total assets was attributable mainly to an increase of 31.1% in loans, net of
deferred fees, as noted below, to $148.4 million at September 30, 2000 from
$113.3 million at September 30, 1999 and an increase of 32.7% in cash and
overnight deposits to $6.9 million at September 30, 2000 from $5.2 million at
September 30, 1999. Total investment securities declined 5.8% to $20.1 million.
Total deposits increased 32.3% to $161.1 million at September 30, 2000, from
$121.8 million at September 30, 1999.
Loans. Loan, net of deferred fees, were $148.4 million at September 30,
2000, an increase of $35.1 million, or 31.1%, from $113.3 million at September
30, 1999. During the twelve months ended September 30, 2000, we continued to
emphasize commercial mortgage lending and lending to small and medium sized
businesses, including loans through various lending programs of the Small
Business Administration. Commercial mortgage loans were $76.0 million at
September 30, 2000, an increase of $16.7 million, or 28.2% from $59.3 million at
September 30, 1999. Commercial loans were $24.2 million, an increase of $3.7
million, or 18.1% from 20.5 million. Residential mortgage loans were $31.3
million, an increase of $7.9 million, or 33.8% from $23.4 million and
installment loans to individuals were $10.4 million, an increase of $3.9
million, or 60.5% from $6.5 million at September 30, 1999.
Investment Securities. Investment securities declined over the last
twelve months and were $20.1 million at September 30, 2000, a reduction of $1.2
million, or 5.8%, from $21.3 million at September 30, 1999. The portfolio of
investment securities at September 30, 2000 consisted of $15.0 million in
securities classified as hold-to-maturity and $4.4 million classified as
available-for-sale with each category lower than the September 30, 1999 level.
The portfolio of securities hold-to-maturity consisted of U.S. Government and
agency securities, mortgage-backed securities of Federal National Mortgage
Association, Government National Mortgage Association and Federal Home Loan
Mortgage Association collateralized mortgage obligations and obligations of
counties and municipalities. The investments classified as available-for-sale
consisted of the same types of mortgage-backed securities, collateralized
mortgage obligations, commercial mortgage-backed securities, obligations of
counties and municipalities and obligations of government-sponsored agencies.
Liabilities. Deposits at September 30, 2000 were $161.1 million, an
increase of $39.3 million, or 32.3%, over deposits of $121.8 million at
September 30, 1999. The weighted average interest rate for all accounts
increased to 5.22% at September 30, 2000 from 4.37% at September 30, 1999.
Advances from the Federal Home Loan Bank of Atlanta totaled $0.0 at
September 30, 2000, a decrease of $3.4 million from $3.4 million at September
30, 1999.
Results of Operations
Our operating results depend primarily on net interest income, which is
the difference between interest and dividend income on interest-earning assets,
such as loans and investments, and interest expense on interest-bearing
liabilities such as deposits and borrowings. Operating results are also affected
by the level of its noninterest income, including income or loss from the sale
of loans and fees and service charges on deposit accounts, and by the level of
operating expenses, including salaries and employee benefits, occupancy
expenses, deposit insurance assessments and income taxes. The following tables
provide information regarding changes in interest income and interest expense,
as well as the underlying components of interest-earning assets and
interest-bearing liabilities.
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<PAGE>
The following table presents, for the periods indicated, average
monthly balances of and weighted average yields on interest-earning assets
and average balances and weighted average effective interest paid on
interest bearing liabilities.
Average Balances, Yields and Rates
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year ended December 31,
---------------------- -------------------------------------------------------------------
2000 1999 1998 1997
---- ---- ---- ----
Average Average Average Average Average Average Average Average
balance yield/rate balance yield/rate balance yield/rate balance yield/rate
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
(taxable-equivalent basis(1)):
Loans receivable (net of
unearned discount(2)) $137,699 9.13% $106,664 8.95% $84,917 9.25% $71,481 9.48%
Investments 24,417 6.69% 23,495 5.73% 28,951 5.88% 28,420 6.26%
-------- -------- ------- -------
Total interest-earning assets 162,116 8.76% 130,160 8.48% 113,868 8.47% 99,901 8.56%
-------- -------- ------- -------
Interest-bearing liabilities
Deposits 134,645 5.47% 105,560 4.99% 92,823 5.29% 81,580 5.19%
Borrowings 5,913 5.89% 5,329 4.49% 3,411 4.49% 3,748 4.64%
-------- -------- ------- -------
Total interest-bearing liabilities 140,558 5.47% 110,889 4.96% 96,234 5.26% 85,328 5.17%
-------- -------- ------- -------
Average dollar difference
between interest-earning assets
and interest-bearing liabilities $ 21,558 $ 19,271 $17,634 $14,573
======== ======== ======= =======
Interest rate spread 3.29% 3.52% 3.21% 3.39%
Interest margin 4.03% 4.25% 4.04% 4.21%
</TABLE>
______________________
(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.
(2) For the purposes of these computations, nonaccruing loans are included
in the daily average loan amounts outstanding.
The following table presents information regarding changes in interest
income and interest expense for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is
provided on changes attributable to changes in volume (changes in volume
multiplied by old rate) and changes in rates (changes in rates multiplied
by old volume). The dollar amount changes in interest income and interest
expense attributable to changes in rate/volume (change in rate multiplied
by change in volume) have been allocated between rate and volume variances
based on the percentage relationship of such variances to each other.
32
<PAGE>
Rate/Volume Analysis
(in thousands)
<TABLE>
<CAPTION>
Nine Months ended September 30, 2000 Year ended December 31, 1999 Year ended December 31, 1998
compared to compared to compared to
Nine Months ended September 30, 1999 year ended December 31, 1998 year ended December 31, 1997
----------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Investment securities $ (116) $ 20 $ (96) $ (23) $ (53) $ (76) $ (98) $ (90) $ (188)
Federal funds sold 183 33 216 (249) (30) (279) 114 (3) 111
Loans 3,246 230 3,476 1,930 (255) 1,675 1,235 (172) 1,063
------ ----- ------ ------ ------ ------ ------ ------ ------
Total interest income 3,313 283 3,596 1,658 (338) 1,320 1,251 (265) 986
------ ----- ------ ------ ------ ------ ------ ------ ------
Interest Expense
Savings and time
Deposits 1,715 524 2,289 607 (251) 356 592 79 671
Short term debt 99 57 156 85 3 88 (13) (6) (19)
Long term debt (25) 17 (8) (1) (1) (2) (1) (1) (2)
------ ----- ------ ------ ------ ------ ------ ------ ------
Total interest expense 1,789 648 2,437 691 (249) 442 578 72 650
------ ----- ------ ------ ------ ------ ------ ------ ------
Increase (Decrease) in
Net Interest Income $1,524 $(365) $1,159 $ 967 $ (89) $ 878 $ 673 $(337) $ 336
====== ===== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Comparison of the Nine Month Period ended September 30, 2000 with the Nine Month
Period ended September 30, 1999
Commonwealth Bankshares' net income for the nine months ended September
30, 2000 was $851 thousand, a small increase of 0.4% over net income of $848
thousand for the nine months ended September 30, 1999. The relatively flat net
income was attributable to the costs associated with opening two new branch
offices and five new ATM machines during the first nine months of 2000 ended
September 30. Diluted earnings per share for the nine months ended September 30,
2000 were $.46, a small decrease of $.01, or 2.1%, from $.47 per share for the
nine months ended September 30, 1999. The weighted average number of diluted
shares of common stock outstanding was 1,843,372 for the nine months of 2000
ended September 30 and 1,800,739 for the comparable nine months of 1999.
Net Interest Income. Net interest income before provisions for loan
losses was $4.8 million for the nine months ended September 30, 2000, an
increase of $872 thousand, or 22.4% over $3.9 million for the nine months ended
September 30, 1999. This increase was due to the growth in the average level of
earning assets from $126.1 million to $162.1 million, which more than offset a
small decline in the interest rate spread from 3.37% in the first nine months of
1999 to 3.29% in the first nine months of 2000. In addition, the increase in
volume of earning assets, particularly higher yielding loans, more than offset a
decline in the interest margin from 4.25% to 4.03% during 2000.
Total Interest Income. Total interest income was $10.5 million for the
nine months ended September 30, 2000, an increase of 34.5% over $7.8 million for
the nine months of 1999 ended September 30. This increase resulted from growth
in interest earning assets. Average loans receivable, net of unearned discount,
increased by $35.7 million, or 35.0%, and average investment securities were
virtually unchanged at $24.1 million in the first nine months of 1999 and $24.4
million in the first nine months of 2000.
The yield on interest earning assets was 8.76% for the nine months
ended September 30, 2000, which increased from 8.29% for the nine months ended
September 30, 1999. For the nine months ended September 30, 2000, the yield on
average loans receivable was 9.13%, up from 8.91% for the nine months ended
September 30, 1999, while the yield on average investment securities increased
from 6.28% during the first nine months of 1999 to 6.69% during the first nine
months of 2000.
Total Interest Expense. Total interest expense for the nine months
ended September 30, 2000 was $5.8 million, an increase of 46.5% over $7.8
million for the nine months ended September 30, 1999. This increase was due
primarily to growth in the average balance of deposits, which were $134.6
million for the nine months ended September 30, 2000 compared to $102.5 million
for the nine months ended September 30, 1999. The average
33
<PAGE>
effective rate paid on interest-bearing liabilities was 5.47% for the nine
months ended September 30, 2000, an increase of 55 basis points from 4.92% for
the nine months ended September 30, 1999.
Provision for Loan Losses. The provision for loan losses amounted to
$138 thousand for the nine months ended September 30, 2000, an increase over the
provision of $80 thousand for the nine months ended September 30, 1999. The
provision for loan losses is a current charge to earnings to increase the
allowance for loan losses. We have established the allowance for loan losses to
absorb the inherent risk in lending after considering an evaluation of the loan
portfolio, current economic conditions, changes in the nature and volume of
lending and past loan experience. Although we believe that the allowance is
adequate, there can be no assurances that additions to the allowance will not be
necessary in future periods, which would adversely affect our results of
operations. After recent discussions with banking regulators, Bank of the
Commonwealth agreed to take a one time additional loan loss allowance of $1
million in the fourth quarter of 2000. For a discussion of the effect of this
additional loan loss allowance on our financial condition, please carefully read
the Risk Factor titled "We are going to make an additional allowance for loan
losses, which will reduce our net income for the 2000 fiscal year and the book
value of our common stock," which appears on page 12. The allowance for loan
losses at September 30, 2000 was $1.0 million, or 0.68% of total loans
receivable compared to $1.0 million, or 0.92% of loans receivable at September
30, 1999. If the additional loan loss allowance discussed above had been taken
on September 30, 2000, our ratio of allowance to loans on that date would have
been approximately 1.35%.
Other Income. Other income totaled $894 thousand for the nine months
ended September 30, 2000, a small increase of 0.9%, from $886 thousand for the
nine months ended September 30, 1999.
Other Expenses. Other expenses for the nine months ended September 30,
2000 were $4.4 million, an increase of 23.0% from $3.5 million for the nine
months ended September 30, 1999. Other expenses for the nine months ended
September 30, 2000 included the cost of staffing the two new branches and
opening five ATMs , normal wage increases for existing personnel and the costs
of the human infrastructure necessary to operate a larger and more complex
institution.
Expenses for premises and equipment increased $133 thousand to $894
thousand for the nine months ended September 30, 2000 compared to the first nine
months of 1999, while salaries and employee benefits increased $420 thousand
over the same respective periods. The increases in expenses are primarily
attributable to the opening of the new Chesapeake and Norfolk branches.
Other expenses increased to $1.3 million for the nine months ended
September 30, 2000 from $1.1 million in the first nine months of 1999.
Comparison of the Year Ended December 31, 1999 with the Year Ended December 31,
1998
Commonwealth Bankshares recorded net income for the year ended December
31, 1999 of $1.155 million, an increase of 4.53% over net income of $1.105
million for the year ended December 31, 1998. This increase in net income
reflects continued growth in core operating earnings, improved credit quality
and loan growth. Factors contributing to the increase in net income include a
13.76% increase in interest on loans and investments and loan fees; an increase
of 8.73% in interest on deposits and short-term borrowings; and an increase of
19.44% in net interest income from 1998 levels. Diluted earnings per share for
the year ended December 31, 1999 were $0.64 as compared to $0.62 for the year
ended December 31, 1998. The weighted average number of diluted shares of common
stock outstanding was 1,804,201 for the year ended December 31, 1999 and
1,788,986 for the year ended December 31, 1998.
Net Interest Income. Net interest income before provision for loan
losses was $5.359 million for the year ended December 31, 1999, an increase of
19.44% over $4.487 million for the year ended December 31, 1998. 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. This 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 sources
of funding.
34
<PAGE>
Total Interest Income. Total interest income was $10.861 million for
the year ended December 31, 1999, an increase of 13.76% over $9.547 million for
the year ended December 31, 1998. This increase primarily resulted from growth
in gross loans from $92 million in 1998 to $126 million in 1999 and
an increased rate of return on the loan portfolio.
Total Interest Expense. Total interest expense for the year ended
December 31, 1999 was $5.501 million, an increase of 8.73% over $5.061 million
for the year ended December 31, 1998. This increase was due primarily to an
increase in interest-bearing liabilities and the rate paid on interest-bearing
liabilities. The average effective rate paid on interest-bearing liabilities was
4.96% for the year ended December 31, 1999, a decrease of 30 basis points from
5.26% for the year ended December 31, 1998.
Provision for Loan Losses. The provision for loan losses amounted to
$109.8 thousand for the year ended December 31, 1999, an increase over the
provision of $101.7 thousand for the year ended December 31, 1998. The allowance
for loan losses at December 31, 1999 was $931 thousand, or .7% of year-end gross
loans compared to $969 thousand, or 1.06% of year-end gross loans at December
31, 1998.
Other Income. Other income totaled $1.209 million for the year ended
December 31, 1999, an increase of 1.9%, from $1.187 million for the year ended
December 31, 1998. The increase was primarily attributable to a significant
increase in service charges and fees on deposits.
Other Expenses. Other expenses for the year ended December 31, 1999
were $4.857 million, an increase of 21.9% from $3.984 million for the year ended
December 31, 1998. This increase is largely attributable to the overall growth
of Bank of the Commonwealth. Salaries and employee benefits expense totaled
$2.291 million for the year ended December 31, 1999 compared to $1.862 million
for the year ended December 31, 1998, an increase of 23%. Net occupancy expense
increased $28.7 thousand in 1999, primarily due to necessary modifications and
improvements to Bank of the Commonwealth's physical facilities. Other expenses
increased to $1.492 million for the year ended December 31, 1999 from $1.137
million for the prior year, an increase of $354.7 thousand or 31.2%.
Comparison of the Year Ended December 31, 1998 with the Year Ended December 31,
1997
Commonwealth Bankshares recorded net income for the year ended December
31, 1998 of $1.105 million, an increase of 18.85% over net income of $930
thousand for the year ended December 31, 1997. The increase in net income
reflects changes to the following significant items: an increase of 11.62% in
interest on loans and investments and loan fees; an increase of 14.74% in
interest on deposits and short-term borrowings and an increase of 8.30% in net
interest income from 1997 levels. Diluted earnings per share for the year ended
December 31, 1998 were $0.62 as compared to $0.53 for the year ended December
31, 1997. The weighted average number of diluted shares of common stock
outstanding were 1,788,986 for the year ended December 31, 1998 and 1,755,776
for the year ended December 31, 1997
Net Interest Income. Net interest income before provision for loan
losses was $4.487 million for the year ended December 31, 1998, an increase of
8.29% over $4.144 million for the year ended December 31, 1997. The net interest
margin from 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 cost of sources of funding.
Total Interest Income. Total interest income was $9.547 million for the
year ended December 31, 1998, an increase of 11.6% over $8.553 million for the
year ended December 31, 1997. This increase primarily resulted from growth in
gross loans from $78 million in 1997 to $92 million in 1998.
Total Interest Expense. Total interest expense for the year ended
December 31, 1998 was $5.060 million, an increase of 14.74% over $4.410 million
for the year ended December 31, 1997. This increase was due primarily to a 13.8%
increase interest-bearing liabilities when comparing December 30, 1998 to
December 30, 1997. The average effective rate paid on interest-bearing
liabilities was 5.26% for the year ended December 31, 1998, an increase of 09
basis points from 5.17% for the year ended December 31, 1997.
35
<PAGE>
Provision for Loan Losses. The provision for loan losses amounted to
$101.7 thousand for the year ended December 31, 1998, an increase over the
provision of $49.8 thousand for the year ended December 31, 1997. The allowance
for loan losses at December 31, 1998 was $969 thousand, or 1.06% of year-end
gross loans compared to $969 thousand, or 1.24% at December 31, 1997.
Other Income. Other income totaled $1.187 million for the year ended
December 31, 1998, an increase of 36.6%, from $869 thousand for the year ended
December 31, 1997. The increase was primarily attributable to a significant
increase in service charges and fees on deposits.
Other Expenses. Other expenses for the year ended December 31, 1998
were $3.984 million, an increase of 10.5% from $3.605 million for the year ended
December 31, 1997. This increase is largely attributable to the overall growth
of Bank of the Commonwealth. Salaries and employee benefits expense totaled
$1.862 million for the year ended December 31, 1998 compared to $1.710 million
for the year ended December 31, 1997, an increase of 8.9%. Net occupancy expense
increased $14.8 thousand in 1999, and was primarily due to necessary
modifications and improvements to Bank of the Commonwealth's physical
facilities. Other expenses increased to $1.137 million for the year ended
December 31, 1998 from $992.3 thousand for the prior year, an increase of $144.9
thousand or 14.6%.
Asset/Liability Management
Bank of the Commonwealth, like most other banks, is engaged primarily
in the business of investing funds obtained from deposits and borrowings into
interest-bearing loans and investments. Consequently, Bank of the Commonwealth's
earnings depend to a significant extent on its net interest income, which is the
difference between the interest income on loans and investments and the interest
expense on deposits and borrowing. Bank of the Commonwealth, to the extent that
its interest-bearing liabilities do not reprice or mature at the same time as
its interest-bearing assets, is subject to interest rate risk and corresponding
fluctuations in its net interest income. Asset/liability management policies
have been employed in an effort to manage Bank of the Commonwealth's
interest-earning assets and interest-bearing liabilities, thereby controlling
the volatility of net interest income, without having to incur unacceptable
levels of credit risk.
Our interest rate sensitivity is primarily monitored by management
through the use of a model which generates estimates of the change in our market
value of portfolio equity over a range of interest rate scenarios. That analysis
was prepared by a third party for Bank of the Commonwealth. Market value of
portfolio equity is the present value of expected cash flows from assets,
liabilities, and off-balance sheet contracts using standard industry assumptions
about estimated loan prepayment rates, reinvestment rates, and deposit decay
rates. The following table sets forth an analysis of our interest rate risk as
measured by the estimated change in market value of portfolio equity resulting
from instantaneous and sustained parallel shifts in the yield curve (plus or
minus 200 basis points) as of September 30, 2000.
Sensitivity of Market Value of Portfolio Equity
(amounts in thousands)
<TABLE>
<CAPTION>
Market Value of
Change in Market Value of Portfolio Equity Portfolio Equity as a % of
Interest Rates $ Change % Change Portfolio
In Basis Points From From Total Equity
(Rate Shock) Amount Base Base Assets Book Value
<S> <C> <C> <C> <C> <C>
UP 200 $10,509 ($2,910) (21.69%) 5.69% 125.62%
BASE 13,419 -- 0.00% 7.26% 101.65%
DOWN 200 15,334 1,915 14.27% 8.30% 116.16%
</TABLE>
36
<PAGE>
Bank of the Commonwealth's interest rate sensitivity is also monitored
by management through the use of a model that generates estimates of the change
in the adjusted net interest income over a range of interest rate scenarios.
That analysis was also prepared by a third party. Net interest income represents
the difference between income on interest-earning assets and expense on
interest-bearing liabilities. Net interest income also depends upon the relative
amounts of interest-earning assets and interest-bearing liabilities and the
interest rate earned or paid on them. In this regard, the model assumes that the
composition of our interest sensitive assets and liabilities at the beginning of
a period remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities.
Sensitivity of Net Interest Income
(amounts in thousands)
Change in Adjusted Net
Interest Rates Interest Income Net Interest Margin
In Basis Points % Change % Change
(Rate Shock) Amount From Base Percent From Base
UP 200 $6,861 3.99% 4.19% 3.97%
BASE 6,597 0.00% 4.03% 0.00%
DOWN 200 6,262 (5.09%) 3.82% -5.21%
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in market value of portfolio
equity and in sensitivity of net interest income require us to make assumptions
which may or may not reflect the manner in which actual yields and costs respond
to changes in market interest rates. Accordingly, although the market value of
portfolio equity table and sensitivity of net interest income table provide an
indication of our interest rate risk exposure at a particular point in time,
those measurements are not intended to and do not provide a precise forecast of
the effect of changes in market interest rates on our worth and net interest
income.
Liquidity and Capital Resources
Bank of the Commonwealth's principal sources of funds are deposits,
loan repayments, repayments from mortgage-backed securities, Federal Home Loan
Bank advances, other borrowings and retained income.
At September 30, 2000, Commonwealth Bankshares had $16.8 million of
undisbursed loan funds and $12.9 million of approved loan commitments. The
amount of certificate of deposit accounts maturing in the fourth quarter of 2000
is $9.7 million. Commonwealth Bankshares anticipates that most maturing
certificates of deposit will renew. Other sources of liquidity include payments
on loans, securities available for sale, which totaled $57.2 million at
September 30, 2000, and available lines of credit with the Bank of America,
SunTrust and the Federal Home Loan Bank, which total approximately $13.3
million.
Commonwealth Bankshares and Bank of the Commonwealth are subject to
regulations of the Federal Reserve Board that impose minimum regulatory capital
requirements. Under current Federal Reserve Board regulations, these
requirements are (a) leverage capital of 4.0% of adjusted average total assets;
(b) tier 1 capital of 4% of risk-weighted assets; (c) tier 1 and 2 capital of 8%
of risk-weighted assets. At September 30, 2000, the Bank of the Commonwealth's
capital ratios were 7.39% leverage capital; 8.81% tier 1 capital; and 9.48% tier
1 and 2 capital.
Impact of Inflation and Changing Prices
The financial statements and related notes presented herein have been
prepared in accordance with generally accepted accounting principles. These
require the measurement of financial position and operating results
37
<PAGE>
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of Commonwealth Bankshares are monetary in
nature. As a result, interest rates changes have a more significant impact on
our performance than the effects of general levels of inflation. Interest rates
may not necessarily move in the same direction or in the same magnitude as the
prices of goods and services. However, other expenses do reflect general levels
of inflation.
38
<PAGE>
MANAGEMENT
The Board of Directors
Commonwealth Bankshares' board of directors is currently comprised of 9
members who are divided into three classes. These directors serve for the terms
of their respective classes, which expire in 2001, 2002 and 2003. The following
table sets forth the composition of the board of directors.
Class I Class II Class III
(Term Expiring in 2001) (Term Expiring in 2002) (Term Expiring in 2003)
Morton Goldmeier George H. Burton, Jr. William P. Kellam
William D. Payne, M.D. Herbert Perlin Edward J. Woodard, Jr., CLBB
Richard J. Tavss Thomas W. Moss, Jr.
Kenneth J. Young
The following paragraphs set forth certain information, as of December
31, 1999, for each of the 9 directors of Commonwealth Bankshares.
Class I
(Term Expiring in 2001)
William D. Payne, M.D., 64, has practiced as a general, laproscopic and
endoscopic surgeon for, and served as President of, Drs. Payne, Ives, and
Holland, Inc. since 1974. Mr. Payne has served as a director of Commonwealth
Bankshares since 1988 and as a director of Bank of the Commonwealth since 1988.
Morton Goldmeier, 76, has served as President of Hampton Roads
Management Associates, Inc. since 1990 Mr. Goldmeier has served as a director of
Commonwealth Bankshares since 1988 and as a director of Bank of the Commonwealth
since 1988.
Richard J. Tavss, 60, has served as Senior Counsel of Tavss, Fletcher,
Maiden & King, P.C. since 1977. Mr. Tavss has served as a director of
Commonwealth Bankshares since 1988 and as a director of Bank of the Commonwealth
since 1988.
Class II
(Term Expiring in 2002)
George H. Burton, Jr., 89, has served as President of Burton Lumber
Corp., a building materials and supplies company located in Chesapeake,
Virginia, since 1953. Mr. Burton has served as a director of Commonwealth
Bankshares since 1988 and as a director of Bank of the Commonwealth since 1981.
Herbert Perlin, 59, has served as President of Perlin Benefit Resources
Inc., a regional pension company located in Chesapeake, Virginia since 1983. Mr.
Perlin has served as a director of Commonwealth Bankshares since 1988 and as a
director of Bank of the Commonwealth since 1987.
Kenneth J. Young, 49, has served as President of Leisure & Recreation
Consultants Inc., located in Tampa, Florida, since 1996. Mr. Young has served as
a director of Commonwealth Bankshares since 1999 and as a director of Bank of
the Commonwealth since 1999.
Thomas W. Moss, Jr., 72, has served as an attorney, President and sole
owner of Thomas W. Moss, Jr., P.C. since 1957. Mr. Moss has served as a director
of Commonwealth Bankshares since 1999 and as a director of Bank of the
Commonwealth since 1999.
39
<PAGE>
Class III
(Term Expiring in 2003)
William P. Kellam, 85, served as the President of Kellam - Eaton
Insurance Agency, Inc., a real estate and insurance firm in Virginia Beach,
Virginia, for 30 years prior to his retirement in 1986. Mr. Kellam has served as
a director of Commonwealth Bankshares since 1988 and as a director of Bank of
the Commonwealth since 1971.
Edward J. Woodard, Jr., CLBB, 57, has served as President and Chief
Executive Officer of Bank of the Commonwealth since 1973 and as Chairman of the
Board since 1988. He has served as Chairman of the Board, President and Chief
Executive Officer of Commonwealth Bankshares since 1988. Mr. Woodard has served
as a director of Bank of the Commonwealth since 1973 and as a director of
Commonwealth Bankshares since 1988.
Executive Officers of Commonwealth Bankshares and Bank of the Commonwealth
In addition to Mr. Woodard, the following individuals serve as our
executive officers.
John H. Gayle, 61, Executive Vice President and Secretary of
Commonwealth Bankshares and Executive Vice President and Cashier of Bank of the
Commonwealth since 1990; Director, Vice President, Secretary and Treasurer of
BOC Title of Hampton Roads, Inc.; and Director, Vice President and Treasurer of
BOC Insurance Agency of Hampton Roads, Inc.
Simon Hounslow, 35, Senior Vice President and Commercial Loan Officer
of Bank of the Commonwealth since 1993.
Security Ownership of Management
The following table sets forth, based on information as of September
30, 2000, the beneficial ownership of Commonwealth Bankshares common stock by
each director of Commonwealth Bankshares and by each person named in the
"Summary Compensation Table" below.
Number of Shares(1) Percent of Class (2)
------------------- --------------------
George H. Burton, Jr. 66,777(3) 3.95
Morton Goldmeier 75,340(4) 4.44
William P. Kellam 35,123(5) 2.07
Thomas W. Moss, Jr. 2,479(6) *
William D. Payne, M.D. 19,449(7) 1.15
Herbert Perlin 44,519(8) 2.62
Richard J. Tavss 120,947(9) 7.13
Edward J. Woodard, Jr. 42,998(10) 2.53
Kenneth J. Young 2,513(11) *
All Directors and Executive
Officers
(11 persons) 445,679 24.26
____________________
*Percentage of ownership is less than one percent of the outstanding shares of
Commonwealth Bankshares common stock.
(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 which an individual has the right to acquire within 60 days
through the exercise of stock options.
(2) Based on 1,678,466 issued and outstanding shares of common stock as of
September 30, 2000.
40
<PAGE>
(3) Includes (i) 13,177 shares which Mr. Burton has the right to acquire
through the exercise of stock options and (ii) 8,345 shares registered
in the name of the Clarice B. Burton revocable trust dated 5/21/83.
(4) Includes (i) 18,000 shares which Mr. Goldmeier has the right to acquire
through the exercise of stock options and (ii) 13,560 shares owned by
Mr. Goldmeier's wife, for which Mr. Goldmeier disclaims beneficial
ownership.
(5) Includes (i) 18,000 shares which Mr. Kellam has the right to acquire
through the exercise of stock options and (ii) 16,375 shares owned by
Mr. Kellam's wife, for which Mr. Kellam disclaims beneficial ownership.
(6) Includes 2,000 shares which Mr. Moss has the right to acquire through
the exercise of stock options.
(7) Includes 18,000 shares which Dr. Payne has the right to acquire through
the exercise of stock options.
(8) Includes (i) 18,000 shares which Mr. Perlin has the right to acquire
through the exercise of stock options, (ii) 18,321 shares registered in
the name of Herbert L. Perlin, Profit Sharing Trust, of which Mr.
Perlin is Acting Trustee, (iii) 3,955 shares owned jointly by Mr.
Perlin and his wife and (iv) 3,633 shares registered in the name of the
Perlin Revocable Living Trust.
(9) Includes (i) 18,000 shares which Mr. Tavss has the right to acquire
through the exercise of stock options, (ii) 1,231 shares registered in
the name of Richard J. Tavss, Custodian for Bobbie J. Tavss, (iii) 205
shares registered in the name of Richard J. Tavss, Custodian for Sander
T. Schoolar (iv) 201 shares registered in the name of Richard J. Tavss,
Custodian for Zachary Maiden (v) 201 shares registered in the name of
Richard J. Tavss, Custodian for Taylor Tavss Schoolar V.
(10) Includes (i) 24,133 shares which Mr. Woodard has the right to acquire
through the exercise of stock options, (ii) 628 shares registered in
the name of E. J. Woodard, Jr., Custodian for Troy Brandon Woodard,
(iii) 1,492 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) 8,593 shares owned jointly by Mr. Woodard and his wife.
(11) Includes 2,000 shares which Mr. Young has the right to acquire through
the exercise of stock options.
Security Ownership of Certain Beneficial Owners
The following table sets forth, to the knowledge of Commonwealth
Bankshares and based on information as of December 31, 1999, the beneficial
ownership of each person, other than a member of our board of directors, who
owns more than five percent of the outstanding shares of Commonwealth Bankshares
common stock.
Name and Address of Holder Beneficial Ownership
-------------------------- ----------------------
Shares Percent
------ -------
John Hancock Mutual Life 91,437 5.6%
Insurance Company
101 Huntington Avenue
Boston, Massachusetts 02199
Director Compensation
Each director of Commonwealth Bankshares is paid $800 for attendance at
each board meeting and $400 for attendance at each meeting of a committee of the
board of which he or she is a member. Additionally, Commonwealth Bankshares has
a Director's Deferred Compensation Plan which allows directors to defer
recognition of income on all or any portion of the directors' fees they earn.
41
<PAGE>
Executive Officer Compensation
The following table presents information concerning the compensation of
Mr. Woodard. No other executive officer of Commonwealth Bankshares earned
combined salary and bonus in excess of $100,000 in 1999. This table presents
compensation for services rendered in all capacities to Commonwealth Bankshares
and Bank of the Commonwealth by Mr. Woodard in 1999, 1998 and 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Name and Principal Other Annual
Position Year Salary Bonus Compensation(1)
-------------------------------- ----------- -------------- ------------ -----------------
<S> <C> <C> <C> <C>
Edward J. Woodard, Jr. 1999 $182,500 $18,500 $23,600
Chairman of the Board, 1998 175,000 15,000 16,300
President and Chief 1997 165,100 10,000 12,100
Executive Officer
</TABLE>
__________________
(1) Includes directors' fees.
Option Grants in Last Fiscal Year
The following table sets forth information for the year ended December
31, 1999 regarding grants of stock options to Mr. Woodard.
Option Grants in Year Ended December 31, 1999
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Percent of Total Stock Price
Number of Securities Options Granted to Appreciation for
Underlying Options Employees in Expiration Option Term
Name Granted Fiscal Year Exercise Price Date 5%($) 10%($)
---- ------------------ ----------- -------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Edward J. Woodard, Jr. 2,500 33% $15.03 12/31/09 $61,206 $97,460
</TABLE>
Option Exercises in Last Fiscal Year
No stock options were exercised in 1999 by Mr. Woodard. Set forth in
the table below is information concerning the year end value of exercisable and
unexercisable options held by Mr. Woodard as of December 31, 1999.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying
Unexercised Options at Value of Unexercised In-the-Money
December 31, 1999 Options at December 31, 1999(1)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Name Exercisable Unexercisable Exercisable Unexercisable
Edward J. Woodard, Jr. 19,133/(2)/ 5,000 $46,433/(2)/ $0
</TABLE>
_________________________
(1) Based on a price of $9.00 per share for Commonwealth Bankshares common
stock.
(2) In February 2000, Mr. Woodard exercised options to acquire 5,064 shares at
an exercise price of $4.81 per share.
42
<PAGE>
Employment Agreements
Edward J. Woodard, Jr., Chairman of the Board, President and Chief
Executive Officer of Commonwealth Bankshares and Bank of the Commonwealth has
entered into an employment agreement with Bank of the Commonwealth. The
agreement provides for Mr. Woodard's employment until the earlier of December
31, 2000, his death or his physical or mental disability; provided, however, the
employment agreement allows for the termination of employment by either Bank of
the Commonwealth or Mr. Woodard in the event of a "change of control" of
Commonwealth Bankshares or Bank of the Commonwealth, or by Mr. Woodard for "good
reason." Mr. Woodard's employment agreement will be renewed automatically each
year unless either party elects not to renew the agreement.
Under the employment agreement, in the case of a termination by
Commonwealth Bankshares or Bank of the Commonwealth prior to a "change in
control," but not "for good cause," Mr. Woodard will be entitled to receive
twelve (12) equal monthly payments, which, in total, equal his annual base
salary, plus directors' fees. In the event of a termination of the employment
agreement by Mr. Woodard for "good reason," or by Commonwealth Bankshares or
Bank of the Commonwealth subsequent to a "change of control," but not "for good
cause," Mr. Woodard will be entitled to receive sixty (60) equal monthly
payments which, in total, equal approximately three times the present value of
his annual compensation at the time of termination.
Under the Agreement, a "change of control" will be deemed to have occurred
upon:
. any third party acquiring, or entering into a definitive agreement to
acquire, more than twenty-five (25%) of the stock of either
Commonwealth Bankshares or Bank of the Commonwealth;
. a change in the majority of the members of the board of directors of
either Commonwealth Bankshares of Bank of the Commonwealth during any
one year period; or
. Commonwealth Bankshares ceasing to be the owner of all of Bank of the
Commonwealth's common stock, except for any directors' qualifying
shares.
The term "for good cause" includes a termination of Mr. Woodard for his
failure to perform the required services, gross or willful neglect of his duty
or a legal or intentional act demonstrating bad faith. The term "good reason" is
defined as any assignment to Mr. Woodard of duties or responsibilities
inconsistent with those in effect on the date of the agreement or a change of
control of either Commonwealth Bankshares or Bank of the Commonwealth.
Mr. Woodard has also entered into an amended and restated deferred
supplemental compensation agreement with Bank of the Commonwealth. Under the
supplemental agreement, upon Mr. Woodard attaining the age of 65, upon his
termination with Bank of the Commonwealth for any reason whatsoever or upon his
death, Mr. Woodard or his beneficiary would be entitled to a payment of
$250,000. Additionally, under the supplemental agreement, in the event that Mr.
Woodard attains, or would have attained, the age of 65 years, Mr. Woodard or his
designated beneficiary will be entitled to a payment of $360,000. In additional
to each of these payments, the supplemental agreement provides that upon Mr.
Woodard's death, his beneficiary shall be entitled to a lump sum payment of
$250,000. Under the supplemental agreement, Mr. Woodard is obligated to make
himself available to Bank of the Commonwealth after his retirement, so long as
he receives payments under the supplemental agreement, for occasional
consultation which Bank of the Commonwealth may reasonably request. Any amounts
unpaid under the supplemental agreement may be forfeited, after notice to Mr.
Woodard, in the event that the board of directors of Bank of the Commonwealth
determines in good faith that Mr. Woodard is performing services of any kind for
a firm or other entity competitive with the business of Bank of the Commonwealth
during the period that he is receiving payments under the supplement agreement.
Certain Relationships and Related Transactions
Loans to Officers and Directors. Certain directors and officers of
Commonwealth Bankshares and Bank of the Commonwealth, members of their immediate
family, and corporations, partnerships and other entities with which they are
associated, are customers of Bank of the Commonwealth. Accordingly, some of
these individuals have engaged in transactions with Bank of the Commonwealth in
the ordinary course of business and will have additional transactions with Bank
of the Commonwealth in the future. All loans, or commitments to lend, extended
by Bank of the Commonwealth to any of these individuals are made in the ordinary
course of business upon substantially the same
43
<PAGE>
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with affiliated persons, and do not involve more
than the normal risk of collectibility or present other unfavorable features. As
of December 31, 1999, the amount of loans from Bank of the Commonwealth to all
officers and directors of Commonwealth Bankshares and/or Bank of the
Commonwealth, or entities in which they are associated, was approximately $3.2
million. This amount represented 26.3% of the total equity capital of Bank of
the Commonwealth as of December 31, 1999.
Business Relationships and Transactions with Management. In the
ordinary course of its business, Commonwealth Bankshares and Bank of the
Commonwealth have engaged in certain transactions with their officers and
directors in which the officers and directors had a significant interest. All of
these transactions were made on substantially the same terms as those prevailing
at the time for comparable transactions with unaffiliated parties. For example,
Bank of the Commonwealth 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 Commonwealth Bankshares and Bank of the Commonwealth, is senior
counsel, to perform certain legal services for Commonwealth Bankshares and Bank
of the Commonwealth.
In 1984, Bank of the Commonwealth entered into a lease with Boush Bank
Building Associates, a limited partnership, to rent the headquarters building of
Commonwealth Bankshares and Bank of the Commonwealth. 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
Commonwealth Bankshares and Bank of the Commonwealth. The lease requires Bank of
the Commonwealth 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 SunTrust
Bank in Richmond, Virginia. Monthly rent paid by Bank of the Commonwealth is
equal to interest on the above bond, plus any interest associated with secondary
financing provided the lessor by Bank of the Commonwealth. Bank of the
Commonwealth 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 Bank of the Commonwealth's return on average assets is
less than seven-tenths of one percent. Under this provision Bank of the
Commonwealth has purchased 54.4% of this property for a total of $999,611. No
purchases have been made after 1988. Commonwealth Bankshares believes the terms
of the lease are not less favorable than could be obtained from a non-related
party.
Additionally, in 1998, the Bank of the Commonwealth entered into a
lease with respect to its branch at 1245 Cedar Road, Chesapeake, Virginia with
Morton Realty Associates, a Virginia general partnership, and Richard J. Tavss
and several other parties who share ownership and responsibility as landlord
under the lease. Morton Goldmeier is a partner in Morton Realty Associates, one
of the landlords under the lease, and is also a member of the board of directors
of the Bank of the Commonwealth and Commonwealth Bankshares. Richard J. Tavss,
also one of the landlords under the lease, is also a member of the board of
directors of the Bank of the Commonwealth and Commonwealth Bankshares. Annual
lease payments under the lease currently are $95,136. The board of directors of
Commonwealth Bankshares reviewed two independent appraisals with respect to this
property prior to entering into this lease. We believe the terms of this lease
are no less favorable than could be obtained from a non-related party in an
arms-length transaction.
Stock Option and Employee Benefit Plans
1990 Stock Option Plan. On February 20, 1990, Commonwealth Bankshares'
board of directors approved a non-qualified stock option plan for the issuance
of 25,000 shares of Commonwealth Bankshares' common stock to eligible officers
and key employees of Commonwealth Bankshares and Bank of the Commonwealth at
prices not less than the market value of Commonwealth Bankshares' common stock
on the date of grant. On April 29, 1997, the shareholders approved an amendment
to this plan to increase the number of shares available for issuance under the
plan to 45,000 shares. This plan expired on February 20, 2000. However, the
terms of this plan continue to govern unexercised options awarded under the plan
that have not expired.
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401(k) Profit Sharing Plan. In 1993, Bank of the Commonwealth adopted a
thrift and profit sharing plan qualified under Section 401(k) of the Internal
Revenue Code to replace Bank of the Commonwealth's former profit sharing plan.
Employees who have attained the age of 20 years and six months and completed six
months of service with Bank of the Commonwealth are eligible to participate in
the 401(k) plan. Eligible employees who elect to participate may contribute up
to 15% of their annual salary to the 401(k) plan. The Bank of the Commonwealth
may make a matching contribution, the amount of which, if any, will be
determined by Bank of the Commonwealth each year. Bank of the Commonwealth
contributed a matching contribution of $17,577 and a discretionary profit
sharing contribution of $27,423 to the 401(k) plan during 1999.
Non-Employee Director Stock Compensation Plan. On April 25, 1995
Commonwealth Bankshares' shareholders approved a non-employee director stock
compensation plan. This plan provided for the issuance of options to acquire
50,000 shares of Commonwealth Bankshares' common stock to eligible non-employee
directors at prices determined by the average of the five most recent trades of
the common stock on the over-the-counter market during the period immediately
preceding an option's grant date or such other value per share as was determined
by the employee directors. On April 29, 1997, shareholders approved an amendment
to this plan to increase shares available for issuance under this plan to 70,000
shares. This plan expired January 17, 2000. However, the terms of this plan
continue to govern unexercised options awarded under the plan that have not
expired.
1999 Stock Incentive Plan. On April 27, 1999, Commonwealth Bankshares'
shareholders approved the Commonwealth Bankshares, Inc. 1999 Stock Incentive
Plan. This plan provides for the issuance of up to the lesser of (i) fifteen
percent (15%) of Commonwealth Bankshares' issued and outstanding common stock
less the aggregate number of shares subject to issuance pursuant to options
granted, or available for grant, under the 1990 plan and non-employee director
plan described above, or (ii) 350,000 shares. Of the aggregate number of shares
of Commonwealth Bankshares' common stock that may be subject to award under this
plan, sixty percent (60%) are available for issuance to Commonwealth Bankshares'
non-employee directors, and forty percent (40%) are available for issuance to
Commonwealth Bankshares' employees. All the employees of Commonwealth Bankshares
and Bank of the Commonwealth, and all other members of the board of directors of
Commonwealth Bankshares, are eligible to receive awards under this plan.
DESCRIPTION OF CONVERTIBLE PREFERRED SECURITIES
Under the amended and restated declaration of trust, Commonwealth
Bankshares Capital Trust will issue the convertible preferred securities and the
common securities, which will represent ownership interests in Commonwealth
Bankshares Capital Trust. The amended and restated declaration of trust will be
qualified under the Trust Indenture Act of 1939. This is a summary of the
convertible preferred securities, the common securities and the amended and
restated declaration of trust. It is not exhaustive. It is subject to, and is
qualified in its entirety by reference to, all the provisions of the amended and
restated declaration of trust. The form of the amended and restated declaration
of trust is available upon request from the trustees.
General
The convertible preferred securities will be limited to $7.0 million
aggregate liquidation amount at any one time outstanding. Commonwealth
Bankshares Capital Trust reserves the right to increase the aggregate
liquidation amount by not more than $1.05 million. The liquidation amount for
each convertible preferred security is $25.00. The convertible preferred
securities will rank equally with the common securities except as described
under "Subordination of Common Securities" on page 54. Legal title to the junior
subordinated debt securities will be held by the property trustee on behalf of
Commonwealth Bankshares Capital Trust for the benefit of the holders of the
convertible preferred securities and common securities. The guarantee agreement
we will execute for the benefit of the holders of the convertible preferred
securities will guarantee the convertible preferred securities on a subordinated
basis. However, it will not guarantee payment of distributions or amounts
payable on redemption of the convertible preferred securities or on liquidation
of Commonwealth Bankshares Capital Trust when Commonwealth Bankshares Capital
Trust does not have funds on hand available to make those payments.
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Distributions
The convertible preferred securities represent ownership interests in
Commonwealth Bankshares Capital Trust. Distributions on each capital security
will be payable at _____% per annum of the stated liquidation amount of $25.00.
Distributions will be payable quarterly in arrears on the 15th day of January,
April, July and October of each year to the holders of the convertible preferred
securities at the close of business on the business day immediately preceding
each distribution date. A business day is any day other than a Saturday or a
Sunday, or a day on which banks in Norfolk, Virginia are authorized or required
by law or executive order to remain closed, or a day on which the corporate
trust office of the property trustee or the debenture trustee is closed for
business.
Distributions on the convertible preferred securities will be cumulative.
Distributions will accumulate from the issue date. The first distribution date
for the convertible preferred securities will be January 15, 2001. The amount of
distributions payable for any period will be computed on the actual number of
days elapsed in a year of twelve 30-day months. If any date on which
distributions are payable on the convertible preferred securities is not a
business day, payment of the distributions payable on such date will be made on
the next business day with the same force and effect as if made on the date such
payment was originally payable.
An agreement known as the junior subordinated indenture contains our
obligations on the junior subordinated debt securities. It also contains
Commonwealth Bankshares Capital Trust's rights as the holder of the junior
subordinated debt securities. As long as we have not defaulted under the
indenture, we have the right under the indenture to defer the payment of
interest on the junior subordinated debt securities at any time or from time to
time for a period not exceeding 20 consecutive quarterly periods. However, no
interest deferral period may extend beyond the stated maturity of the junior
subordinated debt securities which is January 15, 2031. If we defer interest
payments on the junior subordinated debt securities, quarterly distributions on
the convertible preferred securities by Commonwealth Bankshares Capital Trust
will be deferred during the interest deferral period. Distributions to which
holders of the convertible preferred securities are entitled will accumulate
additional distributions thereon at ____% per annum thereof, compounded
quarterly from the relevant payment date for such distributions during any
interest deferral period.
During any interest deferral period, we may not:
. declare or pay any cash dividends or distributions on, or redeem,
purchase, acquire or make a liquidation payment on any of our common
or preferred stock;
. make any payment of principal, interest or premium on or repay,
repurchase or redeem any debt securities we issue that rank equally
with or junior to the junior subordinated debt securities; or
. make any guarantee payments on the debt securities of any subsidiary
we own if our guarantee ranks equally with or junior to the junior
subordinated debt securities.
However, during an interest deferral period, we may:
. pay dividends or make distributions in our own common stock;
. declare a dividend in connection with a stockholders' rights plan,
issue stock under any shareholder rights plan in the future, or redeem
or repurchase any rights issued under any shareholder rights plan;
. make payments under our guarantee of the convertible preferred
securities;
. purchase or acquire shares of our own common stock to satisfy our
obligations under any employee benefit plan or any other contractual
obligation, other than a contractual obligation ranking equally with
or junior to the junior subordinated debt securities;
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. make a distribution as a result of a reclassification of our
capital stock or the exchange or conversion of one class or
series of our capital stock for another class or series of our
capital stock; or
. purchase fractional interests in shares of our stock under the
conversion or exchange provisions of our capital stock or the
security being converted or exchanged.
Before the end of any interest deferral period, we may further extend
the interest deferral period. However, no interest deferral period may exceed 20
consecutive quarterly periods or extend beyond January 15, 2031. When any
interest deferral period ends and we pay of all amounts then accrued and unpaid
on the junior subordinated debt securities, together with interest at _____% per
annum, compounded quarterly, we may begin a new interest deferral period. No
interest or other amounts are due and payable during an interest deferral
period.
We must give the property trustee, the administrative trustees and the
debenture trustee notice of our election to begin an interest deferral period at
least three business days prior to the earlier of the date the distributions on
the convertible preferred securities would have been payable or the date the
administrative trustees are required to give notice to any automated quotation
system or to holders of such convertible preferred securities of the record date
or the date such distributions are payable, but in any event not less than three
business days prior to such record date. The debenture trustee will give notice
of our election to begin or extend an interest deferral period to the holders of
the convertible preferred securities. There is no limit on the number of times
that we may elect to begin an interest deferral period.
We have no current intention of exercising our right to defer payments
of interest on the junior subordinated debt securities.
The revenue of Commonwealth Bankshares Capital Trust available for
distribution to holders of the convertible preferred securities will be limited
to payments under the junior subordinated debt securities. If we do not make
interest payments on the junior subordinated debt securities, the property
trustee will not have funds available to pay distributions on the convertible
preferred securities.
Conversion Rights
General. Holders of convertible preferred securities may convert their
convertible preferred securities into common stock of Commonwealth Bankshares,
Inc. at any time prior to the business day that precedes the date of redemption
or maturity of the convertible preferred securities unless these conversion
rights have been terminated under the conditions further described below.
Initially, each convertible preferred security is convertible into the number of
shares of Commonwealth Bankshares, Inc. common stock that equals the number
obtained by dividing (i) $25.00 by (ii) the conversion price referred to on the
cover page of this prospectus. This conversion price is subject to adjustment as
further described below. Commonwealth Bankshares Capital Trust will covenant in
the amended and restated declaration of trust not to convert the junior
subordinated debt securities held by it except pursuant to a notice of
conversion delivered to the property trustee, as conversion agent, by a holder
of convertible preferred securities. A holder of a convertible preferred
security wishing to exercise its conversion right must deliver an irrevocable
notice of conversion to the conversion agent, who will then exchange the
convertible preferred security for a portion of the junior subordinated debt
securities and immediately convert such junior subordinated debt securities into
our common stock. You may obtain copies of the required form of the conversion
notice from the conversion agent.
Holders of convertible preferred securities at the close of business on
a distribution record date will be entitled to receive the distribution payable
on such convertible preferred securities on the corresponding distribution date
notwithstanding the conversion of such convertible preferred securities
following the distribution record date but prior to the distribution date.
Except as described above, no distribution will be payable by Commonwealth
Bankshares Capital Trust on converted convertible preferred securities with
respect to any distribution date subsequent to the date of conversion and
neither Commonwealth Bankshares Capital Trust nor Commonwealth Bankshares, Inc.
will make, or be required to make, any payment, allowance or adjustment for
accumulated and unpaid distributions, whether or not in arrears, on convertible
preferred securities surrendered for conversion. However, if a notice of
redemption of the convertible preferred securities is mailed or otherwise given
to holders of
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convertible preferred securities or Commonwealth Bankshares Capital Trust issues
a press release announcing the termination of conversion rights, then any holder
of convertible securities that converts his or her preferred securities into our
common stock on any date after the date the notice of redemption is mailed or
otherwise given or after the date of the press release, depending on the
circumstances, and if the date of conversion falls on any day between the first
day of a period in which interest payments on the convertible preferred
securities have been deferred and ending on or prior to a distribution date upon
which an extension period ends, a holder of convertible preferred securities
will be entitled to receive either (i) if the date of conversion falls after a
distribution record date and on or prior to the next succeeding distribution
date, all accrued and unpaid distributions on the convertible preferred
securities (including interest to the extent permitted by law) to such
distribution date or (ii) if the date of conversion does not fall on a date
described in clause (i), all accrued and unpaid distributions on the convertible
preferred securities (including interest to the extent permitted by law) to the
most recent distribution date prior to the date of conversion. Any such
distributions described in the preceding sentence shall be paid to a holder of
convertible preferred securities unless the conversion date of the convertible
preferred securities is on or prior to the distribution date upon which an
extension period ends and after the distribution record date for such
distribution date, in which case distributions will be paid to the person who is
the holder of the convertible preferred securities on the distribution record
date. Commonwealth Bankshares, Inc. will make no payment or allowance for
distributions on the shares of common stock issued upon conversion, except to
the extent shares of common stock are held of record on the record date for any
such distributions. Each conversion will be deemed to have been effected
immediately prior to the close of business on the day on which the related
conversion notice was received by the conversion agent.
Shares of common stock issued upon conversion of convertible preferred
securities will be validly issued, fully paid and nonassessable. No fractional
shares of common stock will be issued as a result of conversion. Fractional
interests will be paid by us in cash based on the closing price of Commonwealth
Bankshares common stock on the date such convertible preferred securities are
surrendered for conversion.
Conversion Price Adjustments - General. The conversion price is subject
to adjustment if we take certain actions after the date of issuance of the
convertible preferred securities, including actions in which we:
. issue shares of common stock as a dividend or a distribution with
respect to common stock,
. effect subdivisions, combinations and reclassification of common
stock,
. issue rights or warrants to all holders of common stock entitling
them (for a period not exceeding 45 days) to subscribe for or purchase shares of
common stock at less than the then current market price (as defined below) of
the common stock,
. distribute evidences of indebtedness, capital stock, cash (except
as described below) or assets (including securities, but excluding those rights,
warrants, dividends and distributions referred to above, and dividends and
distributions paid exclusively in cash) to all holders of common stock,
. pay any dividends (and other distributions) on common stock
exclusively in cash, but not including cash dividends if the annualized per
share amount of the dividends does not exceed 15% of the current market price of
our common stock as of the trading day immediately preceding the date of
declaration of such dividend, and
. make a tender or exchange offer (other than an odd-lot offer) for
our common stock and pay a price in excess of 110% of the then current market
price of our common stock based on the closing price on the trading day next
succeeding the last date tenders or exchanges may be made pursuant to such
tender or exchange offer.
"Current Market Price" means, in general, the average of the daily
Closing Prices (as defined below) for the five consecutive trading days selected
by Commonwealth Bankshares, Inc. commencing not more than 20 trading days
before, and ending not later than, the earlier of the day in question or, if
applicable, the day before the "ex" date with respect to the issuance or
distribution in question.
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"Closing Price" of any security on any day means the last reported sale
price, regular way, on such day or, if no sale takes place on such day, the
average of the reported closing bid and asked price on such day, regular way, in
either case as reported on the Nasdaq National Market, or, if such security is
not quoted or admitted to trading on Nasdaq, on the principal national
securities exchange on which such security is listed or admitted to trading, or
if such security is not listed or admitted to trading on a national securities
exchange, on the principal quotation system on which such security is listed or
admitted to trading or quoted, or, if not listed or admitted to trading or
quoted on any national securities exchange or quotation system, the average of
the closing bid and asked prices of such security in the over-the-counter market
on the day in question as reported by the National Quotation Bureau
Incorporated, or if not so available in such manner, as otherwise determined in
good faith by our board of directors.
From time to time, we may decrease the conversion price of the junior
subordinated debt securities (and thus decrease the conversion price of the
convertible preferred securities) by any amount selected by us for any period of
at least 20 days, in which case we will give at least fifteen days' notice of
such decrease. We may, at our option, make such reductions in the conversion
price, in addition to those set forth above, as we deem advisable to avoid or
diminish any income tax to holders of common stock resulting from any dividend
or distribution of stock (or rights to acquire stock) or from any event treated
as such for income tax purposes.
No adjustment of the conversion price will be made upon the issuance of
any shares of Commonwealth Bankshares common stock pursuant to any present or
future plan providing for the reinvestment of dividends or interest payable on
securities of Commonwealth Bankshares and the investment of additional optional
amounts in shares of common stock under any such plan, or upon the issuance of
any shares of common stock or options or rights pursuant to any employee benefit
plan or program, or pursuant to any option, warrant, right or any exercisable,
exchangeable or convertible security outstanding as of the date on which the
junior subordinated debt securities are first issued. No adjustment of the
conversion price will be made upon the issuance of rights under any shareholder
rights plan. No adjustment in the conversion price will be required unless
adjustment would require a change of at least one percent (1%) in the conversion
price then in effect; provided, however, that any adjustment that would not be
required to be made will be carried forward and taken into account in any
subsequent adjustment. If any action would require adjustment of the conversion
price pursuant to more than one of the provisions described above, only one
adjustment will be made with respect to that action and such adjustment will be
the amount of adjustment that has the highest absolute value to the holders of
the convertible preferred securities.
Conversion Price Adjustments - Merger, Consolidation or Sale of Assets.
In the event that Commonwealth Bankshares becomes a party to any transaction,
including without limitation, and with certain exceptions:
. A recapitalization or reclassification of the common stock;
. consolidation of Commonwealth Bankshares with, or merger of
Commonwealth Bankshares into, any other person, or any merger of another person
into Commonwealth Bankshares;
. any sale, transfer or lease of all or substantially all of the
assets of Commonwealth Bankshares; or
. any compulsory share exchange pursuant to which the common stock
is converted into the right to receive other securities, cash or other property
(each of the foregoing being referred to as a "business consolidation
transaction"), then the holders of convertible preferred securities then
outstanding will have their right to convert the convertible preferred
securities into the kind and amount of securities, cash or other property
receivable upon the consummation of such business consolidation transaction by a
holder of the number of shares of common stock issuable upon conversion of such
convertible preferred securities immediately prior to such business
consolidation transaction.
In the case of a business consolidation transaction, each convertible
preferred security would become convertible into the securities, cash or
property receivable by a holder of the number of shares of the common stock into
which such convertible preferred security was convertible immediately prior to
such business consolidation transaction. This change could substantially lessen
or eliminate the value of the conversion privilege associated with the
convertible preferred securities in the future. For example, if Commonwealth
Bankshares were acquired in a cash merger, each convertible preferred security
would become convertible solely into cash and would no longer be
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convertible into securities with a value that would vary depending on the future
prospects of Commonwealth Bankshares and other factors.
Conversion price adjustments or omissions in making such adjustments
may, under certain circumstances, be deemed to be distributions that could be
taxable as dividends to holders of convertible preferred securities or to the
holders of our common stock.
Termination of Conversion Rights. In addition to the rights of
Commonwealth Bankshares to redeem the convertible preferred securities under the
circumstances described in this prospectus, Commonwealth Bankshares will also
have the right to terminate your ability to convert convertible preferred
securities into Commonwealth Bankshares common stock under certain conditions.
Specifically, we may terminate your conversion rights at any time after January
15, 2004 if the closing price of Commonwealth Bankshares common stock on Nasdaq
exceeds 115% of the conversion price for 20 of 30 consecutive trading days. To
exercise our conversion termination rights, we must first cause Commonwealth
Bankshares Capital Trust to issue a press release announcing the date on which
we will terminate your conversion rights. The press release must also state the
conversion price that is then applicable and the closing price for both the
convertible preferred securities and Commonwealth Bankshares common stock. The
date we can terminate your conversion rights cannot be less than 30 days or more
than 60 days after the date that Commonwealth Bankshares Capital Trust issues
the press release. In the event Commonwealth Bankshares exercises its conversion
termination rights, conversion rights will expire at the end of the business day
on the date set forth in the press release as the date on which conversion
rights terminate.
Events That Will Cause Redemption of Convertible Preferred Securities
If we redeem any of the junior subordinated debt securities, the
proceeds from the redemption will be applied to redeem a like amount of the
common securities and convertible preferred securities. The price paid to a
holder of convertible preferred securities will equal the aggregate liquidation
amount of the convertible preferred securities plus accumulated but unpaid
distributions to the date of redemption. If less than all the junior
subordinated debt securities are to be repaid or redeemed, then the proceeds
from the redemption will be allocated to the proportionate redemption of the
convertible preferred securities and the common securities.
We have the right to redeem the junior subordinated debt securities on
or after January 15, 2006, in whole at any time or in part from time to time. We
also can redeem the junior subordinated debt securities, in whole, but not in
part, at any time within 90 days after a tax event, investment company event or
capital treatment event, each as defined below.
"Tax event" means the receipt by Commonwealth Bankshares Capital Trust
of an opinion of our counsel that, as a result of any amendment to, or change,
including any announced prospective change, in, the laws or regulations of the
United States or any political subdivision, or as a result of any official or
administrative pronouncement or action or judicial decision interpreting or
applying those laws or regulations, which is effective or announced on or after
the date that the convertible preferred securities are issued, there is more
than an insubstantial risk that:
. Commonwealth Bankshares Capital Trust is, or will be within 90
days of the delivery of the opinion, subject to United States
federal income tax on the income received or accrued on the
junior subordinated debt securities;
. interest payable by us on the junior subordinated debt securities
is not, or within 90 days of the delivery of the opinion, will
not be, deductible, in whole or in part, for United States
federal income tax purposes; or
. Commonwealth Bankshares Capital Trust is, or will be within 90
days of the delivery of the opinion, subject to more than a de
minimis amount of other taxes, duties or other governmental
charges.
"Investment company event" means the receipt by Commonwealth Bankshares
Capital Trust of an opinion of our counsel experienced in such matters that, as
a result of a change in law or regulation or a written change,
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including any announced prospective change, in interpretation or application of
law or regulation by any legislative body, court, governmental agency or
regulatory authority, there is more than an insubstantial risk that Commonwealth
Bankshares Capital Trust is or will be considered an investment company that is
required to be registered under the Investment Company Act, which becomes
effective or would become effective, as the case may be, on or after the date
that the convertible preferred securities are issued.
"Capital treatment event" means the reasonable determination by us
that, as a result of any amendment to, or change, including any announced
prospective change, in, the laws or regulations of the United States or any
political subdivision, or as a result of any official or administrative
pronouncement or action or judicial decision interpreting or applying such laws
or regulations, which is effective or announced on or after the date that the
convertible preferred securities are issued, there is more than an insubstantial
risk that we will not be entitled to treat an amount equal to the liquidation
amount of the convertible preferred securities as tier 1 capital, or the
equivalent, for purposes of the risk-based capital adequacy guidelines of the
Federal Reserve, as then in effect and applicable to us.
Payment of additional sums. If a tax event involving the payment of
taxes by Commonwealth Bankshares Capital Trust has occurred and is continuing
and Commonwealth Bankshares Capital Trust is the holder of all the junior
subordinated debt securities, we will pay additional sums, if any, on the junior
subordinated debt securities.
"Additional sums" means the additional amounts as may be necessary in
order that the amount of distributions then due and payable by Commonwealth
Bankshares Capital Trust on the outstanding convertible preferred securities and
common securities of Commonwealth Bankshares Capital Trust will not be reduced
as a result of any additional taxes, duties and other governmental charges to
which Commonwealth Bankshares Capital Trust has become subject as a result of a
tax event.
Procedures for Redeeming Convertible Preferred Securities
Common securities and convertible preferred securities will be redeemed
with the proceeds from the contemporaneous repayment or redemption of the junior
subordinated debt securities. Redemptions of the common securities and
convertible preferred securities will be made and the redemption price shall be
payable only to the extent that Commonwealth Bankshares Capital Trust has funds
on hand available for the payment of the redemption price. See also
"Subordination of Common Securities" on page 54.
If Commonwealth Bankshares Capital Trust gives a notice of redemption,
then, by 12:00 noon, Norfolk, Virginia time, on the date fixed for redemption,
to the extent funds are available, the property trustee will deposit irrevocably
with The Depository Trust Company funds sufficient to pay the redemption price.
The property trustee will give The Depository Trust Company irrevocable
instructions and authority to pay the redemption price to the holders of the
convertible preferred securities. However, if you hold convertible preferred
securities held in certificated form, the property trustee, to the extent funds
are available, will irrevocably deposit with the paying agent for the
convertible preferred securities funds sufficient to pay the redemption price.
It will give the paying agent irrevocable instructions and authority to pay the
redemption price upon surrender of certificates evidencing the convertible
preferred securities.
Distributions payable on or prior to the redemption date are payable to
the holders of the convertible preferred securities on the relevant record dates
for the related distribution dates.
If notice of redemption is given and funds are deposited as required,
then on the date of the deposit, all rights of the holders of the convertible
preferred securities will cease, except the right to receive the redemption
price, without interest. The convertible preferred securities will cease to be
outstanding. If any date fixed for redemption of convertible preferred
securities is not a business day, then payment of the redemption price will be
made on the next business day, without any interest or other payment on account
of the delay. However, if the next business day falls in the next calendar year,
the payment will be made on the immediately preceding business day. If payment
of the redemption price is improperly withheld or refused and not paid either by
Commonwealth Bankshares Capital Trust or by us, distributions on convertible
preferred securities will continue to accrue, from the redemption date
originally established to the date the redemption price is actually paid. The
actual payment date will be the redemption date for purposes of calculating the
redemption price.
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We or our subsidiaries may at any time and from time to time purchase
outstanding convertible preferred securities by tender in the open market or by
private agreement.
Notice of any redemption, other than at the stated maturity of the
junior subordinated debt securities, will be mailed at least 30 days but not
more than 60 days before the redemption date to each holder of convertible
preferred securities at its registered address. Unless we default in payment of
the redemption price on, or in the repayment of, the junior subordinated debt
securities, on and after the redemption date, distributions will cease to accrue
on the common securities and convertible preferred securities called for
redemption.
Liquidation of Commonwealth Bankshares Capital Trust and Distribution of Junior
Subordinated Debt Securities
As the holder of the outstanding common securities, we will have the
right at any time to liquidate Commonwealth Bankshares Capital Trust and cause a
like amount of the junior subordinated debt securities to be distributed to the
holders of the common securities and convertible preferred securities. Our right
to terminate is subject to prior approval of the Federal Reserve if then
required under applicable capital guidelines or policies of the Federal Reserve.
For a discussion of the income tax consequences of liquidating Commonwealth
Bankshares Capital Trust, please refer to "United States Federal Income Tax
Consequences - Distribution of the Junior Subordinated Debt Securities to
Holders of Convertible Preferred Securities", which begins on page 74.
Commonwealth Bankshares Capital Trust will automatically terminate and
liquidate upon the first to occur of:
. Our bankruptcy, dissolution or liquidation;
. the distribution of a like amount of the junior subordinated debt
securities to the holders of the common securities and convertible
preferred securities if we have given written direction to the
property trustee to terminate Commonwealth Bankshares Capital
Trust;
. redemption of all of the common securities and convertible
preferred securities as described under "Events That Will Cause
Redemption of Convertible Preferred Securities" above;
. the end of the term of Commonwealth Bankshares Capital Trust; and
. the entry of an order for the dissolution of Commonwealth
Bankshares Capital Trust by a court of competent jurisdiction.
If an early termination occurs, unless the common securities and
convertible preferred securities are redeemed, Commonwealth Bankshares Capital
Trust will be liquidated by the trustees as expeditiously as the trustees
determine to be possible. After satisfaction of liabilities to creditors of
Commonwealth Bankshares Capital Trust, the holders of such common securities and
convertible preferred securities will receive a like amount of the junior
subordinated debt securities. If a distribution of junior subordinated debt
securities would not be practical, the holders will be entitled to receive out
of the assets of Commonwealth Bankshares Capital Trust available for
distribution, after satisfaction of liabilities to creditors, a liquidating
distribution equal to the aggregate of the liquidation amount plus accumulated
and unpaid distributions thereon to the date of payment.
If the liquidation distribution can be paid only in part because
Commonwealth Bankshares Capital Trust has insufficient assets to pay the
aggregate liquidation distribution, then the amounts payable on the convertible
preferred securities will be paid on a proportionate basis. As the holder of the
common securities, we will be entitled to receive distributions in any
liquidation proportionate with the holders of the convertible preferred
securities. However, if we are in default, or an event that, with notice or
passage of time, would become such a default has occurred and is continuing, the
convertible preferred securities will have a priority over the common
securities. If an early termination occurs as the result of a court order, the
junior subordinated debt securities will be redeemed in whole, but not in part.
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If we elect not to redeem the junior subordinated debt securities prior to
maturity and Commonwealth Bankshares Capital Trust is not liquidated and the
junior subordinated debt securities are not distributed to holders of the common
securities and convertible preferred securities, the convertible preferred
securities will remain outstanding until the repayment of the junior
subordinated debt securities at the stated maturity.
On and after the liquidation date is fixed for any distribution of junior
subordinated debt securities to holders of the common securities and convertible
preferred securities:
. the convertible preferred securities will no longer be deemed to be
outstanding;
. The Depository Trust Company or its nominee, as the record holder of
the convertible preferred securities, will receive a registered global
certificate or certificates representing the junior subordinated debt
securities to be delivered in exchange for the convertible preferred
securities held by The Depository Trust Company or its nominee; and
. any certificates representing convertible preferred securities not
held by The Depository Trust Company or its nominee will be deemed to
represent junior subordinated debt securities with a principal amount
equal to the liquidation amount of those convertible preferred
securities and bearing accrued and unpaid interest in an amount equal
to the accumulated and unpaid distributions on the convertible
preferred securities until the certificates are presented to the
administrative trustees or their agent for cancellation. After
cancellation we will issue to the holder a certificate representing
such junior subordinated debt securities.
Subordination of Common Securities
Payments on the convertible preferred securities and common securities will
be made proportionately to the holders of convertible preferred securities and
common securities. However, if on any distribution date or redemption date we
are in default, or an event that, with notice or passage of time, would become
such a default has occurred and is continuing, our right to distributions is
subordinated to your rights. In that case, no payment to us as the holder of the
common securities may be made unless payment in full in cash of all accumulated
and unpaid distributions on all of the outstanding convertible preferred
securities, or, in the case of payment of the redemption price, the full amount
of the redemption price on all of the outstanding convertible preferred
securities, has been made or provided for. All funds available to the property
trustee shall first be applied to the payment in full in cash of all
distributions on, or the redemption price of, the convertible preferred
securities then due and payable.
If we default, we as holder of the common securities will be deemed to have
waived any right to act with respect to any such default under the amended and
restated declaration of trust until the effect of all events of default have
been cured, waived or otherwise eliminated. Until all such events of default
under the amended and restated declaration of trust have been so cured, waived
or otherwise eliminated, the property trustee shall act solely on behalf of the
holders of such convertible preferred securities and not on our behalf as holder
of the common securities, and only the holders of the convertible preferred
securities will have the right to direct the property trustee to act on their
behalf.
Events That Are a Default Under the Declaration
Any one of the following events constitutes an event of default under the
amended and restated declaration of trust:
. an event of default under the indenture, as described on page 65; or
. default by Commonwealth Bankshares Capital Trust in the payment of any
distribution when it becomes due and payable, and continuation of such
default for a period of 30 days; or
. default by Commonwealth Bankshares Capital Trust in the payment of any
redemption price of any common security or convertible preferred
security when it becomes due and payable; or
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. default in the performance, or breach, in any material respect, of any
covenant or warranty of the trustees in the amended and restated
declaration of trust, other than a covenant or warranty, a default in
the performance of which or the breach of which is addressed in the
second and third points above, and continuation of such default or
breach for a period of 60 days after there has been given, by
registered or certified mail, to the defaulting trustee or trustees by
the holders of at least 25% in aggregate liquidation amount of the
outstanding convertible preferred securities, a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a notice of default under the declaration;
or
. the bankruptcy or insolvency of the property trustee and our failure
to appoint a successor property trustee within 60 days.
Within five business days after any event of default is actually known to
the property trustee, it must transmit notice of the event of default to the
holders of the convertible preferred securities, the administrative trustees and
to us, unless the event of default has been cured or waived. We and the
administrative trustees are required to file annually with the property trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the declaration.
Removal of Trustees
Unless a default under the indenture has occurred and is continuing, we may
remove any trustee at any time. If a default under the indenture has occurred
and is continuing, the property trustee and the Delaware trustee may be removed
by the holders of a majority in liquidation amount of the outstanding
convertible preferred securities. Holders of the convertible preferred
securities will not have the right to vote to appoint, remove or replace the
administrative trustees. No resignation or removal of a trustee and no
appointment of a successor trustee is effective until the acceptance of
appointment by the successor trustee in accordance with the provisions of the
declaration.
Co-trustees and Separate Property Trustee
Unless an event of default has occurred and is continuing, at any time or
times, for the purpose of meeting the legal requirements of the Trust Indenture
Act or of any jurisdiction in which any part of Commonwealth Bankshares Capital
Trust's property may at the time be located, we, as the holder of the common
securities, and the administrative trustees have power to appoint one or more
persons either to act as a co-trustee, jointly with the property trustee, of all
or any part of Commonwealth Bankshares Capital Trust's property, or to act as
separate trustee of any such property. In either case the co-trustees will have
whatever powers provided in the instrument of appointment. We can give a co-
trustee any property, title, right or power we deem necessary or desirable. In
case a default under the indenture has occurred and is continuing, the property
trustee alone shall have power to make such appointment.
Merger or Consolidation of Trustees
Any person into which the property trustee, the Delaware trustee or any
administrative trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any person resulting from any merger,
conversion or consolidation to which the trustee shall be a party, or any person
succeeding to all or substantially all the corporate trust business of the
trustee, shall be the successor of such trustee under the declaration, if such
person is otherwise qualified and eligible.
Mergers, Consolidations, Amalgamations or Replacements of Commonwealth
Bankshares Capital Trust
Commonwealth Bankshares Capital Trust may not merge with or into,
consolidate, amalgamate or be replaced by, or convey, transfer or lease its
properties and assets substantially as an entirety to any corporation or other
person, except as described below.
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Commonwealth Bankshares Capital Trust may, at our request, with the consent
of the administrative trustees but without the consent of the holders of the
convertible preferred securities, the property trustee or the Delaware trustee,
merge with or into, consolidate, amalgamate or be replaced by, or convey,
transfer or lease its properties and assets substantially as an entirety to, a
trust organized under the laws of any State. However, in connection with any
transaction:
. the successor entity either must expressly assume all of the
obligations of Commonwealth Bankshares Capital Trust on the
convertible preferred securities or substitute for the convertible
preferred securities successor securities having substantially the
same terms as the convertible preferred securities, so long as the
successor securities rank the same as the convertible preferred
securities with respect to distributions and payments upon
liquidation, redemption and otherwise;
. we must appoint a trustee of the successor entity possessing the same
powers and duties as the property trustee as the holder of the junior
subordinated debt securities;
. the successor securities must be listed or traded, or any successor
securities will be listed or traded upon notification of issuance, on
any national securities exchange or other organization on which the
convertible preferred securities are then listed or traded;
. the merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease may not adversely affect the rights, preferences and
privileges of the holders of the convertible preferred securities,
including any successor securities, in any material respect;
. the successor entity must have a purpose identical and limited to that
of Commonwealth Bankshares Capital Trust;
. before any transaction, we must receive an opinion from independent
counsel to Commonwealth Bankshares Capital Trust experienced in such
matters that the transaction does not adversely affect the rights,
preferences and privileges of the holders of the convertible preferred
securities, including any successor securities, in any material
respect. The opinion also must state that after the transaction,
neither Commonwealth Bankshares Capital Trust nor its successor entity
will be required to register as an investment company under the
Investment Company Act of 1940; and
. we or our successor must own all of the common securities of the
successor entity and guarantee its obligations under the successor
securities at least to the extent provided by the guarantee.
Commonwealth Bankshares Capital Trust may not, however, except with the
consent of holders of 100% in liquidation amount of the common securities and
convertible preferred securities, consolidate, amalgamate, merge with or into,
or be replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to any other entity, if such action would cause
Commonwealth Bankshares Capital Trust or the successor entity to be classified
as an association taxable as a corporation or as other than a grantor trust for
United States federal income tax purposes.
Voting Rights of Convertible Preferred Securities; Amendment of the Declaration
Except as provided below and under "Description of Guarantee - How the
Guarantee Can Be Amended or Assigned", the holders of the convertible preferred
securities will have no voting rights.
The amended and restated declaration of trust may be amended from time to
time by us, the property trustee and the administrative trustees, without the
consent of the holders of the convertible preferred securities, to:
. cure any ambiguity, correct or supplement any provision that may be
inconsistent with any other provision, or to make any other
provisions, which are not inconsistent with the other provisions of
the amended and restated declaration of trust, or
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. modify, eliminate or add to any provisions necessary to ensure that
Commonwealth Bankshares Capital Trust will be classified for United
States federal income tax purposes as a grantor trust or as other than
an association taxable as a corporation or to ensure that Commonwealth
Bankshares Capital Trust will not be required to register as an
investment company under the Investment Company Act.
However, any amendment made under the first point above may not adversely
affect in any material respect the interests of any holder of convertible
preferred securities. Any amendments of the amended and restated declaration of
trust become effective when notice is given to the holders of the common
securities and convertible preferred securities.
The amended and restated declaration of trust also may be amended with the
consent of holders representing a majority of the outstanding convertible
preferred securities. The trustees, however, must first receive an opinion of
counsel that neither the amendment nor the exercise of any power granted to the
trustees under the amendment will adversely affect the tax status of
Commonwealth Bankshares Capital Trust or its exemption from investment company
status under the Investment Company Act.
However, without the consent of each holder of common securities and
convertible preferred securities, the amended and restated declaration of trust
may not be amended to change the amount or timing of any distribution on the
common securities and convertible preferred securities or otherwise adversely
affect the amount of any distribution required to be made on the common
securities and convertible preferred securities as of a specified date or
restrict the right of a holder of common securities and convertible preferred
securities to institute suit for the enforcement of any such payment on or after
that date.
As long as any junior subordinated debt securities are held by Commonwealth
Bankshares Capital Trust, the trustees may not:
. direct the time, method and place of conducting any proceeding for any
remedy available to the debenture trustee, or executing any trust or
power conferred on the property trustee with respect to the junior
subordinated debt securities;
. waive any past default that is waivable under Section 5.13 of the
indenture;
. exercise any right to rescind or annul a declaration that the
principal of all the junior subordinated debt securities shall be due
and payable or
. consent to any amendment, modification or termination of the indenture
or the junior subordinated debt securities, where such consent shall
be required, without, in each case, obtaining the prior approval of
the holders of a majority in aggregate liquidation amount of all
outstanding convertible preferred securities.
Where a consent under the indenture would require the consent of each
holder of junior subordinated debt securities, no consent may be given by the
property trustee without the prior consent of each holder of the convertible
preferred securities. The trustees may not revoke any action previously
authorized or approved by a vote of the holders of the convertible preferred
securities except by subsequent vote of the holders. The property trustee must
notify each holder of convertible preferred securities of any notice of default
on the junior subordinated debt securities. In addition to obtaining the
foregoing approvals of holders of the convertible preferred securities, prior to
taking any of the foregoing actions, the trustees must obtain an opinion of
counsel experienced in such matters to the effect that Commonwealth Bankshares
Capital Trust will not be classified as an association taxable as a corporation
for United States federal income tax purposes as a result of such action and
such action would not cause Commonwealth Bankshares Capital Trust to be
classified as other than a grantor trust for United States federal income tax
purposes.
Any required approval of holders of convertible preferred securities may be
given at a meeting of holders or by written consent. The property trustee will
cause a notice of any meeting at which holders of convertible preferred
securities are entitled to vote, or of any matter upon which action by written
consent of holders is to be
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taken, to be given to each holder of record of convertible preferred securities
in the manner set forth in the amended and restated declaration of trust.
No vote or consent of the holders of convertible preferred securities
will be required for Commonwealth Bankshares Capital Trust to redeem and cancel
the convertible preferred securities in accordance with the amended and restated
declaration of trust.
Any of the convertible preferred securities that are owned by us, the
trustees or any affiliate of us or any trustees, shall, for purposes of any vote
or consent, will be treated as if they were not outstanding.
Payment of Expenses and Taxes of Commonwealth Bankshares Capital Trust
We have agreed to pay all debts, expenses and other obligations of
Commonwealth Bankshares Capital Trust, other than payments of distributions,
amounts payable upon redemption and the liquidation amount of the common
securities and convertible preferred securities. The expenses we will pay
include
. costs and expenses of organizing Commonwealth Bankshares Capital Trust;
. the fees and expenses of the trustees, the costs and expenses of
operating Commonwealth Bankshares Capital Trust;
. costs of offering the convertible preferred securities; and
. all taxes and all costs and expenses with respect to the foregoing,
other than United States withholding taxes, to which Commonwealth
Bankshares Capital Trust might become subject.
The obligations described above are for the benefit of, and are
enforceable by, any person to whom the obligations are owed, whether or not the
creditor has received notice that we are liable. Any creditor may enforce those
obligations directly against us, and we have irrevocably waived any right or
remedy to require that any creditor take any action against Commonwealth
Bankshares Capital Trust or any other person before proceeding against us.
Form, Denomination, Book-Entry Procedures and Transfer of Convertible Preferred
Securities
The Depository Trust Company will act as securities depositary for the
convertible preferred securities. The convertible preferred securities will be
issued only as fully-registered securities registered in the name of Cede & Co.,
The Depository Trust Company's nominee. One or more fully-registered global
convertible preferred securities certificates, representing the total aggregate
number of the convertible preferred securities, will be issued to and deposited
with The Depository Trust Company.
The Depository Trust Company is a limited-purpose trust company organized
under the New York Banking Law, a "banking organization" within the meaning of
the New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. The Depository Trust Company holds securities that its
participants deposit with The Depository Trust Company. The Depository Trust
Company also facilitates the settlement among participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in participants' accounts, thereby
eliminating the need for physical movement of securities certificates.
Participants in The Depository Trust Company include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. The Depository Trust Company is owned by a number of its
participants and by the New York Stock Exchange, the American Stock Exchange,
Inc., and the National Association of Securities Dealers, Inc. Access to The
Depository Trust Company system is also available to others, such as securities
brokers and dealers, banks and trust companies that clear transactions through
or maintain a direct or indirect custodial relationship with a participant
either directly or indirectly. The rules applicable to The Depository Trust
Company and its participants are on file with the Securities and Exchange
Commission.
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Purchases of convertible preferred securities under The Depository Trust
Company system must be made by or through participants, which will receive a
credit for the convertible preferred securities on The Depository Trust
Company's records. The ownership interest of each actual purchaser, or
beneficial owner, of each convertible preferred security is in turn to be
recorded on the participants' and indirect participants' records. Beneficial
owners will not receive written confirmation from The Depository Trust Company
of their purchases, but beneficial owners are expected to receive written
confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the participants or indirect participants
through which the beneficial owners purchased convertible preferred securities.
Transfers of ownership interests in convertible preferred securities are to be
accomplished by entries made on the books of participants acting on behalf of
beneficial owners. Beneficial owners will not receive certificates representing
their ownership interests in convertible preferred securities, except in the
event that use of the book-entry system for convertible preferred securities is
discontinued.
The Depository Trust Company has no knowledge of the actual beneficial
owners of any such convertible preferred securities. The Depository Trust
Company's records reflect only the identity of the participants to whose
accounts such convertible preferred securities are credited, which may or may
not be the beneficial owners. The participants and indirect participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
So long as The Depository Trust Company, or its nominee, is the
registered owner or holder of a global convertible preferred security, The
Depository Trust Company or such nominee, as the case may be, will be considered
the sole owner or holder of the convertible preferred securities represented
thereby for all purposes. No beneficial owner of an interest in a global
convertible preferred security will be able to transfer that interest except in
accordance with The Depository Trust Company's applicable procedures, in
addition to those provided for under the declaration.
The Depository Trust Company has advised us that it will take any action
permitted to be taken by a holder of convertible preferred securities, including
presentation of convertible preferred securities for exchange as described
below, only at the direction of one or more participants to whose account the
interests in global convertible preferred securities are credited and only in
respect of such portion of the aggregate liquidation amount of convertible
preferred securities as to which such participant or participants has or have
given such direction. However, if there is an Event of Default, The Depository
Trust Company will exchange the global convertible preferred securities
representing such convertible preferred securities for certificated securities,
which it will distribute to its participants.
Conveyance of notices and other communications by The Depository Trust
Company to participants, by participants to indirect participants, and by
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices, if applicable, in respect of any convertible
preferred securities held in book-entry form will be sent to Cede & Co. If less
than all of such convertible preferred securities are being redeemed, The
Depository Trust Company will determine the amount of the interest of each
participant to be redeemed in accordance with its procedures.
Although voting with respect to any of the convertible preferred
securities is limited, in those cases where a vote is required, neither The
Depository Trust Company nor Cede & Co. will itself consent or vote with respect
to the convertible preferred securities. Under its usual procedures, The
Depository Trust Company would mail an omnibus proxy to Commonwealth Bankshares
Capital Trust as soon as possible after the record date. The omnibus proxy
assigns Cede & Co.'s consenting or voting rights to those participants to whose
accounts the convertible preferred securities are credited on the record date
(identified in a listing attached to the omnibus proxy).
Except as provided herein, a beneficial owner of an interest in a global
convertible preferred security will not be entitled to receive physical delivery
of the convertible preferred securities represented thereby. Accordingly, each
beneficial owner must rely on the procedures of The Depository Trust Company to
exercise any rights under the convertible preferred securities.
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Although The Depository Trust Company has agreed to the foregoing
procedures in order to facilitate transfers of interests in global convertible
preferred securities among participants of The Depository Trust Company, The
Depository Trust Company is under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither Commonwealth Bankshares, Inc., Commonwealth Bankshares Capital Trust nor
the trustees of Commonwealth Bankshares Capital Trust will have any
responsibility for the performance by The Depository Trust Company or its
participants or indirect participants under the rules and procedures governing
The Depository Trust Company. The Depository Trust Company may discontinue
providing its services as securities depositary with respect to any of the
convertible preferred securities at any time by giving notice to Commonwealth
Bankshares Capital Trust. Under such circumstances, in the event that a
successor securities depositary is not obtained, convertible preferred
certificates are required to be printed and delivered. Additionally,
Commonwealth Bankshares Capital Trust (with our consent) may decide to
discontinue use of the system of book-entry transfers through The Depository
Trust Company or a successor depositary. In that event, certificates for the
convertible preferred securities will be printed and delivered. In each of the
above circumstances, we will appoint a paying agent with respect to the
convertible preferred securities.
The laws of some states require that certain persons take physical
delivery in certificated form of certain securities, such as the convertible
preferred securities, that they own. Consequently, the ability to transfer
beneficial interests in a global convertible preferred security to such persons
will be limited to that extent. Because The Depository Trust Company can act
only on behalf of participants, which in turn act on behalf of indirect
participants and certain banks, the ability of a person having beneficial
interests in a global convertible preferred security to pledge such interests to
persons or entities that do not participate in The Depository Trust Company
system, or otherwise take actions in respect of such interests, may be affected
by the lack of a physical certificate evidencing such interests.
Except as described below, owners of beneficial interests in the global
convertible preferred securities will not be entitled to have convertible
preferred securities registered in their names, will not receive or be entitled
to receive physical delivery of convertible preferred securities in certificated
form and will not be considered the registered owners or holders thereof under
the declaration for any purpose.
Exchange of Book-Entry Convertible Preferred Securities for Certificated
Convertible Preferred Securities
A global convertible preferred security is exchangeable for convertible
preferred securities in registered certificated form only if:
. The Depository Trust Company notifies Commonwealth Bankshares Capital
Trust that it is no longer willing or able to properly discharge its
responsibilities with respect to the convertible preferred securities
and we are unable to locate a qualified successor, or has ceased to be
a "clearing agency" registered under the Exchange Act;
. Commonwealth Bankshares Capital Trust at its sole option elects to
terminate the book-entry system through The Depository Trust Company;
or
. a Debenture Event of Default has occurred and is continuing.
How Payments Will Be Made on the Convertible Preferred Securities
Distributions on convertible preferred securities held in book-entry form
will be made to The Depository Trust Company in immediately available funds. The
Depository Trust Company's practice is to credit participants' accounts on the
relevant payment date in accordance with their holdings shown on The Depository
Trust Company's records unless The Depository Trust Company has reason to
believe that it will not receive payments on such payment date. Payments by
participants and indirect participants to beneficial owners will be governed by
standing instructions and customary practices and will be the responsibility of
such participants and indirect participants and not of The Depository Trust
Company, Commonwealth Bankshares Capital Trust or us, subject to any statutory
or regulatory requirements as may be in effect from time to time. Payment of
distributions to The Depository Trust Company is the responsibility of
Commonwealth Bankshares Capital Trust, disbursement of such payments to
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participants is the responsibility of The Depository Trust Company, and
disbursement of such payments to the beneficial owners is the responsibility of
participants and indirect participants.
The paying agent shall initially be the property trustee and any co-
paying agent chosen by the property trustee and acceptable to the administrative
trustees and us. The paying agent shall be permitted to resign as paying agent
upon 30 days' written notice to the property trustee, the administrative
trustees and us. In the event that the property trustee shall no longer be the
paying agent, the administrative trustees shall appoint a successor, which shall
be a bank or trust company acceptable to the administrative trustees and us, to
act as paying agent.
Wilmington Trust Company has informed Commonwealth Bankshares Capital
Trust that so long as it serves as paying agent for the convertible preferred
securities, it anticipates that information regarding distributions on the
convertible preferred securities, including payment date, record date and
redemption information, will be made available through Wilmington Trust Company
at 1100 N. Market Street, Wilmington, Delaware, Attention: Corporate Trust
Administration.
Information About Registrar and Transfer Agent
The property trustee will act as registrar and transfer agent for the
convertible preferred securities.
Registration of transfers of the convertible preferred securities will be
effected without charge by or on behalf of Commonwealth Bankshares Capital
Trust, but upon payment of any tax or other governmental charges that may be
imposed in connection with any transfer or exchange. Commonwealth Bankshares
Capital Trust will not be required to register or cause to be registered the
transfer or exchange of the convertible preferred securities after they have
been called for redemption.
Information About the Property Trustee
The property trustee, other than during the occurrence and continuance of
an event of default, undertakes to perform only such duties as are specifically
set forth in the declaration and, during the existence of an event of default,
must exercise the same degree of care and skill as a prudent person would
exercise or use in the conduct of his or her own affairs. Subject to this
provision, the property trustee is under no obligation to exercise any of the
powers vested in it by the amended and restated declaration of trust at the
request of any holder of common securities and convertible preferred securities
unless it is offered reasonable indemnity against the costs, expenses and
liabilities that might be incurred thereby. If no event of default has occurred
and is continuing and the property trustee is required to decide between
alternative causes of action, construe ambiguous provisions in the declaration
or is unsure of the application of any provision of the declaration, and the
matter is not one on which holders of the convertible preferred securities or
the common securities are entitled under the amended and restated declaration of
trust to vote, then the property trustee shall take the action we direct and, if
not so directed, shall take whatever action it deems advisable and in the best
interests of the holders of the common securities and convertible preferred
securities and will have no liability except for its own bad faith, negligence
or willful misconduct.
Miscellaneous
The administrative trustees are authorized and directed to operate
Commonwealth Bankshares Capital Trust so that Commonwealth Bankshares Capital
Trust will not be deemed to be an investment company required to be registered
under the Investment Company Act or classified as an association taxable as a
corporation for United States federal income tax purposes or as other than a
grantor trust for United States federal income tax purposes, and so that the
junior subordinated debt securities will be treated as our indebtedness for
United States federal income tax purposes. In this connection, we and the
administrative trustees are authorized to take any action, not inconsistent with
applicable law, the certificate of trust of Commonwealth Bankshares Capital
Trust or the declaration, that we and the administrative trustees determine in
our discretion to be necessary or desirable for such purposes, as long as such
action does not materially adversely affect the interests of the holders of the
common securities and convertible preferred securities.
Holders of the common securities and convertible preferred securities
have no preemptive or similar rights.
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Commonwealth Bankshares Capital Trust may not borrow money or issue debt
or mortgage or pledge any of its assets.
DESCRIPTION OF JUNIOR SUBORDINATED DEBT SECURITIES
The junior subordinated debt securities are to be issued as a separate
series under the indenture between us and Wilmington Trust Company, as the
debenture trustee. The indenture will be qualified under the Trust Indenture
Act. This is a summary of the material terms and provisions of the junior
subordinated debt securities, but it is not exhaustive. It is qualified by
reference to all of the provisions of the indenture and those terms made a part
of the indenture by the Trust Indenture Act.
General
Commonwealth Bankshares Capital Trust will invest the proceeds from sale
of the common securities and convertible preferred securities in junior
subordinated debt securities issued by us. The junior subordinated debt
securities will bear interest at ___% per annum, payable quarterly in arrears on
the 15th day of January, April, July and October of each year, commencing
January 15, 2001. Interest will be paid to the person in whose name each junior
subordinated debt security is registered at the close of business on the
business day next preceding the interest payment date. We anticipate that, until
the liquidation of Commonwealth Bankshares Capital Trust, each junior
subordinated debt security will be held in the name of the property trustee in
trust for the benefit of the holders of the common securities and convertible
preferred securities.
The amount of interest payable for any period will be computed on the
basis of the actual number of days elapsed in a year of twelve 30-day months. If
any date on which interest is payable on the junior subordinated debt securities
is not a business day, then interest will be paid on the next day that is a
business day, and without any interest or other payment on account of any such
delay. Accrued interest that is not paid on the applicable interest payment date
will bear additional interest at _____% per annum thereof, compounded quarterly
from the relevant interest payment date. The term "interest" includes quarterly
payments, interest on quarterly interest payments not paid on the applicable
interest payment date and additional sums, as applicable.
Unless previously redeemed or repurchased, the junior subordinated debt
securities will mature on January 15, 2031.
The junior subordinated debt securities will be unsecured and will rank
junior and be subordinate in right of payment to all senior debt. Because
Commonwealth Bankshares, Inc., is a bank holding company, our right to
participate in any distribution of assets of any subsidiary, including Bank of
the Commonwealth, upon the subsidiary's liquidation or reorganization or
otherwise and the ability of holders of the convertible preferred securities to
benefit indirectly from such distribution, is subject to the prior claims of
creditors of the subsidiary, except to the extent that we may be recognized as a
creditor of the subsidiary. This means that the junior subordinated debt
securities not only will be subordinated to all senior debt but also effectively
subordinated to all existing and future liabilities of our subsidiaries. Holders
of junior subordinated debt securities should look only to our assets for
payments on the junior subordinated debt securities. The indenture does not
limit other secured or unsecured debt, including senior debt, whether under the
indenture or any existing or other indenture that we may enter into in the
future or otherwise.
The junior subordinated debt securities will rank equally with all other
debentures issued under the indenture. As a holding company, we conduct our
operations principally through Bank of the Commonwealth and our principal source
of cash is receipt of dividends from Bank of the Commonwealth. We are a legal
entity separate and distinct from Bank of the Commonwealth. Federal law
restricts loans from Bank of the Commonwealth to us. Those restrictions prevent
us from borrowing from Bank of the Commonwealth unless the loans are secured by
various types of collateral. In addition, dividend payments to us by Bank of the
Commonwealth are subject to review by banking regulators and are subject to
various statutory limits. Dividend payments that exceed statutory limits require
approval by bank regulatory authorities.
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Denominations, Registration and Transfer
The junior subordinated debt securities will be represented by one or
more global certificates registered in the name of Cede & Co. as the nominee of
The Depository Trust Company if, and only if, distributed to the holders of the
common securities and convertible preferred securities. Until then, the junior
subordinated debt securities will be held in the name of the property trustee in
trust for the benefit of the holders of the common securities and convertible
preferred securities. If the junior subordinated debt securities are distributed
to holders of the common securities and convertible preferred securities,
beneficial interests in the junior subordinated debt securities will be shown
on, and transfers will be effected only through, records maintained by
participants in The Depository Trust Company.
A global security will be exchangeable for junior subordinated debt
securities registered in the names of persons other than Cede & Co. only if:
. The Depository Trust Company notifies us that it is unwilling or unable
to continue as a depositary for such global security and no successor
depositary shall have been appointed, or if at any time The Depository
Trust Company ceases to be a "clearing agency" registered under the
Exchange Act, at a time when The Depository Trust Company is required
to be so registered to act as such depositary;
. we in our sole discretion determine that such global security will be
exchangeable; or
. a debenture event of default has occurred and is continuing.
Any global security that is exchangeable pursuant to the preceding
sentence shall be exchangeable for certificates registered in the names The
Depository Trust Company directs. It is expected that its instructions will be
based upon directions received by it from its participants.
If junior subordinated debt securities are issued in certificated form,
principal and interest will be payable, the transfer of the junior subordinated
debt securities will be registrable, and junior subordinated debt securities
will be exchangeable for junior subordinated debt securities of other
denominations of a like aggregate principal amount, at the corporate office of
the debenture trustee in Wilmington, Delaware, or at the offices of any paying
agent or transfer agent we appoint.
If the junior subordinated debt securities are distributed to the holders
of the common securities and convertible preferred securities upon the
termination of Commonwealth Bankshares Capital Trust, the form, denomination,
book-entry and transfer procedures for the convertible preferred securities as
described under "Description of Convertible Preferred Securities - Form,
Denomination, Book-Entry Procedures and Transfer of Convertible Preferred
Securities," will apply to the junior subordinated debt securities.
How Payments Will Be Made on the Junior Subordinated Debt Securities
Payment of principal and interest on junior subordinated debt securities
will be made at the office of the debenture trustee in Wilmington, Delaware or
at the office of any paying agent or paying agents we designate. Except for
junior subordinated debt securities in global form, we may pay interest by check
mailed to the address of the person entitled to payment. We also may pay by wire
transfer to an account specified by the person entitled to payment. Payment of
interest on any junior subordinated debt security will be made to the person in
whose name it is registered at the close of business on the record date for the
interest payment, except in the case of defaulted interest. At any time we may
designate additional paying agents or rescind the designation of any paying
agent. However, we will at all times be required to maintain a paying agent in
each place of payment for the junior subordinated debt securities.
Any money deposited with the debenture trustee or any paying agent, or
held by us in trust, for the payment of principal of or interest on any junior
subordinated debt security and remaining unclaimed for two years after such
principal or interest has become due and payable shall, at our request, be
repaid to us and the holder of such junior subordinated debt security shall
thereafter look, as a general unsecured creditor, only to us for payment.
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Our Option to Defer Interest Payments
So long as we are not in default under the indenture, we have the right
under the indenture to defer the payment of interest on the junior subordinated
debt securities at any time or from time to time for a period not exceeding 20
consecutive quarterly periods. However, no interest deferral period may extend
beyond January 15, 2031. At the end of an interest deferral period, we must pay
all interest then accrued and unpaid on the junior subordinated debt securities,
together with interest on the deferred interest at ____% per annum, compounded
quarterly from the relevant interest payment date.
Our Option to Redeem the Junior Subordinated Debt Securities Before Maturity
We have the right to redeem the junior subordinated debt securities on or
after January 15, 2006, in whole at any time or in part from time to time. We
also can redeem the junior subordinated debt securities in whole, but not in
part, at any time within 90 days after a tax event, investment company event or
capital treatment event. The proceeds of any redemption will be used by
Commonwealth Bankshares Capital Trust to redeem the convertible preferred
securities.
The Federal Reserve's risk-based capital guidelines currently provide
that redemptions of permanent equity or other capital instruments before stated
maturity could have a significant impact on a bank holding company's overall
capital structure. Any organization considering such a redemption should consult
the Federal Reserve before redeeming any equity or capital instrument prior to
maturity if the redemption could have a material effect on the level or
composition of the organization's capital base. Because it is likely that a
redemption of the junior subordinated debt securities would materially affect
our capital base, it is likely that we would seek the Federal Reserve's prior
approval. However, the Federal Reserve likely would not object if the junior
subordinated debt securities were redeemed with the proceeds of, or replaced by,
a like amount of a similar or higher quality capital instrument and the Federal
Reserve considers the organization's capital position to be fully adequate after
the redemption.
Upon a redemption of junior subordinated debt securities, the redemption
price will equal 100% of the principal amount of the debt securities being
redeemed plus accrued interest to the date of redemption.
Additional Sums We Might Have to Pay to Commonwealth Bankshares Capital Trust
We have agreed in the indenture that as long as Commonwealth Bankshares
Capital Trust is the holder of all junior subordinated debt securities, if it is
required to pay any additional taxes, duties or other governmental charges as a
result of a tax event, we will pay as additional sums on the junior subordinated
debt securities whatever amounts are necessary so that the distributions payable
by Commonwealth Bankshares Capital Trust will not be reduced.
How the Indenture Can Be Amended
We and the debenture trustee may, without the consent of the holders of
junior subordinated debt securities, amend, waive or supplement the indenture
for specified purposes, including curing ambiguities, defects or
inconsistencies. None of those actions, however, may adversely affect the
interest of the holders of junior subordinated debt securities or the holders of
the convertible preferred securities. We also can amend the indenture to
maintain its qualification under the Trust Indenture Act. The indenture contains
provisions permitting us and the debenture trustee, with the consent of the
holders of a majority in principal amount of outstanding junior subordinated
debt securities, to modify the indenture in a manner affecting the rights of the
holders of junior subordinated debt securities. However, no modification without
the consent of the holder of each outstanding junior subordinated debt security
so affected, may change the stated maturity, or reduce the principal amount of
the junior subordinated debt securities, or reduce the rate or extend the time
of payment of interest or reduce the percentage of principal amount of junior
subordinated debt securities.
In addition, we and the debenture trustee, without the consent of any
holder of junior subordinated debt securities, may execute any supplemental
indenture for the purpose of creating any other debentures.
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What Is an Event of Default under the Indenture and What Are the Consequences?
Any one or more of the following described events that has occurred and
is continuing constitutes an event of default under the indenture:
. our failure for 30 days to pay any interest on the junior subordinated
debt securities when due (subject to our right to defer interest
payments for up to 20 consecutive calendar quarters); or
. our failure to pay any principal on the junior subordinated debt
securities when due, whether at maturity, upon redemption, by
declaration of acceleration or otherwise; or
. our failure to observe or perform in any material respect other
covenants contained in the indenture for 90 days after written notice
to us from the debenture trustee or the holders of at least 25% in
aggregate outstanding principal amount of the junior subordinated debt
securities; or
. our bankruptcy, insolvency or reorganization; or
. the voluntary or involuntary dissolution, winding-up or termination of
Commonwealth Bankshares Capital Trust, except in connection with the
distribution of the junior subordinated debt securities to the holder
of common securities and convertible preferred securities in
liquidation of Commonwealth Bankshares Capital Trust, the redemption of
all of the common securities and convertible preferred securities of
Commonwealth Bankshares Capital Trust, or mergers, consolidations or
amalgamations permitted by the amended and restated declaration of
trust.
The holders of a majority in aggregate outstanding principal amount of
the junior subordinated debt securities have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
debenture trustee. The debenture trustee or the holders of not less than 25% in
aggregate outstanding principal amount of the junior subordinated debt
securities may declare the principal due and payable immediately upon a default
under the indenture and, should the debenture trustee or such holders of junior
subordinated debt securities fail to make such declaration, the holders of at
least 25% in aggregate liquidation amount of the convertible preferred
securities have that right. The holders of a majority in aggregate outstanding
principal amount of the junior subordinated debt securities may annul such
declaration and waive the default if the default, other than the nonpayment of
the principal of the junior subordinated debt securities which has become due
solely by such acceleration, has been cured and a sum sufficient to pay all
matured installments of interest and principal due otherwise than by
acceleration has been deposited with the debenture trustee. If the holders of
junior subordinated debt securities fail to annul such declaration and waive
such default, the holders of a majority in aggregate liquidation amount of the
convertible preferred securities have that right.
The holders of a majority in aggregate outstanding principal amount of
the junior subordinated debt securities, on behalf of the holders of all the
junior subordinated debt securities, may waive any past default, except an
uncured default in the payment of principal of or interest on the junior
subordinated debt securities or a default in respect of a covenant or provision
which under the indenture cannot be modified or amended without the consent of
the holder of each outstanding junior subordinated debt security. If the holders
of the junior subordinated debt securities fail to annul such declaration and
waive such default, the holders of a majority in aggregate liquidation amount of
the convertible preferred securities have that right. We are required to file
annually with the debenture trustee a certificate as to whether or not we are in
compliance with all the conditions and covenants applicable to it under the
indenture.
If a default under the indenture occurs and continues, the property
trustee will have the right to declare the principal of and the interest on the
junior subordinated debt securities, and any other amounts payable under the
indenture, to be immediately due and payable and to enforce its other rights as
a creditor with respect to the junior subordinated debt securities.
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Enforcement of Rights by Holders of Convertible Preferred Securities
If a default under the indenture occurs and continues and results from
our failure to pay interest or principal on the junior subordinated debt
securities when due, a holder of convertible preferred securities may sue us
directly. We may not amend the indenture to remove the right to sue us directly
without the prior written consent of the holders of all of the convertible
preferred securities. If we make payments to a holder of convertible preferred
securities in connection with a direct action against us, we will remain
obligated to pay all of the principal of and interest on the junior subordinated
debt securities. We will be subrogated to the rights of the holder of
convertible preferred securities to the extent of any payments made by us to the
holder in any direct action against us.
The holders of the convertible preferred securities will not be able to
exercise directly any remedies, other than those set forth in the preceding
paragraph, available to the holders of the junior subordinated debt securities
unless there has been a default under the amended and restated declaration of
trust.
Consolidation, Merger, Sale of Assets and Other Transactions Involving Us
The indenture provides that we may not consolidate with or merge with or
into any other person or convey, transfer or lease our properties and assets
substantially as an entirety to any person, and no person may consolidate with
or merge with or into us or convey, transfer or lease its properties and assets
substantially as an entirety to us, unless:
. in case we consolidate with or merge with or into another person or
convey or transfer our properties and assets substantially as an
entirety to any person, the successor person is organized under the
laws of the United States or any state or the District of Columbia, and
the successor person expressly assumes our obligations on the junior
subordinated debt securities;
. immediately after giving effect to the transaction, no default under
the indenture, and no event which, after notice or lapse of time or
both, would become a default under the indenture, shall have occurred
and be continuing;
. if at the time any convertible preferred securities are outstanding,
such transaction is permitted under the declaration and the guarantee
and does not give rise to any breach or violation of the amended and
restated declaration of trust or the guarantee; and
. other conditions as prescribed in the indenture are met.
The provisions of the indenture do not afford holders of the junior
subordinated debt securities protection in the event of a highly leveraged or
other transaction involving us that may adversely affect holders of the junior
subordinated debt securities.
What Does Subordination Mean to You?
Under the indenture, the junior subordinated debt securities will be
subordinate and junior in right of payment to all senior debt. Upon any payment
or distribution of assets to creditors in any liquidation, dissolution, winding-
up, reorganization, assignment for the benefit of creditors, marshaling of
assets or any bankruptcy, insolvency, debt restructuring or similar proceedings
in connection with any insolvency or bankruptcy proceeding involving us, the
holders of senior debt will first be entitled to receive payment in full of
principal of and interest on the senior debt before the holders of junior
subordinated debt securities, or the property trustee on behalf of the holders,
will be entitled to receive or retain any payment or distribution.
In the event of the acceleration of the maturity of the junior
subordinated debt securities, the holders of all senior debt outstanding at the
time of acceleration will first be entitled to receive payment in full of all
amounts due, including any amounts due upon acceleration, before the holders of
the junior subordinated debt securities will be entitled to receive or retain
any payment of the principal of or interest on the junior subordinated debt
securities.
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If we default in the payment of any principal of or interest on any
senior debt when it becomes due and payable, whether at maturity or at a date
fixed for prepayment or by declaration of acceleration or otherwise, then,
unless and until the default has been cured or waived or ceases to exist or all
senior debt has been paid, no direct or indirect payment shall be made or agreed
to for principal or interest on the junior subordinated debt securities, or in
respect of any redemption, repayment, retirement, purchase or other acquisition
of any of the junior subordinated debt securities.
"Senior debt" means:
. the principal of, and premium, if any, and interest on all our
indebtedness for money borrowed, whether outstanding on the date of
execution of the indenture or thereafter created, assumed or incurred,
except indebtedness that is expressly stated to rank junior to or
equally with the junior subordinated debt securities;
. all obligations, except those that are expressly stated to rank junior
to or equally with the junior subordinated debt securities, to make
payment pursuant to the terms of financial instruments, such as,
(i) securities contracts and foreign currency exchange contracts,
(ii) derivative instruments, such as swap agreements, including
interest rate and foreign exchange rate swap agreements, cap
agreements, floor agreements, collar agreements, interest rate
agreements, foreign exchange agreements, options, commodity
futures contracts and commodity options contracts, and
(iii) similar financial instruments;
. indebtedness or obligations of others of the kinds described above for
the payment of which we are responsible or liable as guarantor or
otherwise, and
. any deferrals, renewals or extensions of any such senior debt.
However, senior debt does not include
. any debt of ours which, when incurred and without respect to any
election under Section 1111 (b) of the United States Bankruptcy Code of
1978, was without recourse to us,
. any debt of ours to any of our subsidiaries,
. debt to any of our employees,
. debt which by its terms is subordinated to trade accounts payable or
accrued liabilities arising in the ordinary course of business to the
extent that payments made to the holders of such debt by the holders of
the junior subordinated debt securities as a result of the
subordination provisions of the indenture would be greater than such
payments otherwise would have been as a result of any obligation of
such holders of such debt to pay amounts over to the obligees on such
trade accounts payable or accrued liabilities arising in the ordinary
course of business as a result of subordination provisions to which
such debt is subject,
. trade accounts payable or accrued liabilities arising in the ordinary
course of business and
. any other debt securities issued pursuant to the indenture.
The indenture places no limit on the amount of senior debt that we may
incur. We expect from time to time to incur senior debt. At September 30, 2000,
we had $505 thousand of senior debt outstanding. In addition, we
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anticipate borrowing between $3 million and $4 million by the end of 2000 from
the Federal Home Loan Bank to fund loan production. The indenture also places no
limitation on the indebtedness of our subsidiaries, which ranks senior in right
of payment to the junior subordinated debt securities.
Governing Law
The indenture and the junior subordinated debt securities will be
governed by and construed in accordance with the laws of Virginia.
Information About the Debenture Trustee
The debenture trustee has all the duties and responsibilities specified
for an indenture trustee under the Trust Indenture Act. Subject to the Trust
Indenture Act, the debenture trustee is under no obligation to exercise any of
the powers vested in it by the indenture at the request of any holder of junior
subordinated debt securities, unless offered reasonable indemnity against the
costs, expenses and liabilities which might be incurred thereby. The debenture
trustee is not required to expend or risk its own funds or otherwise incur
personal financial liability in the performance of its duties if the debenture
trustee reasonably believes that repayment or adequate indemnity is not
reasonably assured to it.
DESCRIPTION OF GUARANTEE
The guarantee will be executed and delivered by us when Commonwealth
Bankshares Capital Trust issues the common securities and convertible preferred
securities. The guarantee is for the benefit of the holders of the common
securities and convertible preferred securities. Wilmington Trust Company will
act as the guarantee trustee under the guarantee agreement. The guarantee
agreement will be qualified under the Trust Indenture Act. This summary of the
guarantee is not exhaustive and is subject to, and qualified in its entirety by
reference to, all of the provisions of the guarantee and the Trust Indenture
Act. The guarantee trustee will hold the guarantee for the benefit of the
holders of the common securities and convertible preferred securities.
General
We will irrevocably agree to pay in full on a subordinated basis the
guarantee payments to the holders of the common securities and convertible
preferred securities, as and when due, regardless of any defense, right of set-
off or counterclaim that Commonwealth Bankshares Capital Trust may have or
assert other than the defense of payment. We guarantee the following payments,
if not paid by or on behalf of Commonwealth Bankshares Capital Trust:
. any accrued and unpaid distributions required to be paid on the common
securities and convertible preferred securities, to the extent that
Commonwealth Bankshares Capital Trust has funds on hand available for
distributions,
. the redemption price of common securities and convertible preferred
securities called for redemption, to the extent that Commonwealth
Bankshares Capital Trust has funds on hand available for redemption
payments, and
. upon a voluntary or involuntary dissolution, winding up or liquidation
of Commonwealth Bankshares Capital Trust, other than in connection with
the distribution of junior subordinated debt securities to the holders
of the common securities and convertible preferred securities or the
redemption of all of the convertible preferred securities, the lesser
of the liquidation distribution, to the extent Commonwealth Bankshares
Capital Trust has funds available and the amount of assets of
Commonwealth Bankshares Capital Trust remaining available for
distribution to holders of the common securities and convertible
preferred securities upon liquidation of Commonwealth Bankshares
Capital Trust after satisfaction of liabilities to creditors of
Commonwealth Bankshares Capital Trust as required by applicable law.
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Our obligation to make a guarantee payment may be satisfied by direct
payment of the required amounts by us to the holders of the common securities
and convertible preferred securities or by causing Commonwealth Bankshares
Capital Trust to pay.
The guarantee will be an irrevocable guarantee on a subordinated basis of
Commonwealth Bankshares Capital Trust's obligations under the common securities
and convertible preferred securities, although it will apply only to the extent
that Commonwealth Bankshares Capital Trust has funds sufficient to make such
payments.
Status of the Guarantee
The guarantee will constitute our unsecured obligation and will rank
subordinate and junior in right of payment to all senior debt in the same manner
as junior subordinated debt securities.
The guarantee will rank equally with all other guarantees issued by us
under the indenture. The guarantee will be a guarantee of payment and not of
collection. That is, the guaranteed party may institute a legal proceeding
directly against us to enforce its rights under the guarantee without first
instituting a legal proceeding against any other person or entity. The guarantee
will be held for the benefit of the holders of the common securities and
convertible preferred securities. The guarantee will not be discharged except by
payment of the guarantee payments in full to the extent not paid by Commonwealth
Bankshares Capital Trust or upon distribution to the holders of the common
securities and convertible preferred securities of the junior subordinated debt
securities. The guarantee does not limit the amount of additional senior debt
that we may incur. We expect from time to time to incur senior debt.
How the Guarantee Can Be Amended or Assigned
Except for any changes that do not materially adversely affect the rights
of holders of the common securities and convertible preferred securities, in
which case no vote will be required, the guarantee may not be amended without
the prior approval of the holders of a majority of the aggregate liquidation
amount of the outstanding convertible preferred securities. The manner of
obtaining any such approval will be as set forth under "Description of
Convertible Preferred Securities - Voting Rights of Convertible Preferred
Securities; Amendment of the Declaration," which begins on page 56. All
guarantees and agreements contained in the guarantee will bind our successors,
assigns, receivers, trustees and representatives and shall inure to the benefit
of the holders of the convertible preferred securities.
Your Rights If We Default
An event of default under the guarantee will occur if and when we fail to
perform any of our payments or other obligations under the guarantee. Except for
a default in payment of any guarantee payment, we are not in default under the
guarantee unless we have received notice of default and do not cure the default
within 60 days after receipt of the notice. Additionally, no event of default
under the guarantee can occur unless default under the amended and restated
declaration of trust or a default under the indenture has occurred. The holders
of not less than a majority in aggregate liquidation amount of the convertible
preferred securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the guarantee trustee in
respect of the guarantee or to direct the exercise of any trust or power
conferred upon the guarantee trustee under the guarantee.
Any holder of the convertible preferred securities may institute a legal
proceeding directly against us to enforce its rights under the guarantee without
first instituting a legal proceeding against Commonwealth Bankshares Capital
Trust, the guarantee trustee or any other person or entity.
We, as guarantor, are required to file annually with the guarantee
trustee a certificate as to whether or not we are in compliance with all the
conditions and covenants applicable to us under the guarantee.
Information About the Guarantee Trustee
The guarantee trustee, other than during the occurrence and continuance
of a default by us in performance of the guarantee, undertakes to perform only
such duties as are specifically set forth in the guarantee and, after
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default under the guarantee, must exercise the same degree of care and skill as
a prudent person would exercise or use in the conduct of his or her own affairs.
Subject to this provision, the guarantee trustee is under no obligation to
exercise any of the powers vested in it by the guarantee at the request of any
holder of the common securities and convertible preferred securities unless it
is offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
Termination of the Guarantee
The guarantee will terminate and be of no further force and effect upon
full payment of the redemption price of the common securities and convertible
preferred securities, upon full payment of the amounts payable upon liquidation
of Commonwealth Bankshares Capital Trust or upon distribution of junior
subordinated debt securities to the holders of the common securities and
convertible preferred securities. The guarantee will continue to be effective or
will be reinstated, as the case may be, if at any time any holder of the common
securities and convertible preferred securities must restore payment of any sums
paid under the common securities and convertible preferred securities or the
guarantee.
Governing Law
The guarantee will be governed by and construed in accordance with the
laws of Virginia.
RELATIONSHIP AMONG THE CONVERTIBLE PREFERRED SECURITIES,
THE JUNIOR SUBORDINATED DEBT SECURITIES AND THE GUARANTEE
Our Full and Unconditional Guarantee
Payments of distributions and other amounts due on the convertible
preferred securities, to the extent Commonwealth Bankshares Capital Trust has
funds available for the payment of such distributions, are irrevocably
guaranteed by us as set forth under "Description of Guarantee." Taken together,
our obligations under the junior subordinated debt securities, the indenture,
the declaration and the guarantee provide a full, irrevocable and unconditional
guarantee of payments of distributions and other amounts due on the convertible
preferred securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of
Commonwealth Bankshares Capital Trust's obligations under the convertible
preferred securities. If we do not make payments on the junior subordinated debt
securities, Commonwealth Bankshares Capital Trust will not pay distributions or
other amounts due on the convertible preferred securities. The guarantee does
not cover payment of distributions when Commonwealth Bankshares Capital Trust
does not have sufficient funds to make distributions. In that case, the remedy
of a holder of convertible preferred securities is to sue us directly. Our
obligations under the guarantee are subordinate and junior in right of payment
to all senior debt.
Why Our Payments on the Junior Subordinated Debt Securities Will be Sufficient
As long as payments of interest and other payments are made when due on
the junior subordinated debt securities, those payments will be sufficient to
cover distributions and other payments due on the convertible preferred
securities, because:
. the aggregate principal amount or redemption price of the junior
subordinated debt securities will be equal to the sum of the aggregate
liquidation amount or redemption price, as applicable, of the common
securities and convertible preferred securities;
. the interest rate and interest and other payment dates on the junior
subordinated debt securities will match the distribution rate and
distribution and other payment dates for the convertible preferred
securities;
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. we will pay for all costs, expenses and liabilities of Commonwealth
Bankshares Capital Trust except Commonwealth Bankshares Capital Trust's
obligations to make distributions to holders of common securities and
convertible preferred securities; and
. the amended and restated declaration of trust further provides that
Commonwealth Bankshares Capital Trust will not engage in any activity
that is not consistent with the limited purposes thereof.
We have the right to set off any payment we are otherwise required to
make under the indenture with and to the extent we have previously made, or are
concurrently on the date of such payment making, any payment under the guarantee
used to satisfy the related payment of indebtedness under the indenture.
Enforcement Rights of Holders of Convertible Preferred Securities
A holder of any convertible preferred security may institute a legal
proceeding directly against us to enforce the guarantee without first
instituting a legal proceeding against the guarantee trustee, Commonwealth
Bankshares Capital Trust or any other person or entity.
A default or event of default under any senior debt would not constitute
an event of default under the amended and restated declaration of trust.
However, in the event of payment defaults under, or acceleration of, senior
debt, the subordination provisions of the indenture provide that no payments may
be made on the junior subordinated debt securities until the senior debt has
been paid in full or any payment default under the senior debt has been cured or
waived. Failure to make required payments on junior subordinated debt securities
would constitute an event of default under the amended and restated declaration
of trust
The Purpose of Commonwealth Bankshares Capital Trust Is Limited
The convertible preferred securities evidence a beneficial interest in
Commonwealth Bankshares Capital Trust, and Commonwealth Bankshares Capital Trust
exists for the sole purpose of issuing the convertible preferred securities and
common securities, investing the proceeds of the common securities and
convertible preferred securities in junior subordinated debt securities and
engaging in other activities necessary or incidental thereto.
Your Rights Upon Termination of Commonwealth Bankshares Capital Trust
Upon any voluntary or involuntary termination, winding-up or liquidation
of Commonwealth Bankshares Capital Trust involving the liquidation of the junior
subordinated debt securities, after satisfaction of the liabilities of creditors
of Commonwealth Bankshares Capital Trust, the holders of the common securities
and convertible preferred securities will be entitled to receive, out of assets
held by Commonwealth Bankshares Capital Trust, the liquidation distribution in
cash.
Upon our voluntary or involuntary liquidation or bankruptcy, the property
trustee, as holder of the junior subordinated debt securities, would be our
subordinated creditor, subordinated in right of payment to all senior debt as
set forth in the indenture, but entitled to receive payment in full of principal
and interest, before any of our stockholders receive payments or distributions.
Since we are the guarantor under the guarantee and have agreed to pay for all
costs, expenses and liabilities of Commonwealth Bankshares Capital Trust (other
than Commonwealth Bankshares Capital Trust's obligations to the holders of its
common securities and convertible preferred securities), the positions of a
holder of convertible preferred securities and a holder of junior subordinated
debt securities relative to our other creditors and to stockholders in the event
of our liquidation or bankruptcy are expected to be substantially the same.
DESCRIPTION OF COMMONWEALTH BANKSHARES, INC. COMMON STOCK
Under its articles of incorporation, Commonwealth Bankshares is
authorized to issue up to 5,000,000 shares of common stock, par value $2.50 per
share, and 300,000 shares of preferred stock, par value $25.00 per share. As of
September 30, 2000, Commonwealth Bankshares had 1,678,466 issued and outstanding
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shares of common stock held by 525 shareholders of record. All outstanding
shares of common stock are fully paid and nonassessable. Commonwealth Bankshares
has not issued any shares of preferred stock.
Common Stock
Holders of Commonwealth Bankshares' common stock are entitled to receive
dividends when Commonwealth Bankshares' board of directors declares dividends
out of legally available funds. However, the payment of any dividends to holders
of common stock is subject to the preferential dividend rights of any preferred
stock that the board of directors authorizes for issuance in the future. In the
event Commonwealth Bankshares is liquidated, dissolved or wound up, holders of
common stock, and the holders of any class or series of stock entitled to
participate with the common stock in the distribution of assets, will be
entitled to receive the assets of Commonwealth Bankshares available for
distribution, but only after Commonwealth Bankshares has paid or provided for
the payment of Commonwealth Bankshares' debts and liabilities and after
distributions or provisions for distributions are made to holders of any series
or class of stock having preference over common stock in the liquidation,
dissolution or winding up of Commonwealth Bankshares.
Holders of common stock are entitled to one vote per share on all matters
submitted to shareholders. Holders of common stock do not have cumulative voting
rights in the election of directors and do not have preemptive rights to
purchase additional shares of any class of capital stock that Commonwealth
Bankshares' board of directors elects to issue. In addition, holders of common
stock do not have any conversion or redemption rights.
Preferred Stock
Commonwealth Bankshares' articles of incorporation authorize the board of
directors to determine the preferences, limitations and relative rights of any
class or series of preferred stock before the issuance of any shares of that
class or series. To date, Commonwealth Bankshares' board of directors has not
authorized the issuance of any class or series of preferred stock. If
Commonwealth Bankshares' board of directors elects to issue any shares of
preferred stock in the future, holders of preferred stock are likely to have
rights superior to the rights of holders of common stock. These superior rights
may include special voting rights, liquidation rights, rights to redemption or
other rights that the board of directors elects to grant to holders of preferred
stock.
Limitations on Liability of Officers and Directors
Commonwealth Bankshares' articles of incorporation provide that to the
full extent that Virginia law permits the limitation or elimination of the
liability of directors and officers, these persons will not be liable to
Commonwealth Bankshares or its shareholders for any money damages in excess of
$1.00. At this time, Virginia law does not permit any limitation of liability if
a director engages in willful misconduct or a knowing violation of the criminal
law or any federal or state securities law.
Commonwealth Bankshares' articles of incorporation further provide that
Commonwealth Bankshares will indemnify its directors and officers who are a
party to any proceeding by reason of the fact that he or she is or was such a
director or officer, or is or was serving at the request of Commonwealth
Bankshares as a director, officer, employee or agent of another entity, benefit
plan or enterprise, against all liabilities and expenses incurred in the
proceeding except to the extent such liabilities and expenses are incurred
because of a director's or officer's willful misconduct or knowing violation of
the criminal law. Unless a determination is made that indemnification is not
permissible, Commonwealth Bankshares will make advances and reimbursement for
expenses incurred by a director or officer in a proceeding upon receipt of an
undertaking by the director or officer to repay those advances and
reimbursements if it is ultimately determined that he or she is not entitled to
indemnification. At this time, Virginia law does not permit indemnification
against willful misconduct or a knowing violation of the criminal law.
The rights of indemnification provided in Commonwealth Bankshares'
articles of incorporation are not exclusive of any other rights that may be
available under any insurance or other agreement, whether by a vote of
shareholders, directors or otherwise. The articles of incorporation provide that
Commonwealth Bankshares may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of Commonwealth
Bankshares, whether or not Commonwealth Bankshares would have the power to
provide indemnification to such person.
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To the extent that officers and directors of Commonwealth Bankshares may
be indemnified from liabilities arising under the Securities Act of 1933
pursuant to the foregoing provisions, Commonwealth Bankshares has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a description of the material United States federal
income tax consequences of the purchase, ownership and disposition of
convertible preferred securities, the junior subordinated debt securities and
the related guarantee. The statements of law or legal conclusions set forth in
this section also constitute the opinion of Kaufman & Canoles, a Virginia
professional corporation, tax counsel to us and Commonwealth Bankshares Capital
Trust as to the material federal income tax consequences relating to the
convertible preferred securities, the junior subordinated debt securities and
the related guarantee. Unless otherwise stated, this section addresses only the
tax consequences to a "U.S. holder", as defined below, that acquires convertible
preferred securities on their original issue at their original offering price.
It does not address the tax consequences to persons that may be subject to
special treatment under United States federal income tax law, such as banks,
insurance companies, thrift institutions, regulated investment companies, real
estate investment trusts, tax-exempt organizations or dealers in securities or
currencies. It also does not address the tax consequences to persons that hold
convertible preferred securities as part of a position in a "straddle" or as
part of a "hedging", "conversion" or other integrated investment transaction for
United States federal income tax purposes. It also does not address the tax
consequences to persons whose functional currency is not the United States
dollar or persons that do not hold convertible preferred securities as capital
assets. A "U.S. holder" is an individual citizen or resident of the United
States, a domestic corporation or partnership organized under the laws of the
United States or any State or the District of Columbia or an estate or trust the
income of which is subject to United States federal income taxation regardless
of source.
This description is based upon the Internal Revenue Code of 1986, as
amended, Treasury Regulations, Internal Revenue Service rulings and
pronouncements and judicial decisions now in effect, all of which are subject to
change at any time. Such changes may be applied retroactively in a manner that
could cause the tax consequences to vary substantially from the consequences
described below, possibly adversely affecting a beneficial owner of the
convertible preferred securities. The authorities on which this description is
based are subject to various interpretations, and it is therefore possible that
the United States federal income tax treatment of the purchase, ownership and
disposition of the convertible preferred securities may differ from the
treatment described below.
Prospective investors are advised to consult with their own tax advisors
in light of their own particular circumstances as to the federal tax
consequences of the purchase, ownership and disposition of the convertible
preferred securities, as well as the effect of any state, local or foreign tax
laws.
Classification of the Junior Subordinated Debt Securities and Commonwealth
Bankshares Capital Trust
Under current law and assuming compliance with the terms of the amended
and restated declaration of trust, Commonwealth Bankshares Capital Trust will
not be classified as an association taxable as a corporation for United States
federal income tax purposes. Moreover, Commonwealth Bankshares Capital Trust
should be classified as a grantor trust, and if not so classified will be
classified as a partnership, for United States federal income tax purposes. As a
result, each beneficial owner of convertible preferred securities that is a U.S.
holder will be required to include in its gross income its pro rata share of the
interest income, including original issue discount, paid or accrued with respect
to the junior subordinated debt securities, whether or not cash is actually
distributed. The junior subordinated debt securities will be classified as
indebtedness of Commonwealth Bankshares, Inc. for United States federal income
tax purposes.
Interest Income and Original Issue Discount
Under applicable Treasury Regulations, a remote contingency that stated
interest will not be timely paid will be ignored in determining whether a debt
instrument is issued with original issue discount. We believe that the
likelihood of our exercising our option to defer payments of interest is remote.
Based on the foregoing, we believe
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that the junior subordinated debt securities will not be considered to be issued
with original issue discount at the time of their original issuance.
Because the discount at which the junior subordinated debt securities are
being issued is less than 1/4 of 1 percent of the junior subordinated debt
securities stated redemption price at maturity times the number of complete
years to maturity of the junior subordinated debt securities, such discount will
constitute de minimis original issue discount and will not be required to be
taken into account on a current basis. The following discussion assumes that
unless and until we exercise our option to defer interest on the junior
subordinated debt securities, the junior subordinated debt securities will not
be treated as issued with original issue discount other than de minimis original
issue discount.
Under the Treasury Regulations, if we exercised our option to defer any
payment of interest, the junior subordinated debt securities would be treated as
reissued with original issue discount, and, thereafter, all stated interest on
the junior subordinated debt securities would be treated as original issue
discount as long as the junior subordinated debt securities remained
outstanding. In such event, all of a U.S. holder's taxable interest income with
respect to the junior subordinated debt securities would be accounted for as
original issue discount on an economic accrual basis regardless of the U.S.
holder's method of tax accounting, and actual distributions of stated interest
would not be reported separately as taxable income. Consequently, a U.S. holder
would be required to include original issue discount in gross income even though
we would not make any actual cash payments during an interest deferral period.
The Treasury Regulations have not been addressed in any rulings or other
interpretations by the IRS, and it is possible that the IRS could take the
position that the junior subordinated debt securities were issued with original
issue discount at the time of their original issuance.
Because income on the convertible preferred securities will constitute
interest or original issue discount, corporate U.S. holders will not be entitled
to the dividends-received deduction with respect to any income recognized with
respect to the convertible preferred securities. If any additional distributions
are paid on the convertible preferred securities it is possible that such
additional distributions might constitute original issue discount (whether or
not an interest deferral period has occurred).
Subsequent uses of the term "interest" in this section shall include
income in the form of original issue discount.
Distribution of the Junior Subordinated Debt Securities to Holders of
Convertible Preferred Securities
Under current law, a distribution by the trust of the junior subordinated
debt securities will be nontaxable and will result in a U.S. holder receiving
directly its pro rata share of the junior subordinated debt securities
previously held indirectly through Commonwealth Bankshares Capital Trust, with a
holding period and aggregate adjusted tax basis equal to the holding period and
aggregate adjusted tax basis such U.S. holder had in its convertible preferred
securities immediately before such distribution. If, however, the liquidation of
Commonwealth Bankshares Capital Trust were to occur because Commonwealth
Bankshares Capital Trust were subject to United States federal income tax with
respect to income accrued or received on the junior subordinated debt
securities, the distribution of junior subordinated debt securities to U.S.
holders by Commonwealth Bankshares Capital Trust would be a taxable event to
Commonwealth Bankshares Capital Trust and each U.S. holder, and each U.S. holder
would recognize gain or loss as if the U.S. holder had exchanged its convertible
preferred securities for the junior subordinated debt securities it received
upon the liquidation of Commonwealth Bankshares Capital Trust. A U.S. holder
will include interest in respect of the junior subordinated debt securities
received from Commonwealth Bankshares Capital Trust in the manner described
above under "Interest Income and Original Issue Discount."
Sales or Redemption of the Convertible Preferred Securities
Gain or loss will be recognized by a U.S. holder on a sale, exchange, or
other disposition of the convertible preferred securities (including a
redemption for cash) in an amount equal to the difference between the amount
realized and the U.S. holder's adjusted tax basis in the convertible preferred
securities sold or so redeemed. Assuming that we do not exercise our option to
defer payment of interest on the junior subordinated debt securities,
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a U.S. holder's adjusted tax basis in the convertible preferred securities
generally will be its initial purchase price. If the junior subordinated debt
securities are deemed to be issued with original issue discount as a result of
our deferral of any interest payment, a U.S. holder's adjusted tax basis in the
convertible preferred securities generally will be its initial purchase price,
increased by original issue discount previously included in such U.S. holder's
gross income to the date of disposition and decreased by distributions or other
payments received on the convertible preferred securities other than payments of
stated interest that are not treated as original issue discount. Gain or loss
recognized by a U.S. holder on the convertible preferred securities generally
will be taxable as capital gain or loss, except to the extent any amount
realized is treated as a payment of accrued interest with respect to such U.S.
holder's pro rata share of the junior subordinated debt securities required to
be included in income, and generally will be long-term capital gain or loss if
the convertible preferred securities have been held for more than one year.
Should we exercise our option to defer any payment of interest on the
junior subordinated debt securities, the convertible preferred securities may
trade at a price that does not fully reflect the value of accrued but unpaid
interest with respect to the underlying junior subordinated debt securities. In
the event of such a deferral, a holder that disposes of its convertible
preferred securities between record dates for payments of distributions and
consequently does not receive a distribution from Commonwealth Bankshares
Capital Trust for the period prior to such disposition will nevertheless be
required to include in income as ordinary income accrued but unpaid interest on
the junior subordinated debt securities through the date of disposition and to
add such amount to its adjusted tax basis in its convertible preferred
securities disposed of. Such U.S. holder will recognize a capital loss on the
disposition of its convertible preferred securities to the extent the selling
price, which may not fully reflect the value of accrued but unpaid interest, is
less than the U.S. holder's adjusted tax basis in the convertible preferred
securities, which will include accrued but unpaid interest. Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States federal income tax purposes.
Conversion of Preferred Securities
A holder of convertible preferred securities generally will not recognize
income, gain or loss upon the conversion, through the conversion agent, of
convertible preferred securities into common stock. A holder will, however,
recognize gain if he or she receives cash in lieu of fractional shares of common
stock equal to the amount of cash received less the holder's tax basis in the
fractional shares. A holder's tax basis in the common stock received upon
exchange and conversion will generally equal the holder's tax basis in the
convertible preferred securities delivered to the conversion agent for exchange
less that basis allocated to any fractional share for which cash is received.
For tax purposes, a holder's holding period in the common stock received upon
exchange and conversion will generally begin on the date the holder acquired the
convertible preferred securities delivered to the conversion agent for exchange.
Adjustment of Conversion Price
Regulations promulgated by the Internal Revenue Service under Section 305
of the Internal Revenue Code would treat holders of convertible preferred
securities as having received a constructive distribution from Commonwealth
Bankshares in the event the conversion price of the junior subordinated debt
securities were adjusted if (i) as a result of such adjustment, the
proportionate interest (measured by the quantum of common stock into or for
which the junior subordinated debt securities are convertible or exchangeable)
of the holders of the convertible preferred securities in the assets or earnings
and profits of Commonwealth Bankshares were increased, and (ii) the adjustment
was not made pursuant to a bona fide, reasonable anti-dilution formula. An
adjustment in the conversion price would not be considered made pursuant to such
a formula if the adjustment was made to compensate for certain taxable
distributions with respect to the common stock. Accordingly, under certain
circumstances, a reduction of the conversion price for the holders of
convertible preferred securities may result in deemed dividend income to holders
to the extent of the current or accumulated earnings and profits of Commonwealth
Bankshares. Holders of convertible preferred securities would be required to
include their allocable share of such deemed dividend income in gross income but
would not receive any cash related to that deemed dividend income.
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United States Alien Holders
For purposes of this discussion, a United States alien holder is any
corporation, individual, partnership, estate or trust that is, as to the United
States, a foreign corporation, a nonresident alien individual, a foreign
partnership or a nonresident fiduciary of a foreign estate or trust.
Under current United States federal income tax law, and subject to the
discussion of backup withholding below, payments by Commonwealth Bankshares
Capital Trust or any of its paying agents to any holder who or that is a United
States alien holder will not be subject to United States federal withholding
tax; provided that:
. the holder does not actually or constructively own 10% or more of the
total combined voting power of all classes of stock of Commonwealth
Bankshares, Inc. entitled to vote;
. the holder is not a controlled foreign corporation that is related to
Commonwealth Bankshares, Inc. through stock ownership; and
. either the holder certifies to Commonwealth Bankshares Capital Trust or
its agent, under penalties of perjury, that it is not a United States
holder and provides its name and address, or a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business, holding the
convertible preferred security in such capacity, certifies to
Commonwealth Bankshares Capital Trust or its agent, under penalties of
perjury, that such statement has been received from the holder by it or
by a financial institution holding such security for the holder and
furnishes Commonwealth Bankshares Capital Trust or its agent with a
copy thereof.
Additionally, a United States alien holder of a convertible preferred
security will not be subject to United States federal withholding tax on any
gain realized upon the sale or other disposition of a convertible preferred
security.
Information Reporting to Securityholders
Generally, income on the convertible preferred securities will be
reported to holders on Forms 1099, which forms should be mailed to holders by
January 31 following each calendar year.
Backup Withholding
Payments made on, and proceeds from the sale of, the convertible
preferred securities may be subject to a "backup" withholding tax of 31% unless
the holder complies with certain certification requirements. Any withheld
amounts will be allowed as a credit against the holder's United States federal
income tax, provided the required information is furnished to the Internal
Revenue Service on a timely basis.
ERISA CONSIDERATIONS
ERISA pension plans, qualified retirement plans, and IRAs are subject to
transactional restrictions under ERISA and/or the Internal Revenue Code. For
example, a plan fiduciary is prohibited from engaging in transactions in its own
interest or for its own account or from receiving consideration from any party
dealing with a plan with regard to its assets. In addition, a plan may not enter
into a purchase, sale, or loan transaction with a disqualified person. A
disqualified person includes a fiduciary, the plan sponsor, and any entity
providing services to a plan. Violation of these transactional restrictions can
trigger federal excise taxes, federal and state income tax on otherwise exempt
retirement trusts, and accelerated federal and state income tax on the otherwise
deferred income accounts of retirement plan participants.
In the usual case, when a retirement plan invests plan assets in a
security, the security purchased replaces the purchase money as a plan asset and
the purchase money becomes an asset of the entity who offered the security for
sale. Because of a concern that some enterprises were in reality acting as
investment managers to plans, but avoiding classification as a fiduciary under
ERISA through the device of issuing participation units in, for example,
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limited partnerships, the Department of Labor issued plan asset regulations. The
plan asset regulations provide that when certain equity interests, including a
beneficial interest in a trust, are acquired by a plan, both the equity interest
acquired in the hands of the purchasing plan and the purchase money in the hands
of the issuer of the equity interest constitute plan assets. Since the issuer
has discretionary control over these assets, the issuer becomes a fiduciary
under ERISA with respect to the investing plan.
As a result, unless an exception applies, Commonwealth Bankshares Capital
Trust's purchase of the junior subordinated debt securities from Commonwealth
Bankshares, Inc. with assets invested by retirement plans would transform
Commonwealth Bankshares Capital Trust into a fiduciary dealing on its own
account and in its own interest with plan assets or receiving consideration from
an entity, Commonwealth Bankshares, Inc., engaged in a transaction involving
plan assets. The plan asset regulations provide certain exemptions to its plan
asset characterization rules.
One of the exemptions provided by the plan asset regulations, namely, the
publicly-offered exemption, applies to junior subordinated debt securities
purchased by Commonwealth Bankshares Capital Trust. Because of the exemption,
the purchase money or junior subordinated debt securities will not be deemed to
be plan assets in the hands of the trustee.
Under the plan asset regulations, a publicly-offered equity interest in a
trust purchased by a plan does not constitute a plan asset if the interest is
freely transferable and widely held. The plan asset regulations provide that a
security is publicly-offered if it is sold to a plan as part of an offering of
securities to the public pursuant to an effective registration statement under
the Securities Act of 1933 and the class of securities of which such security is
part is registered under the Securities Exchange Act of 1934 within 120 days, or
such later time as may be allowed by the Securities and Exchange Commission,
after the end of the fiscal year of the issuer during which the offering of such
securities to the public occurred.
We intend to cause the convertible preferred securities to be so
registered under the Securities Exchange Act of 1934. Further, although
ultimately under the plan asset regulations it is a question of fact, a security
will generally be deemed to be freely transferable if its purchase price is
$25,000 or less at the time of the public offering. If, in addition, the
securities when offered initially to the public will be held by 100 or more
persons independent of the issuer or of one another, they will generally be
deemed to be widely held. We anticipate that the convertible preferred
securities will constitute securities which are publicly-offered, widely held,
and freely transferable. Retirement plans should, nevertheless, consult with
their own counsel regarding the application of the plan asset regulations to the
purchase of convertible preferred securities from Commonwealth Bankshares
Capital Trust.
If we or Bank of the Commonwealth provide any services to an investing
retirement plan, then it is a disqualified person with respect to that plan
irrespective of whether Commonwealth Bankshares Capital Trust qualifies under
the publicly-offered securities exemption to the plan asset regulations.
Consequently, the purchase of junior subordinated debt securities by
Commonwealth Bankshares Capital Trust would be an indirect loan made by the
retirement plan to us and, as such, would constitute a prohibited transaction
under ERISA.
FORWARD LOOKING STATEMENTS
Some of the statements contained or incorporated by reference in this
prospectus may be "forward-looking statements." Statements which use words such
as "believes," "expects," "may," "will," "should," "projected," "contemplates"
or "anticipates" or the negative of those terms or other variations may be
forward-looking statements. These statements are subject to known and unknown
risks, uncertainties and other factors that could cause actual results to differ
materially from those contemplated by the statements.
Some important factors that may cause actual results to differ from that
projected in a forward-looking statement, include for example,
. our ability to implement our business strategy;
. a decline in economic condition in our market areas;
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. a tightening in the difference between our cost of funds and what we
earn on the loans we make;
. changes in governmental regulations affecting our business.
There are several other factors spelled out in "Risk Factors" beginning
on page 9 of this prospectus.
UNDERWRITING
The underwriter, McKinnon & Company, Inc., 555 Main Street, Norfolk,
Virginia, has agreed, subject to the terms and conditions contained in an
underwriting agreement with Commonwealth Bankshares Capital Trust and us, to
sell, as selling agent, on a best efforts basis, up to $7.0 million (aggregate
liquidation amount) of convertible preferred securities. Commonwealth Bankshares
Capital Trust has, however, reserved the right to increase the aggregate
liquidation amount by not more than $1.05 million. The underwriter is not
obligated to purchase the convertible preferred securities if they are not sold
to the public. The terms and conditions contained in the underwriting agreement
include, as examples, the effectiveness of the registration statement filed with
the Securities and Exchange Commission, the accuracy of our representations to
the underwriter and the absence of any materially adverse changes to our
business.
The underwriter has informed Commonwealth Bankshares Capital Trust and us
that it proposes to sell the convertible preferred securities as selling agent
for Commonwealth Bankshares Capital Trust, subject to prior sale, when, as and
if issued by Commonwealth Bankshares Capital Trust, in part to the public at the
public offering price set forth on the cover page of this prospectus and, in
part, through certain selected dealers, who are members of the National
Association of Securities Dealers, Inc., to customers of such selected dealers
at the public offering price, for which each selected dealer will receive a
commission of $0.__, for each $25.00 of convertible preferred securities that it
sells. The underwriter reserves the right to reject any order for the purchase
of convertible preferred securities through it in whole or in part.
The public offering is not contingent upon any event or the sale of a
minimum or maximum number of convertible preferred securities. Although we have
no expectation of doing so, we may, in our discretion, close this offering if
only a small amount of convertible preferred securities are sold. Funds received
by the underwriter from investors in the public offering will be deposited with
and held by the escrow agent in a non-interest bearing account until the closing
of the public offering. Closing is expected to occur on or about December __,
2000. If closing does not occur for any reason, funds held in escrow will be
returned promptly to investors.
As the proceeds of the sale of the convertible preferred securities will
ultimately be used to purchase the junior subordinated debt securities, the
underwriting agreement provides that we will pay as underwriter's compensation
an amount directly to the underwriter of $0.__ per convertible preferred
security (or up to $_________ in the aggregate). We will reimburse expenses
incurred by the underwriter up to $2,000, excluding blue sky fees and expenses.
In addition, we will be responsible for the expenses of issuance and
distribution of the convertible preferred securities, including registration
fees, legal and accounting fees and printing expenses, which we estimate will
total approximately $130,000.
The underwriting agreement provides that we and Commonwealth Bankshares
Capital Trust will indemnify the underwriter against certain liabilities,
including liabilities under the Securities Act or contribute to payments the
underwriter may be required to make in respect thereof.
Because the National Association of Securities Dealers, Inc. may view the
convertible preferred securities as interests in a direct participation program,
the offering is being made in compliance with the applicable provisions of its
Conduct Rules.
The convertible preferred securities are a new issue of securities with
no established trading market. Commonwealth Bankshares Capital Trust has applied
to list the convertible preferred securities on the National Association of
Securities Dealers, Inc. Over-the-Counter Bulletin Board under the symbol
"CWBSP". We and Commonwealth Bankshares Capital Trust have been advised by the
underwriter that it will make a market in the convertible preferred securities.
The underwriter, however, is not obligated to make a market in the convertible
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preferred securities and it can discontinue market making at any time without
notice. Neither we nor Commonwealth Bankshares Capital Trust can provide any
assurance that an active trading market for the convertible preferred securities
will develop.
VALIDITY OF SECURITIES
Delaware law relating to the validity of the convertible preferred
securities, the enforceability of the declaration and the formation of
Commonwealth Bankshares Capital Trust will be passed upon by Richards, Layton &
Finger, special Delaware counsel to us and Commonwealth Bankshares Capital
Trust. The validity of the guarantee and the junior subordinated debt
securities, as well as material United States federal income tax considerations
relating to the convertible preferred securities, will be passed upon for us by
Kaufman & Canoles, a Virginia professional corporation. Kaufman & Canoles will
rely on the opinion of Richards, Layton & Finger as to matters of Delaware law.
ACCOUNTANTS
The consolidated financial statements of Commonwealth Bankshares, Inc. as
of December 31, 1999 and 1998 and for each of the years in the three year period
ended December 31, 1999 have been included herein in reliance upon the report of
Poti, Walton & Associates, PC, independent auditors, and upon the authority of
said firm as experts in accounting and auditing.
78
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
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-9
</TABLE>
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>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
September 30,
2000 December 31,
(Unaudited) 1999 1998
------------ ---------- ----------
<S> <C> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 6,933,151 $ 6,320,567 $ 5,383,384
Federal funds sold 2,689,652 - 7,378,500
------------ ------------ -------------
Total cash and cash equivalents 9,622,803 6,320,567 12,761,884
Investment securities:
Available for sale 15,032,916 15,478,387 16,828,831
Held to maturity 4,411,012 4,706,761 5,665,833
Equity securities, restricted, at cost 661,624 548,078 503,678
Loans receivable:
Commercial 24,214,193 23,306,635 15,990,112
Commercial construction 4,195,767 1,711,924 1,522,464
Commercial mortgage 76,024,912 65,985,847 46,379,110
Residential mortgage 31,291,698 25,146,370 19,576,529
Installment loans to individuals 10,441,652 6,538,126 5,564,235
Other 2,774,056 2,816,716 2,817,787
------------ ------------ -------------
Gross loans 148,942,278 125,505,618 91,850,237
Unearned income (507,454) (460,527) (274,472)
Allowance for loan losses (1,002,603) (931,000) (969,000)
------------ ------------ -------------
Loans, net 147,432,221 124,114,091 90,606,765
Premises and equipment, net 4,081,252 2,822,142 2,742,015
Foreclosed real estate 294,628 601,101 998,697
Accrued interest receivable 1,232,743 1,044,211 856,458
Other assets 2,047,717 1,380,269 1,273,083
------------ ------------ -------------
$184,816,916 $157,015,607 $ 132,237,244
============ ============ =============
</TABLE>
F-3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999 1998
------------- ----------- -------------
<S> <C> <C> <C>
Liabilities:
Deposits:
Noninterest-bearing demand deposits $ 17,724,470 $ 15,071,902 $ 16,433,391
Interest-bearing:
Demand deposits 18,470,632 18,241,708 16,895,521
Savings deposits 4,900,448 4,658,485 5,303,955
Other time deposits 119,981,133 100,385,874 77,536,948
------------- ------------- --------------
Total deposits 161,076,683 138,357,969 116,169,815
Short-term borrowings 7,725,136 4,156,193 2,483,725
Long-term debt 504,832 530,944 557,056
Accrued interest payable 748,500 550,917 381,067
Other liabilities 1,560,429 1,192,986 1,065,836
------------- ------------- --------------
Total liabilities 171,615,580 144,789,009 120,657,499
Stockholders' equity:
Common stock, par value $2.50, 5,000,000
shares authorized; 1,678,466, 1,644,743 and
1,084,153 shares issued and outstanding in
2000, 1999 and 1998, respectively 4,196,165 4,111,858 2,710,383
Additional paid-in capital 5,383,529 5,274,788 5,175,939
Retained earnings 4,044,092 3,367,585 3,740,072
Accumulated other comprehensive loss (422,450) (527,633) (46,649)
------------- ------------- --------------
Total stockholders' equity 13,201,336 12,226,598 11,579,745
------------- ------------- --------------
$ 184,816,916 $ 157,015,607 $ 132,237,244
============= ============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
-------------------------- ----------------------------------------
2000 1999
(Unaudited (Unaudited) 1999 1998 1997
------------ ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 9,403,311 $6,793,778 $ 9,512,833 $7,837,677 $6,774,908
Investment securities 910,642 981,833 1,296,281 1,379,586 1,559,530
Other interest income 205,850 44,418 51,463 329,628 218,649
----------- ---------- ------------ ---------- ----------
Total interest income 10,519,803 7,820,029 10,860,577 9,546,891 8,553,087
Interest expense:
Deposits 5,521,787 3,805,259 5,262,773 4,906,526 4,235,619
Other interest expense 239,403 127,904 238,804 153,547 174,373
----------- ---------- ------------ ---------- ----------
Total interest expense 5,761,190 3,933,163 5,501,577 5,060,073 4,409,992
----------- ---------- ------------ ---------- ----------
Net interest income 4,758,613 3,886,866 5,359,000 4,486,818 4,143,095
Provision for loan losses 138,117 80,000 109,823 101,738 49,762
----------- ---------- ------------ ---------- ----------
Net interest income after provision for loan losses 4,620,496 3,806,866 5,249,177 4,385,080 4,093,333
Noninterest income (loss):
Service charges on deposit accounts 530,361 595,198 842,240 824,827 526,540
Other service charges and fees 263,203 163,358 386,706 369,776 273,044
Other 101,213 123,226 (19,750) (7,933) 69,435
----------- ---------- ------------ ---------- ----------
Total noninterest income 894,777 881,782 1,209,196 1,186,670 869,019
Noninterest expenses:
Salaries and employee benefits 2,116,858 1,696,359 2,290,700 1,862,484 1,709,545
Net occupancy expense 407,290 331,295 464,458 435,770 420,943
Furniture and equipment expense 486,890 429,477 609,499 548,691 481,917
Other operating expense 1,350,890 1,084,101 1,491,902 1,137,214 992,290
----------- ---------- ------------ ---------- ----------
Total noninterest expenses 4,361,928 3,541,232 4,856,559 3,984,159 3,604,695
----------- ---------- ------------ ---------- ----------
Income before income taxes 1,153,345 1,147,416 1,601,814 1,587,591 1,357,657
Provision for income taxes 301,868 299,291 446,424 482,339 427,692
----------- ---------- ------------ ---------- ----------
Net income $ 851,477 $ 848,125 $ 1,155,390 $1,105,252 $ 929,965
=========== ========== ============ ========== ==========
Per share data:
Basic $ .51 $ .52 $ .71 $ .68 $ .57
=========== ========== ============ ========== ==========
Diluted $ .46 $ .47 $ .64 $ .62 $ .53
=========== ========== ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1999, 1998, and 1997
--------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
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
========== ========== ========== ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000 and 1999 (Unaudited)
---------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
---------- ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $2,710,383 $5,175,939 $3,740,072 $ (46,649) $ 11,579,745
Comprehensive income:
Net income for the nine-month period
ended September 30, 1999 - - 848,125 - 848,125
Net change in unrealized loss on
securities available for sale - - - (368,726) (368,726)
-----------
Total comprehensive income 479,399
Issuance of common stock -
14,094 shares 35,234 71,704 - - 106,938
50% stock dividend - 541,954 shares 1,354,885 - (1,354,885) - -
Cash dividend - $.07 per share - - (115,546) - (115,546)
---------- ---------- ---------- --------- -----------
Balance, September 30, 1999 $4,100,502 $5,247,643 $3,117,766 $(415,375) $12,050,536
========== ========== ========== ========= ===========
Balance, December 31, 1999 $4,111,858 $5,274,788 $3,367,585 $(527,633) $12,226,598
Comprehensive income:
Net income for the nine-month period
ended September 30, 2000 - - 851,477 - 851,477
Net change in unrealized loss on
securities available for sale - - - 105,183 105,183
-----------
Total comprehensive income 956,660
Issuance of common stock -
33,723 shares 84,307 108,741 - - 193,048
Cash dividend - $.105 per share - - (174,970) - (174,970)
---------- ---------- ---------- --------- -----------
Balance, September 30, 2000 $4,196,165 $5,383,529 $4,044,092 $(422,450) $13,201,336
========== ========== ========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
-------------------------- -----------------------------------------
2000 1999
(Unaudited) (Unaudited) 1999 1998 1997
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income $ 851,477 $ 848,125 $ 1,155,390 $ 1,105,252 $ 929,965
Adjustments to reconcile net income to net cash
from operating activities:
Provision for loan losses 138,117 80,000 109,823 101,738 49,762
Depreciation and amortization 343,446 304,176 411,795 370,417 338,200
Other, net (66,208) (93,415) (15,477) 133,279 78,099
Net change in:
Accrued interest receivable (188,532) (81,409) (187,753) (55,545) (64,821)
Accrued interest payable 197,583 75,867 169,850 (22,772) 69,677
Other assets (264,125) 493,288 362,897 (616,565) (217,407)
------------ ------------ ----------- ------------ -------------
Net cash from operating activities 1,011,758 1,626,632 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 (250,000) (3,773,059) (3,773,059) (12,599,300) (8,251,207)
Purchase of equity securities, restricted (113,546) (44,400) (44,400) (352,000) -
Net purchase of premises and equipment (1,606,665) (381,491) (494,140) (782,043) (221,881)
Net expenditures on foreclosed real estate (83,276) (19,451) (30,448) (157,811) (138,820)
Net change in loans (23,456,247) (21,680,406) (33,692,449) (13,465,516) (12,429,517)
Proceeds from:
Maturities of securities held to maturity 295,813 784,726 959,072 6,138,292 5,495,645
Sales and maturities of securities available
for sale 854,776 4,088,177 4,386,431 7,394,086 6,916,709
Sale of real estate acquired in settlement of
loans 370,000 115,000 434,194 670,000 302,534
------------ ------------ ----------- ------------ -------------
Net cash used in investing activities (23,989,145) (20,910,904) (32,254,799) (14,146,911) (11,425,081)
Financing activities:
Net change in:
Other time deposits 19,595,259 5,491,846 22,848,926 11,745,243 8,261,228
Demand, interest bearing demand and savings
deposits 3,123,455 130,603 (660,772) 3,664,522 2,236,368
Short-term borrowings 3,568,943 6,344,743 1,672,468 (276,343) (813,282)
Other (8,034) (34,720) (53,665) (28,815) (28,707)
------------ ------------ ----------- ------------ -------------
Net cash from financing activities 26,279,623 11,932,472 23,806,957 15,104,607 9,655,607
------------ ------------ ----------- ------------ -------------
Net increase (decrease) in cash and cash
equivalents 3,302,236 (7,351,800) (6,441,317) 1,973,500 (585,999)
Cash and cash equivalents, beginning of period 6,320,567 12,761,884 12,761,884 10,788,384 11,374,383
------------ ------------ ------------ ------------ -------------
Cash and cash equivalents, end of period $ 9,622,803 $ 5,410,084 $ 6,320,567 $ 12,761,884 $ 10,788,384
============ ============ ============ ============ =============
Supplemental disclosure of cash paid during the
period for:
Interest $ 5,563,607 $ 3,857,296 $ 5,331,577 $ 5,082,993 $ 4,340,315
Income taxes 421,101 406,366 562,366 631,174 433,635
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED 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-9
<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-10
<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:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
--------------------------- -----------------------------------
2000 1999
(Unaudited) (Unaudited) 1999 1998 1997
----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Weighted average shares outstanding used
to compute basic earnings per share
1,663,553 1,630,015 1,631,684 1,626,107 1,626,107
Incremental shares issuable upon the
assumed exercise of stock options 179,819 170,724 172,517 162,879 129,669
---------- ----------- ----------- ---------- ----------
Shares used to compute diluted earnings
per share 1,843,372 1,800,739 1,804,201 1,788,986 1,755,776
========== =========== =========== ========== ==========
</TABLE>
F-11
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Note 1 Summary of Significant Accounting Policies (Continued)
Per Share Data (Continued) - 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.
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 ($4,114,751 at
September 30, 2000 [unaudited]) in excess of the Federal Deposit
Insurance Corporation limit of $100,000 per institution.
F-12
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
Note 3 Investment Securities
The carrying and market values of investment securities are as follows:
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
September 30, 2000
Available for sale:
U.S. Government and agency securities $ 4,500,000 $ - $ (208,965) $ 4,291,035
Mortgage-backed securities 6,226,132 3,249 (235,167) 5,994,214
State and municipal securities 4,446,858 - (159,191) 4,287,667
Other 500,000 - (40,000) 460,000
------------ -------- ---------- ------------
$ 15,672,990 $ 3,249 $ (643,323) $ 15,032,916
============ ======== ========== ============
Held to maturity:
U.S. Government and agency securities $ 750,000 $ - $ (110,625) $ 639,375
Mortgage-backed securities 1,870,758 714 (31,942) 1,839,530
State and municipal securities 1,790,254 10,262 (6,996) 1,793,520
------------ -------- ---------- ------------
$ 4,411,012 $ 10,976 $ (149,563) $ 4,272,425
============ ======== ========== ============
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
============ ======== ========== ============
</TABLE>
F-13
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
Note 3 Investment Securities (Continued)
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
------------ ---------- --------- ----------
<S> <C> <C> <C> <C>
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>
A maturity schedule of investment securities as of September 30, 2000
(unaudited) 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 $ 250,000 $ 236,095 $ 190,102 $ 189,660
After one year through five years 1,188,534 1,157,532 1,721,285 1,604,105
After five years through ten years 3,635,924 3,513,900 628,867 639,130
After ten years 3,872,400 3,671,175 - -
------------ ----------- ------------ ------------
8,946,858 8,578,702 2,540,254 2,432,895
Mortgage-backed securities 6,226,132 5,994,214 1,870,758 1,839,530
Other 500,000 460,000 - -
------------ ----------- ------------ ------------
$ 15,672,990 $15,032,916 $ 4,411,012 $ 4,272,425
============ =========== ============ ============
</TABLE>
F-14
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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. All non-equity securities were pledged
at September 30, 2000.
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-15
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Note 4 Loans Receivable (Continued)
A summary of transactions in the allowance for loan losses follows:
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 931,000 $969,000 $969,000 $932,000
Provision charged to operating expense 138,117 109,823 101,738 49,762
Loan charge-offs (71,469) (156,963) (105,218) (30,576)
Loan recoveries 4,955 9,140 3,480 17,814
---------- -------- -------- --------
Balance at end of period $1,002,603 $931,000 $969,000 $969,000
========== ======== ======== ========
</TABLE>
Note 5 Premises and Equipment
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION> September 30,
2000 December 31,
(Unaudited) 1999 1998
------------- ----------- -----------
<S> <C> <C> <C>
Land $ 263,802 $ 263,802 $ 263,802
Buildings and improvements 1,805,146 1,603,264 1,612,422
Leasehold improvements 442,414 370,853 338,576
Furniture and equipment 3,760,099 2,775,892 2,997,073
Construction in progress 555,986 220,301 71,398
----------- ----------- -----------
6,827,447 5,234,112 5,283,271
Less accumulated depreciation 2,746,195 2,411,970 2,541,256
----------- ----------- -----------
$ 4,081,252 $ 2,822,142 $ 2,742,015
=========== =========== ===========
</TABLE>
F-16
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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-17
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Note 9 Income Taxes
The current and deferred components of income tax expense are as
follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------------- ---------------------------------
2000 1999
(Unaudited) (Unaudited) 1999 1998 1997
----------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Current $391,934 $ 415,680 $540,657 $563,490 $492,714
Deferred (90,066) (116,389) (94,233) (81,151) (65,022)
-------- --------- -------- -------- --------
Provision for income taxes $301,868 $ 299,291 $446,424 $482,339 $427,692
======== ========= ======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------------- ---------------------------------
2000 1999
(Unaudited) (Unaudited) 1999 1998 1997
----------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income tax expense at statutory
rates $392,137 $390,121 $544,617 $539,781 $461,603
Increase (decrease) due to:
Tax exempt income (74,436) (76,450) (98,220) (61,303) (42,684)
Other (15,833) (14,380) 27 3,861 8,773
-------- -------- -------- -------- --------
Provision for income taxes $301,868 $299,291 $446,424 $482,339 $427,692
======== ======== ======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
September 30,
2000 1999 December 31,
(Unaudited) (Unaudited) 1999 1998
------------ ----------- ---------- ---------
<S> <C> <C> <C> <C>
Deferred tax asset $1,094,499 $1,010,238 $1,060,531 $ 705,173
Deferred tax liability (163,845) (151,480) (165,757) (152,754)
---------- ---------- ---------- ---------
Net deferred tax asset $ 930,654 $ 858,758 $ 894,774 $ 552,419
=========== ========== ========== =========
</TABLE>
F-18
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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:
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999 1998
------------- ----------- -----------
<S> <C> <C> <C>
Beginning of period $3,161,389 $ 2,493,226 $ 2,553,484
Additional borrowings 1,286,678 1,724,906 1,476,197
Curtailments (257,699) (1,056,743) (1,536,455)
---------- ----------- -----------
End of period $4,190,368 $ 3,161,389 $ 2,493,226
========== =========== ===========
</TABLE>
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-19
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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
Minimum Under Prompt
Capital Corrective Action
Actual Requirement 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-20
<PAGE>
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- -------- -------- --------
<S> <C> <C> <C> <C>
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
</TABLE>
The contract or notional amount of financial instruments with off-
balance sheet risk are as follows:
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999 1998
------------- ----------- -----------
<S> <C> <C> <C>
Commitments to extend credit $29,200,124 $20,590,217 $12,983,891
Standby letters of credit 500,118 440,941 568,456
</TABLE>
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-21
<PAGE>
================================================================================
_______, 2000
$ 7,000,000
COMMONWEALTH BANKSHARES CAPITAL TRUST I
$_______Convertible Preferred Securities
(liquidation amount $25.00 per capital security)
Fully and unconditionally guaranteed, as described herein, by
COMMONWEALTH BANKSHARES, INC.
-------------------
PROSPECTUS
-------------------
McKinnon & Company, Inc.
________________________________________________________________________________
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
<TABLE>
<CAPTION>
Item 13. Other Expenses of Issuance and Distribution
<S> <C>
Securities and Exchange Commission Registration Fee $ 2,125.20*
National Association of Securities Dealers Examination Fee $ 1,600.00
Printing Expenses $10,000.00
Accounting Fees and Expenses $20,000.00
Legal Fees and Expenses $50,000.00
Blue Sky Fees and Expenses $ 2,000.00
Miscellaneous Expenses $ 5,000.00
Total $90,725.20
==========
</TABLE>
____________________
* Represents actual expenses. All other expenses are estimates.
Item 14. Indemnification of Directors and Officers
Article 10 of Chapter 9 of Title 13.1 of the Code of Virginia, 1950,
as amended (the "Code"), permits a Virginia corporation to indemnify any
director or officer for reasonable expenses incurred in any legal proceeding in
advance of final disposition of the proceeding, if the director or officer
furnishes the corporation a written statement of his good faith belief that he
has met the standard of conduct prescribed by the Code, and a determination is
made by the board of directors that such standard has been met. In a proceeding
by or in the right of the corporation, no indemnification shall be made in
respect of any matter as to which an officer or director is adjudged to be
liable to the corporation, unless the court in which the proceeding took place
determines that, despite such liability, such person is reasonably entitled to
indemnification in view of all the relevant circumstances. In any other
proceeding, no indemnification shall be made if the director or officer is
adjudged liable to the corporation on the basis that personal benefit was
improperly received by him. Corporations are given the power to make any other
or further indemnity, including advance of expenses, to any director or officer
that may be authorized by the articles of incorporation or any bylaw made by the
shareholders, or any resolution adopted, before or after the event, by the
shareholders, except an indemnity against willful misconduct or a knowing
violation of the criminal law. Unless limited by its articles of incorporation,
indemnification of a director or officer is mandatory when he entirely prevails
in the defense of any proceeding to which he is a party because he is or was a
director or officer.
The Articles of Incorporation of Commonwealth Bankshares contain
provisions indemnifying the directors and officers of Commonwealth Bankshares
against expenses and liabilities incurred in legal proceedings to the fullest
extent permitted by Virginia law.
Under the Declaration of Trust, Commonwealth Bankshares, as depositor
of the Trust, has agreed (i) to indemnify and hold harmless each Administrative
Trustee and any employee or agent of the Trust or its Affiliates from and
against any loss, damage, liability, tax, penalty, expense or claim of any kind
or nature whatsoever incurred by such person by reason of the creation,
operation or termination of the Trust or any act or omission performed or
omitted by such person in good faith on behalf of the Trust and in a manner such
person reasonably believes to be within the scope of authority conferred on such
person by the Declaration, except that no person shall be entitled to be
indemnified in respect of any loss, damage or claim incurred by such person by
reason of negligence or willful misconduct with respect to such acts or
omissions, and (ii) to advance expenses (including legal fees) incurred by such
person in defending any claim, demand, action, suit or proceeding, from time to
time, prior to the final disposition of such claim, demand, action, suit or
proceeding.
Item 15. Recent Sales of Unregistered Securities
None.
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) The following exhibits are filed on behalf of the Registrant as part
of this Registration Statement:
EXHIBIT NO. DESCRIPTION
---------- -----------
*1.1 Form of Underwriting Agreement for offering of
Convertible Preferred Securities.
3.1 Articles of Incorporation of Commonwealth Bankshares,
Inc. (incorporated herein by reference to Exhibit 3.1
to Commonwealth Bankshares, Inc.'s Registration
Statement on Form S-4, filed with the Securities and
Exchange Commission on June 15, 1988).
3.2 Bylaws of Commonwealth Bankshares, Inc. (incorporated
herein by reference to Exhibit 3.2 to Commonwealth
Bankshares, Inc.'s Registration Statement on Form S-
4, filed with the Securities and Exchange Commission
on June 15, 1988).
3.3 Amendment to Articles of Incorporation dated July 28,
1989 (incorporated herein by reference to Exhibit 3.3
to Commonwealth Bankshares, Inc.'s Form 10-K filed
with the Securities and Exchange Commission on March
20, 1990).
*3.4 Amendment to Articles of Incorporation dated November
2000.
*4.1 Certificate of Trust of Commonwealth Bankshares
Capital Trust I.
*4.2 Declaration of Trust between Commonwealth Bankshares,
Inc. and Wilmington Trust Company.
*4.3 Form of Amended and Restated Declaration of Trust for
Commonwealth Bankshares Capital Trust I.
*4.4 Form of Junior Subordinated Indenture between
Commonwealth Bankshares, Inc. and Wilmington Trust
Company, as Trustee.
4.5 Form of Convertible Preferred Security (included in
Exhibit 4.3 above).
4.6 Form of Junior Subordinated Debt Security (included
in Exhibit 4.4 above).
*4.7 Form of Guarantee Agreement with respect to
Convertible Preferred Securities issued by
Commonwealth Bankshares Capital Trust I.
*4.8 Form of Escrow Agreement among McKinnon & Company,
Inc., Commonwealth Bankshares Capital Trust I,
Commonwealth Bankshares, Inc. and Wilmington Trust
Company.
**5.1 Opinion of Kaufman & Canoles, P.C.
**5.2 Opinion of Richards, Layton & Finger.
**8.1 Opinion of Kaufman & Canoles, P.C. as to tax matters.
*12.1 Calculation of Ratio of Earnings to Fixed Charges.
*23.1 Consent of Poti, Walton & Associates, PC.
23.2 Consent of Kaufman & Canoles, P.C. (included in
Exhibit 5.1 above).
23.3 Consent of Richards, Layton & Finger (included in
Exhibit 5.2 above).
24.1 Powers of Attorney (included on signature page).
*25.1 Statement of Eligibility under the Trust Indenture
Act of 1939, as amended, of Wilmington Trust Company,
as Trustee under the Junior Subordinated Indenture.
*25.2 Statement of Eligibility under the Trust Indenture
Act of 1939, as amended, of Wilmington Trust Company,
as Property Trustee under the Declaration of Trust of
Commonwealth Bankshares Capital Trust I.
II-2
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- -----------
*25.3 Statement of Eligibility under the Trust Indenture
Act of 1939, as amended, of Wilmington Trust Company,
as Guarantee Trustee under the Guarantee Agreement
for the benefit of holders of Trust Securities of
Commonwealth Bankshares Capital Trust I.
*27.1 Financial Data Schedule
________________
* Filed herewith.
**To be filed by amendment.
(b) Financial Statement Schedules:
All financial statement schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
either included in the financial information set forth in the Prospectus or are
inapplicable and therefore have been omitted.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of a
Registrant pursuant to the foregoing provisions, or otherwise, each of the
Registrants has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by a Registrant of expenses
incurred or paid by a director, officer or controlling person of a Registrant in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, such Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
Each of the undersigned Registrants hereby undertakes to deliver or
cause to be delivered with the Prospectus, to each person to whom the Prospectus
is sent or given, the latest annual report to security holders that is
incorporated by reference in the Prospectus and furnished pursuant to and
meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities
Exchange Act of 1934; and, where interim financial information required to be
presented by Article 3 of Regulation S-X is not set forth in the Prospectus, to
deliver, or cause to be delivered to each person to whom the Prospectus is sent
or given, the latest quarterly report that is specifically incorporated by
reference in the Prospectus to provide such interim financial information.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Norfolk, Commonwealth of Virginia, on November 20, 2000.
COMMONWEALTH BANKSHARES, INC.
By: /s/ Edward J. Woodard, Jr.
----------------------------------------
Edward J. Woodard, Jr., CLBB
President and Chief Executive Officer
POWER OF ATTORNEY
Each of the undersigned hereby appoints E. J. Woodard, Jr. and John H.
Gayle as attorneys and agents for the undersigned, with full power of
substitution, for and in the name, place and stead of the undersigned, to sign
and file with the Securities and Exchange Commission under the Securities Act of
1933, as amended, any and all amendments and exhibits to the registration
statement and any and all applications, instruments and other documents to be
filed with the Securities and Exchange Commission pertaining to the registration
of securities covered hereby with full power and authority to do and perform any
and all acts and things whatsoever requisite or desirable.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Edward J. Woodward, Jr. President, Chief Executive November 20, 2000
-----------------------------------------------------
Edward J. Woodard, Jr. Officer and Director
(Principal Executive Officer)
/s/ John H. Gayle Executive Vice President and November 20, 2000
-----------------------------------------------------
John H. Gayle Cashier (Principal Financial
Officer)
/s/ George H. Burton Director November 20, 2000
-----------------------------------------------------
George H. Burton
/s/ Morton Goldmeier Director November 20, 2000
-----------------------------------------------------
Morton Goldmeier
/s/ William P. Kellam Director November 20, 2000
-----------------------------------------------------
William P. Kellam
/s/ Thomas W. Moss, Jr. Director November 20, 2000
-----------------------------------------------------
Thomas W. Moss, Jr.
/s/ William D. Payne, M.D. Director November 20, 2000
-----------------------------------------------------
William D. Payne, M.D.
/s/ Herbert L. Perlin Director November 20, 2000
-----------------------------------------------------
Herbert L. Perlin
/s/ Richard J. Tavss Director November 20, 2000
-----------------------------------------------------
Richard J. Tavss
/s/ Kenneth J. Young Director November 20, 2000
-----------------------------------------------------
Kenneth J. Young
</TABLE>
II-4
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Norfolk, Commonwealth of Virginia, on November 20, 2000.
COMMONWEALTH BANKSHARES
CAPITAL TRUST I
By: Commonwealth Bankshares, Inc., as
Depositor
By: /s/ Edward J. Woodard, Jr.
----------------------------------------
Edward J. Woodard, Jr., CLBB
President and Chief Executive Officer
II-5
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- -----------
*1.1 Form of Underwriting Agreement for offering of
Convertible Preferred Securities.
3.1 Articles of Incorporation of Commonwealth Bankshares,
Inc. (incorporated herein by reference to Exhibit 3.1
to Commonwealth Bankshares, Inc.'s Registration
Statement on Form S-4, filed with the Securities and
Exchange Commission on June 15, 1988).
3.2 Bylaws of Commonwealth Bankshares, Inc. (incorporated
herein by reference to Exhibit 3.2 to Commonwealth
Bankshares, Inc.'s Registration Statement on Form S-
4, filed with the Securities and Exchange Commission
on June 15, 1988).
3.3 Amendment to Articles of Incorporation dated July 28,
1989 (incorporated herein by reference to Exhibit 3.3
to Commonwealth Bankshares, Inc.'s Form 10-K filed
with the Securities and Exchange Commission on March
20, 1990)
*3.4 Amendment to Articles of Incorporation dated November
2000.
*4.1 Certificate of Trust of Commonwealth Bankshares
Capital Trust I.
*4.2 Declaration of Trust between Commonwealth Bankshares,
Inc. and Wilmington Trust Company.
*4.3 Form of Amended and Restated Declaration of Trust for
Commonwealth Bankshares Capital Trust I.
*4.4 Form of Junior Subordinated Indenture between
Commonwealth Bankshares, Inc. and Wilmington Trust
Company, as Trustee.
4.5 Form of Convertible Preferred Security (included in
Exhibit 4.3 above).
4.6 Form of Junior Subordinated Debt Security (included
in Exhibit 4.4 above).
*4.7 Form of Guarantee Agreement with respect to
Convertible Preferred Securities issued by
Commonwealth Bankshares Capital Trust I.
*4.8 Form of Escrow Agreement among McKinnon & Company,
Inc., Commonwealth Bankshares Capital Trust I,
Commonwealth Bankshares, Inc. and Wilmington Trust
Company.
**5.1 Opinion of Kaufman & Canoles, P.C.
**5.2 Opinion of Richards, Layton & Finger.
**8.1 Opinion of Kaufman & Canoles, P.C. as to tax matters.
*12.1 Calculation of Ratio of Earnings to Fixed Charges.
*23.1 Consent of Poti, Walton & Associates, PC.
23.2 Consent of Kaufman & Canoles, P.C. (included in
Exhibit 5.1 above).
23.3 Consent of Richards, Layton & Finger (included in
Exhibit 5.2 above).
24.1 Powers of Attorney (included on signature page).
*25.1 Statement of Eligibility under the Trust Indenture
Act of 1939, as amended, of Wilmington Trust Company,
as Trustee under the Junior Subordinated Indenture.
*25.2 Statement of Eligibility under the Trust Indenture
Act of 1939, as amended, of Wilmington Trust Company,
as Property Trustee under the Declaration of Trust of
Commonwealth Bankshares Capital Trust I.
II-6
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- -----------
*25.3 Statement of Eligibility under the Trust Indenture
Act of 1939, as amended, of Wilmington Trust Company,
as Guarantee Trustee under the Guarantee Agreement
for the benefit of holders of Trust Securities of
Commonwealth Bankshares Capital Trust I.
*27.1 Financial Data Schedule
*Filed herewith.
**To be filed by amendment.
II-7
