UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
| x | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2007
or
| ¨ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number: 000-17377
COMMONWEALTH BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
| VIRGINIA | 54-1460991 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
403 Boush Street Norfolk, Virginia | 23510 | |
| (Address of principal executive offices) | (Zip Code) |
(757) 446-6900
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¨ Accelerated Filer x Non-Accelerated Filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $2.066 Par Value – 6,891,998 shares as of October 17, 2007
Table of Contents
| Page | ||||
PART I - FINANCIAL INFORMATION | ||||
ITEM 1 – FINANCIAL STATEMENTS (unaudited) | ||||
| Consolidated Balance Sheets | 3 | |||
September 30, 2007 | ||||
December 31, 2006 | ||||
| Consolidated Statements of Income | 4 | |||
Three months ended September 30, 2007 | ||||
Three months ended September 30, 2006 | ||||
Nine months ended September 30, 2007 | ||||
Nine months ended September 30, 2006 | ||||
| Consolidated Statements of Comprehensive Income | 5 | |||
Nine months ended September 30, 2007 | ||||
Nine months ended September 30, 2006 | ||||
| Consolidated Statements of Stockholders’ Equity | 6 | |||
Nine months ended September 30, 2007 | ||||
Year ended December 31, 2006 | ||||
Year ended December 31, 2005 | ||||
| Consolidated Statements of Cash Flows | 7 | |||
Nine months ended September 30, 2007 | ||||
Nine months ended September 30, 2006 | ||||
| Notes to Consolidated Financial Statements | 8 -11 | |||
ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 11 -18 | |||
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 19 | |||
| 19 | ||||
| PART II - OTHER INFORMATION | ||||
| 20 | ||||
| 20 | ||||
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 20 | |||
| 20 | ||||
ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 20 | |||
| 20 | ||||
| 20 | ||||
| 21 | ||||
2
Consolidated Balance Sheets
| September 30, 2007 (Unaudited) | December 31, 2006 (Audited) | |||||||
Assets | ||||||||
Cash and cash equivalents: | ||||||||
Cash and due from banks | $ | 7,352,883 | $ | 10,567,691 | ||||
Interest bearing deposits in banks | 207,314 | 427,391 | ||||||
Federal funds sold | 409,440 | 2,031,055 | ||||||
Total cash and cash equivalents | 7,969,637 | 13,026,137 | ||||||
Investment securities: | ||||||||
Available for sale, at fair market value | 6,452,865 | 7,206,153 | ||||||
Held to maturity, at amortized cost (fair market value was $440,301 and $476,041, respectively) | 436,618 | 470,265 | ||||||
Total investment securities | 6,889,483 | 7,676,418 | ||||||
Equity securities, restricted, at cost | 7,774,750 | 7,184,850 | ||||||
Loans | 749,752,679 | 669,541,325 | ||||||
Allowance for loan losses | (8,859,981 | ) | (8,144,265 | ) | ||||
Loans, net | 740,892,698 | 661,397,060 | ||||||
Premises and equipment, net | 21,997,775 | 12,939,966 | ||||||
Deferred tax assets | 4,784,076 | 4,283,163 | ||||||
Accrued interest receivable | 6,167,692 | 5,373,086 | ||||||
Other assets | 3,967,855 | 3,324,594 | ||||||
Total assets | $ | 800,443,966 | $ | 715,205,274 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Liabilities: | ||||||||
Deposits: | ||||||||
Noninterest-bearing demand deposits | $ | 48,415,476 | $ | 43,045,107 | ||||
Interest-bearing | 506,407,649 | 444,129,720 | ||||||
Total deposits | 554,823,125 | 487,174,827 | ||||||
Short-term borrowings | 57,492,200 | 88,611,200 | ||||||
Long-term debt | 45,322,048 | 5,348,160 | ||||||
Trust preferred capital notes | 20,619,000 | 20,619,000 | ||||||
Accrued interest payable | 2,623,353 | 1,678,156 | ||||||
Other liabilities | 8,648,438 | 8,548,552 | ||||||
Total liabilities | 689,528,164 | 611,979,895 | ||||||
Stockholders’ Equity: | ||||||||
Common stock, par value $2.066, 18,150,000 shares authorized; 6,891,998 and 6,844,975 shares issued and outstanding in 2007 and 2006, respectively | 14,238,869 | 14,141,719 | ||||||
Additional paid-in capital | 64,462,502 | 63,965,840 | ||||||
Retained earnings | 32,204,786 | 25,123,140 | ||||||
Accumulated other comprehensive gain (loss) | 9,645 | (5,320 | ) | |||||
Total stockholders’ equity | 110,915,802 | 103,225,379 | ||||||
Total liabilities and stockholders’ equity | $ | 800,443,966 | $ | 715,205,274 | ||||
See accompanying notes to consolidated financial statements (unaudited).
3
Consolidated Statements of Income (Unaudited)
| Three months ended | Nine months ended | |||||||||||||||
| September 30, 2007 | September 30, 2006 | September 30, 2007 | September 30, 2006 | |||||||||||||
Interest and dividend income: | ||||||||||||||||
Loans, including fees | $ | 15,543,534 | $ | 13,777,176 | $ | 45,214,686 | $ | 37,609,329 | ||||||||
Investment securities: | ||||||||||||||||
Taxable | 83,751 | 94,741 | 261,426 | 287,710 | ||||||||||||
Tax exempt | 11,310 | 15,559 | 34,931 | 49,201 | ||||||||||||
Dividend income, equity securities, restricted | 115,990 | 106,745 | 343,246 | 285,928 | ||||||||||||
Other interest income | 15,293 | 28,819 | 79,371 | 78,040 | ||||||||||||
Total interest and dividend income | 15,769,878 | 14,023,040 | 45,933,660 | 38,310,208 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 5,643,221 | 4,576,015 | 15,791,964 | 11,769,801 | ||||||||||||
Federal Home Loan Bank | 825,058 | 1,278,812 | 3,261,765 | 3,313,089 | ||||||||||||
Junior subordinated debt securities | — | 41,017 | — | 207,065 | ||||||||||||
Trust preferred capital notes | 330,122 | 330,122 | 979,601 | 986,777 | ||||||||||||
Long-term debt | 401,093 | 54,530 | 639,996 | 162,045 | ||||||||||||
Total interest expense | 7,199,494 | 6,280,496 | 20,673,326 | 16,438,777 | ||||||||||||
Net interest income | 8,570,384 | 7,742,544 | 25,260,334 | 21,871,431 | ||||||||||||
Provision for loan losses | 370,000 | 625,000 | 1,085,000 | 2,045,000 | ||||||||||||
Net interest income after provision for loan losses | 8,200,384 | 7,117,544 | 24,175,334 | 19,826,431 | ||||||||||||
Noninterest income: | ||||||||||||||||
Service charges on deposit accounts | 297,168 | 298,932 | 774,530 | 847,154 | ||||||||||||
Other service charges and fees | 186,737 | 146,838 | 507,327 | 397,441 | ||||||||||||
Mortgage brokerage income | 337,895 | 434,160 | 1,064,867 | 1,198,429 | ||||||||||||
Title insurance income | 168,254 | 220,972 | 613,330 | 697,109 | ||||||||||||
Investment service income | 241,526 | 280,207 | 657,945 | 514,622 | ||||||||||||
Other | 45,445 | 43,781 | 156,237 | 120,879 | ||||||||||||
Total noninterest income | 1,277,025 | 1,424,890 | 3,774,236 | 3,775,634 | ||||||||||||
Noninterest expense: | ||||||||||||||||
Salaries and employee benefits | 2,647,515 | 2,383,349 | 7,870,355 | 6,688,494 | ||||||||||||
Net occupancy expense | 674,298 | 412,889 | 1,700,009 | 1,198,879 | ||||||||||||
Furniture and equipment expense | 398,002 | 338,024 | 1,162,282 | 1,011,799 | ||||||||||||
Other operating expense | 1,493,040 | 1,190,276 | 4,188,984 | 3,558,953 | ||||||||||||
Total noninterest expense | 5,212,855 | 4,324,538 | 14,921,630 | 12,458,125 | ||||||||||||
Income before provision for income taxes and noncontrolling interest | 4,264,554 | 4,217,896 | 13,027,940 | 11,143,940 | ||||||||||||
Provision for income taxes | 1,494,734 | 1,447,257 | 4,559,664 | 3,799,240 | ||||||||||||
Income before noncontrolling interest | 2,769,820 | 2,770,639 | 8,468,276 | 7,344,700 | ||||||||||||
Noncontrolling interest in subsidiary | (124 | ) | (6,061 | ) | (9,911 | ) | (19,849 | ) | ||||||||
Net income | $ | 2,769,696 | $ | 2,764,578 | $ | 8,458,365 | $ | 7,324,851 | ||||||||
Basic earnings per share | $ | 0.40 | $ | 0.53 | $ | 1.23 | $ | 1.43 | ||||||||
Diluted earnings per share | $ | 0.40 | $ | 0.48 | $ | 1.21 | $ | 1.29 | ||||||||
Dividends paid per share | $ | 0.08 | $ | 0.05 | $ | 0.20 | $ | 0.15 | ||||||||
Basic weighted average shares outstanding | 6,896,580 | 5,258,992 | 6,882,892 | 5,129,145 | ||||||||||||
Diluted weighted average shares outstanding | 6,952,185 | 5,802,346 | 6,966,270 | 5,783,125 | ||||||||||||
See accompanying notes to consolidated financial statements (unaudited).
4
Consolidated Statements of Comprehensive Income (Unaudited)
| Nine months ended | |||||||
| September 30, 2007 | September 30, 2006 | ||||||
Net income | $ | 8,458,365 | $ | 7,324,851 | |||
Other comprehensive income, net of income tax: | |||||||
Net change in unrealized loss on securities available for sale | 14,965 | (3,645 | ) | ||||
Comprehensive income | $ | 8,473,330 | $ | 7,321,206 | |||
See accompanying notes to consolidated financial statements (unaudited).
5
Consolidated Statements of Stockholders’ Equity
For the Nine Months Ended September 30, 2007 and Years Ended December 31, 2006 and 2005
| Common Shares | Common Amount | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (loss) | Total | ||||||||||||||||||
Balance, January 1, 2005 | 3,611,601 | $ | 7,461,986 | $ | 19,321,813 | $ | 10,187,132 | $ | 53,218 | $ | 37,024,149 | ||||||||||||
Comprehensive income: | |||||||||||||||||||||||
Net income | — | — | — | 6,634,308 | — | 6,634,308 | |||||||||||||||||
Change in unrealized loss on securities available for sale, net of tax effect | — | — | — | — | (58,789 | ) | (58,789 | ) | |||||||||||||||
Total comprehensive income | 6,575,519 | ||||||||||||||||||||||
Issuance of common stock | 147,310 | 304,360 | 1,049,696 | — | — | 1,354,056 | |||||||||||||||||
Issuance of common stock through private placement | 1,170,081 | 2,417,522 | 16,108,400 | — | — | 18,525,922 | |||||||||||||||||
Cash dividends—$0.1736 per share | — | — | — | (749,627 | ) | — | (749,627 | ) | |||||||||||||||
Balance, December 31, 2005 | 4,928,992 | $ | 10,183,868 | $ | 36,479,909 | $ | 16,071,813 | $ | (5,571 | ) | $ | 62,730,019 | |||||||||||
Comprehensive income: | |||||||||||||||||||||||
Net income | — | — | — | 10,091,629 | — | 10,091,629 | |||||||||||||||||
Change in unrealized gain on securities available for sale, net of tax effect | — | — | — | — | 251 | 251 | |||||||||||||||||
Total comprehensive income | 10,091,880 | ||||||||||||||||||||||
Issuance of common stock | 752,522 | 1,553,717 | 3,523,022 | — | — | 5,076,739 | |||||||||||||||||
Issuance of common stock through private placement | 1,163,461 | 2,404,134 | 23,867,509 | — | — | 26,271,643 | |||||||||||||||||
Stock based compensation expense -options issued | — | — | 95,400 | — | — | 95,400 | |||||||||||||||||
Cash dividends—$0.1991 per share | — | — | — | (1,040,302 | ) | — | (1,040,302 | ) | |||||||||||||||
Balance, December 31, 2006 | 6,844,975 | $ | 14,141,719 | $ | 63,965,840 | $ | 25,123,140 | $ | (5,320 | ) | $ | 103,225,379 | |||||||||||
Comprehensive income: | |||||||||||||||||||||||
Net income | — | — | — | 8,458,365 | — | 8,458,365 | |||||||||||||||||
Change in unrealized gain on securities available for sale, net of tax effect | — | — | — | — | 14,965 | 14,965 | |||||||||||||||||
Total comprehensive income | 8,473,330 | ||||||||||||||||||||||
Issuance of common stock | 62,423 | 128,966 | 791,141 | — | — | 920,107 | |||||||||||||||||
Common stock repurchased | (15,400 | ) | (31,816 | ) | (294,479 | ) | (326,295 | ) | |||||||||||||||
Cash dividends—$0.20 per share | — | — | — | (1,376,719 | ) | — | (1,376,719 | ) | |||||||||||||||
Balance, September 30, 2007 | 6,891,998 | $ | 14,238,869 | $ | 64,462,502 | $ | 32,204,786 | $ | 9,645 | $ | 110,915,802 | ||||||||||||
See accompanying notes to consolidated financial statements (unaudited).
6
Consolidated Statements of Cash Flows (Unaudited)
| Nine months ended | ||||||||
| September 30, 2007 | September 30, 2006 | |||||||
Operating activities: | ||||||||
Net income | $ | 8,458,365 | $ | 7,324,851 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 1,085,000 | 2,045,000 | ||||||
Depreciation and amortization | 1,113,029 | 902,436 | ||||||
(Gain) Loss on the sale of premises and equipment | (861 | ) | 2,326 | |||||
(Gain) on the sale of securities available for sale | — | (2,013 | ) | |||||
Net amortization of premiums and accretion of discounts on investments securities | (6,317 | ) | (3,674 | ) | ||||
Deferred tax assets | (508,621 | ) | (1,027,011 | ) | ||||
Net change in: | ||||||||
Accrued interest receivable | (794,606 | ) | (1,872,935 | ) | ||||
Other assets | (643,261 | ) | (847,439 | ) | ||||
Accrued interest payable | 945,197 | 777,334 | ||||||
Other liabilities | 275,602 | 2,805,257 | ||||||
Net cash provided by operating activities | 9,923,527 | 10,104,132 | ||||||
Investing activities: | ||||||||
Purchase of securities available for sale | (32,612 | ) | (29,643 | ) | ||||
Purchase of equity securities, restricted | (7,549,800 | ) | (10,131,285 | ) | ||||
Net purchase of premises and equipment | (10,180,477 | ) | (3,560,558 | ) | ||||
Net change in loans | (80,492,412 | ) | (135,729,453 | ) | ||||
Proceeds from: | ||||||||
Calls and maturities of securities held to maturity | 40,422 | 48,263 | ||||||
Sales and maturities of securities available for sale | 808,115 | 878,227 | ||||||
Sale of equity securities, restricted | 6,959,900 | 8,490,535 | ||||||
Sale of premises and equipment | 10,500 | 9,750 | ||||||
Net cash used in investing activities | (90,436,364 | ) | (140,024,164 | ) | ||||
Financing activities: | ||||||||
Net change in: | ||||||||
Demand, interest-bearing demand and savings deposits | 17,517,318 | 34,156,281 | ||||||
Time deposits | 32,263,019 | 26,742,743 | ||||||
Brokered time deposits | 17,867,960 | 51,101,181 | ||||||
Short-term borrowings | (31,119,000 | ) | 16,191,600 | |||||
Increase in long-term debt | 40,000,000 | — | ||||||
Principal payments on long-term debt | (26,112 | ) | (26,608 | ) | ||||
Common stock repurchased | (326,295 | ) | — | |||||
Dividends reinvested and sale of stock | 656,166 | 484,358 | ||||||
Dividends paid | (1,376,719 | ) | (766,761 | ) | ||||
Net cash provided by financing activities | 75,456,337 | 127,882,794 | ||||||
Net decrease in cash and cash equivalents | (5,056,500 | ) | (2,037,238 | ) | ||||
Cash and cash equivalents, January 1 | 13,026,137 | 13,595,811 | ||||||
Cash and cash equivalents, September 30 | $ | 7,969,637 | $ | 11,558,573 | ||||
Supplemental cash flow disclosure: | ||||||||
Interest paid during the period | $ | 21,618,523 | $ | 15,661,443 | ||||
Income taxes paid during the period | $ | 5,185,000 | $ | 4,827,877 | ||||
Supplemental noncash disclosure: | ||||||||
Conversion of convertible preferred securities for common stock | $ | — | $ | 2,634,843 | ||||
See accompanying notes to consolidated financial statements (unaudited).
7
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2007
Note A – Basis of Presentation
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., T/A Executive Title Center, BOC Insurance Agencies of Hampton Roads, Inc., Community Home Mortgage of Virginia, Inc., T/A Bank of the Commonwealth Mortgage and Commonwealth Financial Advisors, LLC, are in accordance with accounting principles generally accepted in the United States of America and conform to accepted practices within the banking industry. In December 2006, Commonwealth Bankshares Capital Trust I (“the Trust”) was dissolved. For further discussion see footnote 10 in the Company’s annual report on Form 10-K for the year ended December 31, 2006. The accompanying (unaudited) consolidated financial statements include the accounts of the Parent, the Bank and its subsidiaries, collectively referred to as “the Company.” All significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2006.
On November 27, 2006, the Board of Directors approved an amendment to the Articles of Incorporation of the Company to increase the number of authorized shares of Common Stock from 16,500,000 to 18,150,000 shares, to reduce the par value of each share from $2.273 to $2.066 per share, and effect an eleven-for-ten stock split distributed on December 29, 2006 to stockholders of record on December 18, 2006.
On May 16, 2006, the Board of Directors approved an amendment to the Articles of Incorporation of the Company to increase the number of authorized shares of Common Stock from 15,000,000 to 16,500,000 shares, to reduce the par value of each share from $2.50 to $2.273 per share, and effect an eleven-for-ten stock split distributed on June 30, 2006 to stockholders of record on June 19, 2006.
All share and per share amounts included in the accompanying consolidated financial statements and footnotes have been restated for all periods presented to reflect the stock splits.
Certain 2006 amounts have been reclassified to conform to the 2007 presentation.
8
Note B – Earnings Per Share
Basic earnings per share is calculated 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:
| Three months ended | Nine months ended | |||||||||||
| September 30, 2007 | September 30, 2006 | September 30, 2007 | September 30, 2006 | |||||||||
Earnings available to common shareholders | $ | 2,769,696 | $ | 2,764,578 | $ | 8,458,365 | $ | 7,324,851 | ||||
Weighted average shares outstanding | 6,896,580 | 5,258,992 | 6,882,892 | 5,129,145 | ||||||||
Basic earnings per common share | $ | 0.40 | $ | 0.53 | $ | 1.23 | $ | 1.43 | ||||
Effect of dilutive securities: | ||||||||||||
Earnings available to common shareholders | $ | 2,769,696 | $ | 2,764,578 | $ | 8,458,365 | $ | 7,324,851 | ||||
Convertible preferred securities interest, net of tax effect | — | 27,237 | — | 130,851 | ||||||||
Earnings available to common plus assumed conversion | $ | 2,769,696 | $ | 2,791,815 | $ | 8,458,365 | $ | 7,455,702 | ||||
Effect of dilutive securities on EPS: | ||||||||||||
Weighted average shares outstanding | 6,896,580 | 5,258,992 | 6,882,892 | 5,129,145 | ||||||||
Effect of stock options | 55,605 | 118,940 | 83,378 | 547,530 | ||||||||
Effect of convertible preferred securities | — | 424,414 | — | 106,450 | ||||||||
Diluted average shares outstanding | 6,952,185 | 5,802,346 | 6,966,270 | 5,783,125 | ||||||||
Diluted earnings per common share | $ | 0.40 | $ | 0.48 | $ | 1.21 | $ | 1.29 | ||||
Note C – Investment Securities
The amortized costs and fair values of investment securities are as follows:
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||
September 30, 2007 | |||||||||||||
Available for sale: | |||||||||||||
U.S. Government and agency securities | $ | 5,010,708 | $ | 13,206 | $ | (3,833 | ) | $ | 5,020,081 | ||||
Mortgage-backed securities | 653,308 | 4,213 | (4,099 | ) | 653,422 | ||||||||
State and municipal securities | 774,237 | 5,125 | — | 779,362 | |||||||||
| $ | 6,438,253 | $ | 22,544 | $ | (7,932 | ) | $ | 6,452,865 | |||||
Held to maturity: | |||||||||||||
Mortgage-backed securities | $ | 247,817 | $ | 981 | $ | (332 | ) | $ | 248,466 | ||||
State and municipal securities | 188,801 | 3,034 | — | 191,835 | |||||||||
| $ | 436,618 | $ | 4,015 | $ | (332 | ) | $ | 440,301 | |||||
December 31, 2006 | |||||||||||||
Available for sale: | |||||||||||||
U.S. Government and agency securities | $ | 5,509,602 | $ | 2,489 | $ | (16,514 | ) | $ | 5,495,577 | ||||
Mortgage-backed securities | 790,297 | 3,111 | (7,423 | ) | 785,985 | ||||||||
State and municipal securities | 914,314 | 10,277 | — | 924,591 | |||||||||
| $ | 7,214,213 | $ | 15,877 | $ | (23,937 | ) | $ | 7,206,153 | |||||
Held to maturity: | |||||||||||||
Mortgage-backed securities | $ | 288,847 | $ | 591 | $ | (599 | ) | $ | 288,839 | ||||
State and municipal securities | 181,418 | 5,784 | — | 187,202 | |||||||||
| $ | 470,265 | $ | 6,375 | $ | (599 | ) | $ | 476,041 | |||||
9
Note D – Loans
Major classifications of loans are summarized as follows:
| September 30, 2007 | December 31, 2006 | |||||||
Construction and development | $ | 208,075,565 | $ | 178,804,545 | ||||
Commercial | 64,477,118 | 57,091,568 | ||||||
Commercial mortgage | 348,010,525 | 323,729,404 | ||||||
Residential mortgage | 115,866,792 | 97,395,290 | ||||||
Installment loans to individuals | 13,893,154 | 13,027,309 | ||||||
Other | 1,118,747 | 1,266,547 | ||||||
Gross loans | 751,441,901 | 671,314,663 | ||||||
Unearned income | (1,689,222 | ) | (1,773,338 | ) | ||||
Allowance for loan losses | (8,859,981 | ) | (8,144,265 | ) | ||||
Loans, net | $ | 740,892,698 | $ | 661,397,060 | ||||
Non-performing assets are as follows:
| September 30, 2007 | December 31, 2006 | |||||||
Non-accrual loans: | ||||||||
Commercial | 847,894 | 884,149 | ||||||
Commercial mortgage | 1,323,495 | 1,310,000 | ||||||
Residential mortgage | 2,095,354 | — | ||||||
Installment loans to individuals | 24,023 | 29,370 | ||||||
| 4,290,766 | 2,223,519 | |||||||
Loans contractually past-due 90 days or more: | ||||||||
Construction and development | 62,045 | — | ||||||
Commercial | 135,041 | — | ||||||
Residential mortgage | 354,487 | — | ||||||
Installment loans to individuals | 125,644 | — | ||||||
Other | 24,056 | 3,633 | ||||||
| 701,273 | 3,633 | |||||||
Total non-performing loans | $ | 4,992,039 | $ | 2,227,152 | ||||
Allowance as a percentage of non-performing assets | 177.48 | % | 365.68 | % | ||||
Non-performing assets as a percentage of total assets | 0.62 | % | 0.31 | % | ||||
Note E – Allowance For Loan Losses
A summary of transactions in the allowance for loan losses for the nine months ended September 30, 2007 and 2006 were as follows:
| September 30, 2007 | September 30, 2006 | |||||||
Balance at beginning of year | $ | 8,144,265 | $ | 5,523,087 | ||||
Provision charged to operating expense | 1,085,000 | 2,045,000 | ||||||
Loans charged-off | (383,290 | ) | (80,041 | ) | ||||
Recoveries of loans previously charged-off | 14,006 | 650 | ||||||
Balance at end of period | $ | 8,859,981 | $ | 7,488,696 | ||||
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Note F – Premises and Equipment
Premises and equipment are summarized as follows:
| September 30, 2007 | December 31, 2006 | |||||||
Land | $ | 345,403 | $ | 345,403 | ||||
Building and improvements | 3,380,658 | 3,040,031 | ||||||
Leasehold improvements | 11,232,975 | 3,391,944 | ||||||
Furniture and equipment | 12,777,295 | 9,907,236 | ||||||
Construction in progress | 3,290,183 | 4,197,094 | ||||||
| 31,026,514 | 20,881,708 | |||||||
Less accumulated depreciation | (9,028,739 | ) | (7,941,742 | ) | ||||
| $ | 21,997,775 | $ | 12,939,966 | |||||
Note G – Subsequent Events
On October 16, 2007, the Company declared a $0.08 per share cash dividend payable November 30, 2007, to shareholders of record on November 19, 2007.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
General
The sole business of Commonwealth Bankshares, Inc. is to serve as a holding company for Bank of the Commonwealth. The Company was incorporated as a Virginia Company on June 6, 1988, and on November 7, 1988 it acquired the Bank.
Bank of the Commonwealth was formed on August 28, 1970 under the laws of Virginia. Since the Bank opened for business on April 14, 1971, its main banking and administrative offices have been located in Norfolk, Virginia. The Bank currently operates four branches in Norfolk, four branches in Virginia Beach, four branches in Chesapeake, two branches in Portsmouth, one branch in Powells Point, North Carolina and one branch in Waves, North Carolina. Bank of the Commonwealth Mortgage currently operates one mortgage branch office in Virginia Beach, one mortgage branch office in Gloucester, one mortgage branch office in Richmond, Virginia and a mortgage branch office in Kill Devil Hills, North Carolina. Executive Title Center currently operates one title insurance branch office in Norfolk and one title insurance branch in Suffolk, Virginia. Commonwealth Financial Advisors currently has three locations, one in Virginia Beach and two in Norfolk, Virginia.
The Bank concentrates its marketing efforts in the cities of Norfolk, Virginia Beach, Portsmouth and Chesapeake, Virginia and Eastern North Carolina. The Company’s present intention is to continue concentrating its banking activities in its current market, which the Company believes, is an attractive area in which to operate.
The following discussion provides information about the important factors affecting the consolidated results of operations, financial condition, capital resources and liquidity of the Company. This report identifies trends and material changes that occurred during the reporting period and should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2006.
In addition to historical information, the following discussion contains forward looking statements that are subject to risks and uncertainties that could cause the Company’s actual results to differ materially from those anticipated, including risks associated with general economic conditions and interest rate trends. These forward looking statements include, but are not limited to, statements regarding management’s expectations that the Company will continue to experience growth in core operating earnings, improved credit quality and increased service fee income, and that the Company may pay cash dividends in the future. Readers are cautioned not to place undue reliance on these forward looking statements, which reflect management’s analysis only as of the date hereof.
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Critical Accounting Policies
Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. The Company’s most critical accounting policy relates to the Company’s allowance for loan losses, which reflects the estimated losses resulting from the inability of the Company’s borrowers to make required loan payments. If the financial condition of the Company’s borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the Company’s estimates would be updated, and additional provisions for loan losses may be required.
New Accounting Pronouncement
In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We do not have any uncertain tax positions, and therefore adoption of FIN 48 effective January 1, 2007 did not impact our consolidated financial statements.
In February 2007, FASB issued Statement No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115” (“Statement 159”). Statement 159 permits all entities to measure eligible items at fair value. Eligible items include recognized financial assets and financial liabilities with exceptions, firm commitments involving financial instruments, nonfinancial insurance contracts and warranties paid to a third party, and host financial instruments resulting from separation of an embedded nonfinancial instrument. The Amendment to FASB Statement 115 also provides the fair value measurement to all entities with available-for-sale and trading securities. Statement 159 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the effect that adoption of this statement will have on the Company’s consolidated financial position and results of operations when it becomes effective in 2008.
Stock Compensation Plans
The Company adopted the provisions of SFAS No. 123(R), “Share-Based Payments”,on January 1, 2006 using the modified prospective method. Under this method, stock-based awards that are granted, modified, or settled after December 31, 2005, are measured and accounted for in accordance with the provisions of SFAS No. 123(R). Also under this method, expense is recognized for unvested awards that were granted prior to January 1, 2006, based upon the fair value determined at the grant date under SFAS No. 123, “Accounting for Stock-Based Compensation.” Share-based compensation expense is recorded in salary and employee benefits. Prior to the adoption of SFAS No. 123(R), the Company accounted for its share-based compensation under the intrinsic value method as permitted by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, the Company previously recognized no compensation expense for employee stock options that were granted with an exercise price equal to the fair value of the underlying common stock on the date of grant.
Stock option compensation expense is the estimated fair value of options granted on the date of grant using the Black-Scholes option-pricing model. Substantially, all employee stock options are awarded at the end of the year as part of an employees overall compensation, based on the individual’s performance during the year, and either vest immediately or over a nominal vesting period. There were no options granted during the nine months ended September 30, 2007 and 2006, respectively. There have been no significant changes in the assumptions for the Black-Scholes option-pricing model previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
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See Note 20 - Stock Based Compensation Plans, in our Annual Report on Form 10-K for the year ended December 31, 2006, for further information related to stock based compensation.
Financial Condition
Total assets at September 30, 2007 reached a new high of $800.4 million, up 11.9% or $85.2 million from $715.2 million at December 31, 2006. Total loans, the Company’s largest and most profitable asset, ended the quarter at a record $749.8 million, up $80.2 million or 12.0% from December 31, 2006. The low interest rate environment, our strong local economy and the efforts of our experienced loan officers to develop new loan relationships combined with the support of existing customers continue to generate record loan demand for the Company.
As of September 30, 2007, 83.0% of the Company’s loan portfolio consisted of commercial loans, which are considered to provide higher yields, but also generally carry a greater risk. It should be noted that 56.1% of these commercial loans are collateralized with real estate, and accordingly do not represent an unfavorable risk. At September 30, 2007, 61.7% of the Bank’s total loan portfolio consisted of loans collateralized with real estate.
Deposits are the most significant source of the Company’s funds for use in lending and general business purposes. The Company’s strong growth in deposits continued into the third quarter of 2007 with deposits at September 30, 2007 reaching a record $554.8 million, an increase of $67.6 million from December 31, 2006. Noninterest-bearing demand deposits increased by $5.4 million or 12.5% and interest-bearing deposits increased by $62.3 million or 14.0%. Time deposits, excluding broker certificates of deposit, increased $32.3 million during the first nine months of 2007 with interest-bearing demand and savings accounts increasing $13.1 million and decreasing $903.9 thousand, respectively. To help fund the record increase in the loan portfolio, the Company added $34.8 million in broker certificates of deposit during the first nine months of 2007. These additions offset by maturities and redemptions of $17.0 million, brings our total to $135.0 million at September 30, 2007. Management believes the growth in deposits is a result of the new branch locations, increased promotional efforts put forth by the Company as well as the efforts of our experienced staff to attract new customers through our special promotions, product enhancements and offering unsurpassed service. The Company’s deposits are predominantly provided by individuals and businesses located within communities served.
As of September 30, 2007, short-term borrowings (advances from FHLB) were $57.5 million, compared to $88.7 million outstanding on December 31, 2006. While our loan demand continued to increase at a faster pace than our deposit growth, the decrease in short-term borrowings was primarily a result of the Company taking advantage of the low interest rate environment with four long-term convertible advances from FHLB totaling $40.0 million.
Results of Operation
During the first nine months of 2007, the Company reached a record $8.5 million in net income, an increase of 15.5% over the $7.3 million reported in the first nine months of 2006. On a per share basis, diluted earnings were $1.21 for the nine months ended September 30, 2007 and $1.29 for the comparable period in 2006. Net income for the quarter ended September 30, 2007 totaled $2.8 million, an increase of 0.2% or $5.1 thousand over the amount reported in the third quarter of 2006. Diluted earnings per share equaled $0.40 for three months ended September 30, 2007 compared to $0.48 for the same period in 2006. Earnings per share comparisons were affected by a greater number of shares outstanding in the 2007 periods as a result of the 1.2 million shares of common stock issued in October 2006 from the completion of a $27.5 million private placement of the Company’s common stock.
Profitability as measured by the Company’s return on average assets (ROA) was 1.49% and 1.57% for the nine months ended September 30, 2007 and 2006, respectively. ROA was impacted by the increase in net income of 15.5%, which was offset by a 21.1% increase in average assets or $132.4 million from September 30, 2006 to September 30, 2007. The return on average equity (ROE) was 10.58% and 14.66% for the nine months ended September 30, 2007 and 2006, respectively. The decrease in ROE is the result of the increase in net income
13
which was offset by the significant growth in average equity of $40.1 million or 60.0% from September 30, 2006 to September 30, 2007. The substantial growth in average equity is the result of the $27.5 million in additional capital raised by the Company in October 2006, and the record 52.1% and 15.5% increase in net income for the year ended December 31, 2006 and nine months ended September 30, 2007, respectively. For the quarter ended September 30, 2007, ROA was 1.40% and ROE was 10.03%.
A fundamental source of the Company’s earnings, net interest income, is defined as the difference between income on earning assets and the cost of funds supporting those assets. Significant categories of earning assets are loans and securities, while deposits and short-term borrowings represent the major portion of interest- bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates when compared to previous periods of operations. Net interest income reached a total of $25.3 million for the nine months ended September 30, 2007, an increase of $3.4 million or 15.5% over the comparable period in 2006. For the quarter ended September 30, 2007, net interest income reached our second highest quarterly total of $8.6 million, an increase of $827.8 thousand or 10.7% over the comparable period in 2006.
Total interest and dividend income was $45.9 million for the nine months ended September 30, 2007, an increase of $7.6 million or 19.9% over the same period of 2006. For the quarter ended September 30, 2007, total interest and dividend income reached a record $15.8 million, an increase of $1.7 million or 12.5% over the third quarter of 2006. Strong loan demand continued into the third quarter of 2007, generating record increases in interest income. Interest income on loans, including fees, increased $7.6 million or 20.2% to $45.2 million for the nine months ended September 30, 2007 and $1.8 million or 12.8% to $15.5 million for the three months ended September 30, 2007 as compared to the same time periods in 2006, respectively.
Interest expense of $20.7 million for the nine months ended September 30, 2007 represented a $4.2 million increase from the comparable period in 2006. Interest expense for the third quarter of 2007 was $7.2 million, up $919.0 thousand from the quarter ended September 30, 2006. The increase was primarily attributable to the substantial increase in the Company’s average interest bearing liabilities, along with the increase in overall rates paid on our interest bearing liabilities as a result of the interest rate environment as well as strong competition for local deposits, which lead to increased rates on deposit accounts. Year to date average interest bearing liabilities increased $88.8 million or 17.6% from September 30, 2006 to September 30, 2007, while the overall rates paid on these liabilities increased 31 basis points to 4.65%.
The net interest margin, which is calculated by expressing net interest income as a percentage of average interest earning assets, is an indicator of the Company’s efficiency in generating income from earning assets. The net interest margin is affected by the structure of the balance sheet as well as by competition and the economy. The Company’s net interest margin (tax equivalent basis) was 4.65% during the first nine months of 2007 as compared to 4.85% for the same period in 2006. This slight decrease can be attributed to changes in the balance sheet mix, changes in the yields obtained from interest earning assets and paid on interest bearing liabilities, the prevailing interest rate environment and changes in volume. For the quarter ended September 30, 2007, the net interest margin was 4.54% compared to 4.75% for the third quarter in 2006.
The provision for loan losses is the annual cost of maintaining an allowance for inherent credit losses. The amount of the provision each year and the level of the allowance are matters of judgment and are impacted by many factors, including actual credit losses during the period, the prospective view of credit losses, loan performance measures and trends (such as delinquencies and charge-offs), loan growth, and other factors, both internal and external that may affect the quality and future loss experience of the credit portfolio. At September 30, 2007, the Company had total allowance for loan losses of $8.9 million or 1.18% of total loans. As a result of growth in the loan portfolio, the Company made provisions for loan losses of $1.1 million for the first nine months of 2007, compared to $2.0 million for the same period of 2006. Loan charge-offs for the nine months ended September 30, 2007 totaled $383.3 thousand and recoveries for the same period totaled $14.0 thousand.
Despite the rapid growth in the Company’s loan portfolio, our asset quality remains exceptional. Net charge-offs for the nine months ended September 30, 2007 were $369.3 thousand, or 0.05% of year to date average loans. Non-performing assets were $5.0 million or 0.62% of total assets at September 30, 2007 compared to $3.9 million or 0.57% of total assets at September 30, 2006. Non-performing assets at September 30, 2007 consisted of
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33 loans. $3.9 million or 78.0% of the total consists of thirteen (13) loans which are secured by real estate and management does not anticipate any material losses associated with these credits. Subsequent to September 30th, one loan for $600,000 has been paid in full. The remaining $1.1 million in non-performing assets represents twenty (20) loans, with the majority making monthly payments and in most cases are secured with workout arrangements currently in place.
Noninterest income for the nine months ended September 30, 2007 and 2006 equaled $3.8 million. For the three months ended September 30, 2007, noninterest income was $1.3 million and $1.4 million for the comparable period in 2006.
Noninterest expense represents the overhead expenses of the Company. Costs associated with handling our substantial asset and liability growth, as well as the branch expansion, resulted in increases to almost every component of noninterest expense. Noninterest expense for the nine months ended September 30, 2007 totaled $14.9 million, an increase of $2.4 million over the $12.5 million recorded during the nine months ended September 30, 2006.
A key measure of overhead is the operating efficiency ratio. The operating efficiency ratio is calculated by dividing noninterest expense by net bank revenue on a tax equivalent basis. Efficiency gains can be achieved by controlling costs and generating additional sources and higher levels of noninterest income along with increasing our margins. The Company’s efficiency ratio (tax equivalent basis) was only slightly affected by the new branch additions. The efficiency ratio was 51.33% and 52.88% for the nine and three months ended September 30, 2007, as compared to 48.66% and 46.96% for the comparable periods in 2006.
Salaries and employee benefits, the largest component of noninterest expense, increased by $1.2 million or 17.7% over the $6.7 million reported during the first nine months of 2006. For the quarter ended September 30, 2007, salaries and employee benefits increased $264.2 thousand to $2.6 million as compared to $2.4 million for the quarter ended September 30, 2006. This increase was driven by annual merit increases, the addition of several new positions, including the additional staff needed to operate the Bank’s five new branches which were opened in 2007 and a branch which opened in the second quarter of 2006, an increase in certain employee benefit costs and the expansion of the Investment Company and the Mortgage Company. Occupancy expense increased $501.1 thousand for the nine months ended September 30, 2007 as compared to same period in 2006. This increase relates to the opening of the Bank’s Ocean View branch in its new permanent facility, the addition of the five branch locations in 2007, the addition of the private bank center which opened in the second quarter of 2006 and the expansion of our subsidiaries as mentioned above. Other noninterest operating expenses, which include a grouping of numerous transactions relating to normal banking operations, increased $630.0 thousand for the nine months ended September 30, 2007 to $4.2 million or 17.7% over the comparable period for 2006. The major part of this increase is the result of the Company’s continued investment in an extensive multimedia advertising campaign utilizing billboards, radio and newspaper to promote and reinforce its presence throughout Southside Hampton Roads and now Eastern North Carolina. For the nine months ended September 30, 2007, advertising and marketing expense increased $300.0 thousand or 34.5% over the comparable period for 2006.
Capital Resources
As of September 30, 2007, total stockholders’ equity was $110.9 million, an increase of $7.7 million or 7.5% from the $103.2 million reported as of December 31, 2006. Contributing to the increase in total stockholders’ equity was our record earnings of $8.5 million for the first nine months of 2007. Stockholders’ equity for September 30, 2007 reflects a $9.6 thousand net unrealized gain on securities available for sale in accordance with FASB 115, as compared to a $5.3 thousand net unrealized loss as of December 31, 2006.
The Federal Reserve Board, the Office of Controller of the Currency, and the FDIC have issued risk-based capital guidelines for U.S. banking organizations. These guidelines provide a capital framework that is sensitive to differences in risk profiles among banking companies.
Risk-based capital ratios are another measure of capital adequacy. At September 30, 2007, the Bank’s risk-adjusted capital ratios were 13.98% for Tier 1 and 15.17% for total capital, well above the required minimums of
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4% and 8%, respectively. These ratios are calculated using regulatory capital (either Tier 1 or total capital) as the numerator and both on and off-balance sheet risk-weighted assets as the denominator. Tier 1 capital consists primarily of common equity less goodwill and certain other intangible assets. Total capital adds certain qualifying debt instruments and a portion of the allowance for loan losses to Tier 1 capital. One of four risk weights, primarily based on credit risk, is applied to both on and off-balance sheet assets to determine the asset denominator. Under Federal Reserve Bank rules, the Bank was considered “well capitalized,” the highest category of capitalization defined by the regulators, as of September 30, 2007.
In order to maintain a strong equity capital position and to protect against the risks of loss in the investment and loan portfolios and on other assets, management will continue to monitor the Bank’s capital position. Several measures have been or will be employed to maintain the Bank’s strong capital position, including but not limited to continuing its efforts to return all non-performing assets to performing status, monitoring the Bank’s growth and continued utilization of its formal asset/liability policy.
Cash Dividend and Stock Split
In compliance with the Company’s dividend payout policy, on February 28, 2007 the Company paid a cash dividend of 6.0 cents per share, totaling $412.3 thousand. On May 31, 2007 the Company paid a 6.0 cent dividend totaling $412.7 thousand. On August 31, 2007 the Company paid an 8.0 cent dividend totaling $551.7 thousand. Total dividends of 20.0 cents per share paid during the first nine months of 2007 are up 34.2% from the 14.9 cents per share paid during the same time period in 2006.
Interest Sensitivity and Liquidity
The Company’s primary component of market risk is exposure to interest rate volatility. Fluctuations in interest rates will impact both the level of interest income and interest expense and the market value of the Company’s interest earning assets and interest bearing liabilities.
The Company’s Asset/Liability Management Committee (ALCO) is responsible for formulating liquidity strategies, monitoring performance based on established objectives and approving new liquidity initiatives. ALCO’s overall objective is to optimize net interest income within the constraints of prudent capital adequacy, liquidity needs, the interest rate and economic outlook, market opportunities, and customer requirements. General strategies to accomplish this objective include maintaining a strong balance sheet, achieving solid core deposit growth, taking on manageable interest rate risk, and adhering to conservative financial management on a daily basis. These strategies are monitored regularly by ALCO and reviewed periodically with the Board of Directors.
The primary goal of the Company’s asset/liability management strategy is to maximize its net interest income over time while keeping interest rate risk exposure within levels established by the Company’s management. The Company’s ability to manage its interest rate risk depends generally on the Company’s ability to match the maturities and re-pricing characteristics of its assets and liabilities while taking into account the separate goals of maintaining asset quality and liquidity and achieving the desired level of net interest income. The principal variables that affect the Company’s management of its interest rate risk include the Company’s existing interest rate gap position, management’s assessment of future interest rates and the withdrawal of liabilities over time. In addition, the Company uses simulation modeling to forecast future balance sheet and income statement behavior. By studying the effects on net interest income of rising, stable and falling interest rate scenarios, the Company can position itself to take advantage of anticipated interest rate movements, and protect itself from unanticipated interest rate movements, by understanding the dynamic nature of its balance sheet components.
One technique the Company uses in managing its interest rate risk exposure is the management of the Company’s interest sensitivity gap. The interest sensitivity gap is defined as the difference between the amount of interest earning assets anticipated, based upon certain assumptions, to mature or re-price within a specific time period and the amount of interest bearing liabilities anticipated, based upon certain assumptions, to mature or re-price within that time period. At September 30, 2007, the Company’s one year “positive gap” (interest earning assets maturing or re-pricing within the same period exceed interest bearing liabilities
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maturing or re-pricing within the same period) was approximately $912.0 thousand, or 0.11% of total assets. Thus, during periods of rising interest rates, this implies that the Company’s net interest income would be positively affected because the yield on the Company’s interest earning assets is likely to rise more quickly than the cost of its interest bearing liabilities. At December 31, 2006, the Company’s one year “positive gap” was approximately $36.6 million, or 5.12% of total assets.
The following tables set forth the amount of interest earning assets and interest bearing liabilities outstanding at September 30, 2007 and December 31, 2006 that are subject to re-pricing or that mature in each of the future time periods shown. Loans and securities with call or balloon provisions are included in the period in which they balloon or may first be called. Long-term debt (advances from Federal Home Loan Bank of Atlanta) is included in period in which they contractually mature. Each contain certain conversion options that may cause the advances to mature or convert prior to final maturity. Except as stated above, the amount of assets and liabilities shown that re-price or mature during a particular period were determined in accordance with the contractual terms of the asset or liability.
Interest Rate Sensitivity Analysis
| September 30, 2007 | |||||||||||||||||||
(in thousands) | Within 90 Days | 91 Days to One Year | After One but Within Five Years | After Five Years | Total | ||||||||||||||
Interest Earning Assets: | |||||||||||||||||||
Investment securities | $ | 563 | $ | 3,013 | $ | 2,458 | $ | 855 | $ | 6,889 | |||||||||
Equity securities | — | — | — | 7,775 | 7,775 | ||||||||||||||
Loans | 345,588 | 39,505 | 268,068 | 98,281 | 751,442 | ||||||||||||||
Interest bearing deposits in banks | 207 | — | — | — | 207 | ||||||||||||||
Federal funds sold | 409 | — | — | — | 409 | ||||||||||||||
Total | $ | 346,767 | $ | 42,518 | $ | 270,526 | $ | 106,911 | $ | 766,722 | |||||||||
Cumulative totals | 346,767 | 389,285 | 659,811 | 766,722 | |||||||||||||||
Interest Bearing Liabilities: | |||||||||||||||||||
Deposits: | |||||||||||||||||||
Demand | $ | 93,131 | $ | — | $ | — | $ | — | $ | 93,131 | |||||||||
Savings | 6,266 | — | — | — | 6,266 | ||||||||||||||
Time deposits, $100,000 and over | 23,635 | 41,370 | 28,195 | 760 | 93,960 | ||||||||||||||
Other time deposits | 39,398 | 126,759 | 141,041 | 5,853 | 313,051 | ||||||||||||||
Short-term borrowings | 57,492 | — | — | — | 57,492 | ||||||||||||||
Long-term debt | 322 | — | 5,000 | 40,000 | 45,322 | ||||||||||||||
Trust preferred capital notes | — | — | 20,619 | — | 20,619 | ||||||||||||||
Total | $ | 220,244 | $ | 168,129 | $ | 194,855 | $ | 46,613 | $ | 629,841 | |||||||||
Cumulative totals | 220,244 | 388,373 | 583,228 | 629,841 | |||||||||||||||
Interest sensitivity gap | $ | 126,523 | $ | (125,611 | ) | $ | 75,671 | $ | 60,298 | $ | 136,881 | ||||||||
Cumulative interest sensitivity gap | $ | 126,523 | $ | 912 | $ | 76,583 | $ | 136,881 | |||||||||||
Cumulative interest sensitivity gap as a percentage of total assets | 15.81 | % | 0.11 | % | 9.57 | % | 17.10 | % | |||||||||||
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Interest Rate Sensitivity Analysis
| December 31, 2006 | |||||||||||||||||||
(in thousands) | Within 90 Days | 91 Days to One Year | After One but Within Five Years | After Five Years | Total | ||||||||||||||
Interest Earning Assets: | |||||||||||||||||||
Investment securities | $ | 189 | $ | 510 | $ | 6,416 | $ | 561 | $ | 7,676 | |||||||||
Equity securities | — | — | — | 7,185 | 7,185 | ||||||||||||||
Loans | 317,206 | 24,097 | 222,713 | 107,299 | 671,315 | ||||||||||||||
Interest bearing deposits in banks | 427 | — | — | — | 427 | ||||||||||||||
Federal funds sold | 2,031 | — | — | — | 2,031 | ||||||||||||||
Total | $ | 319,853 | $ | 24,607 | $ | 229,129 | $ | 115,045 | $ | 688,634 | |||||||||
Cumulative totals | 319,853 | 344,460 | 573,589 | 688,634 | |||||||||||||||
Interest Bearing Liabilities: | |||||||||||||||||||
Deposits: | |||||||||||||||||||
Demand | $ | 80,080 | $ | — | $ | — | $ | — | $ | 80,080 | |||||||||
Savings | 7,170 | — | — | — | 7,170 | ||||||||||||||
Time deposits, $100,000 and over | 1,693 | 41,459 | 39,894 | 6,908 | 89,954 | ||||||||||||||
Other time deposits | 10,577 | 77,906 | 162,506 | 15,937 | 266,926 | ||||||||||||||
Short-term borrowings | 88,611 | — | — | — | 88,611 | ||||||||||||||
Long-term debt | 348 | — | 5,000 | — | 5,348 | ||||||||||||||
Trust preferred capital notes | — | — | 20,619 | — | 20,619 | ||||||||||||||
Total | $ | 188,479 | $ | 119,365 | $ | 228,019 | $ | 22,845 | $ | 558,708 | |||||||||
Cumulative totals | 188,479 | 307,844 | 535,863 | 558,708 | |||||||||||||||
Interest sensitivity gap | $ | 131,374 | $ | (94,758 | ) | $ | 1,110 | $ | 92,200 | $ | 129,926 | ||||||||
Cumulative interest sensitivity gap | $ | 131,374 | $ | 36,616 | $ | 37,726 | $ | 129,926 | |||||||||||
Cumulative interest sensitivity gap as a percentage of total assets | 18.37 | % | 5.12 | % | 5.27 | % | 18.17 | % | |||||||||||
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| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
There have been no significant changes from the quantitative and qualitative disclosures made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
| Item 4. | Controls and Procedures |
Disclosure Controls and Procedures. The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and regulations and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company or its subsidiary to disclose material information otherwise required to be set forth in the Company’s periodic reports.
Management’s Report on Internal Control over Financial Reporting.Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control – Integrated Framework.Based on our assessment, we believe that, as of September 30, 2007, the Company’s internal control over financial reporting is effective based on those criteria.
Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006 has been audited by PKF Witt Mares, PLC, the independent registered public accounting firm who also audited the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2006.
Changes in Internal Control over Financial Reporting.There was no change in the internal control over financial reporting that occurred during the quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.
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| Item 1. | Legal proceedings |
As of September 30, 2007, there were no legal proceedings against the Company.
| Item 1A. | Risk factors |
There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
| Item 2. | Unregistered sales of equity securities and use of proceeds |
The Company announced an open ended program in May 2007 by which management was authorized to repurchase an unlimited number of shares of the Company’s common stock in open market and privately negotiated transactions. During the first nine months of 2007, the Company repurchased 15,400 shares of its common stock in open market and privately negotiated transactions. Detail for the shares repurchase transactions conducted during the third quarter of 2007 appears below.
Period | Total Number Shares | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly | Maximum Number Under the Plans or | |||||
Month # 1 | |||||||||
July 1, 2007 - July 31, 2007 | 11,200 | $ | 21.28 | 11,200 | — | ||||
Month # 2 | |||||||||
August 1, 2007 - August 31, 2007 | 4,000 | $ | 20.47 | 4,000 | — | ||||
Month # 3 | |||||||||
September 1, 2007 - September 30, 2007 | 200 | $ | 20.25 | 200 | — | ||||
Total | 15,400 | $ | 21.06 | 15,400 | — | ||||
| Item 3. | Defaults upon senior securities |
There were no defaults upon senior securities during the quarter.
| Item 4. | Submission of matters to a vote of security holders |
There was no submission of matters to vote of security holders during the quarter.
| Item 5. | Other information |
None.
| Item 6. | Exhibits |
(a) Exhibits
| 31.1 | Certification of CEO pursuant to Rule 13a-14(a). | |
| 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a). | |
| 32.1 | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350. | |
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In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Commonwealth Bankshares, Inc. | ||||
| (Registrant) | ||||
| Date: November 9, 2007 | by: | /s/ Edward J. Woodard, Jr., CLBB | ||
| Edward J. Woodard, Jr., CLBB | ||||
| Chairman of the Board, President and Chief Executive Officer | ||||
| Date: November 9, 2007 | by: | /s/ Cynthia A. Sabol, CPA | ||
| Cynthia A. Sabol, CPA | ||||
| Executive Vice President & Chief Financial Officer | ||||
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