Filed pursuant to Rule 424(b)1
File No. 333-63314
Up to 1,600,000 Convertible Preferred Securities
COMMONWEALTH BANKSHARES CAPITAL TRUST I
8% CUMULATIVE CONVERTIBLE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $5 PER CONVERTIBLE PREFERRED SECURITY)
GUARANTEED ON A JUNIOR SUBORDINATED BASIS, AS DESCRIBED IN THIS PROSPECTUS, BY
[LOGO OF COMMONWEALTH BANKSHARES, INC.]
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Commonwealth Bankshares Capital Trust I is offering up to 1,600,000
convertible preferred securities at $5.00 per security. The convertible
preferred securities represent an indirect interest in our 8% junior
subordinated debt securities. The junior subordinated debt securities have the
same payment terms as the convertible preferred securities and will be
purchased by Commonwealth Bankshares Capital Trust I using the proceeds from
this offering of the convertible preferred securities. The convertible
preferred securities are convertible into shares of our common stock as
described in this prospectus.
Our common stock trades on the Nasdaq National Market under the symbol
"CWBS." As of July 20, 2001, the last reported sale price of our common stock
on the Nasdaq National Market was $7.00 per share. The convertible preferred
securities have been approved for quotation on the Nasdaq National Market under
the symbol "CWBSP." Trading is expected to commence on delivery of the
securities.
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Purchase of these securities involves a significant amount of risk.
Prospective purchasers should carefully read and consider the section "Risk
Factors" beginning on page 10 in addition to all other information contained in
this prospectus before deciding to purchase any of the convertible preferred
securities.
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The securities offered by this prospectus are not savings accounts, deposits
or obligations of any bank and are not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other governmental agency.
Per Convertible
Preferred Security Total
------------------ ----------
Public Offering Price $5.00 $8,000,000
Proceeds to the Trust $5.00 $8,000,000
This is a best efforts underwriting. The table above assumes the sale of all
1,600,000 convertible preferred securities offered pursuant to this prospectus.
We will pay underwriting commissions of $0.20 per convertible preferred
security, or a total of up to $320,000, for arranging the investment in our
junior subordinated debt securities.
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.
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By its acceptance and purchase of a convertible preferred security, each
holder of a convertible preferred security agrees and acknowledges that
Anderson & Strudwick Incorporated will have the right to select and direct the
remedies to be pursued by the property trustee upon an event of default under
the trust documents.
Anderson & Strudwick
Incorporated
This prospectus is dated July 23, 2001
[MAP WITH BRANCH LOCATIONS]
Prospectus Summary
This summary highlights information contained in this prospectus. Because
this is a summary, it may not contain all of the information that is important
to you. You should also read the more detailed information set forth in this
prospectus, including our financial statements.
Except as otherwise indicated or required by the context, references in
this prospectus to we, our, us, or Commonwealth Bankshares refer to Commonwealth
Bankshares, Inc. and its subsidiaries collectively. References in this
prospectus to the Trust refer to Commonwealth Bankshares Capital Trust and
references in this prospectus to the Bank refer to Bank of the Commonwealth.
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, and we conduct virtually all of our business through the Bank.
The Bank was organized in 1970 and began operations in April 1971. It is the
oldest independent bank in its market area. Commonwealth Bankshares was formed
to become the bank holding company of the Bank.
Our market area is concentrated in the cities of Norfolk, Virginia Beach,
Portsmouth and Chesapeake, Virginia. The Bank is currently operating three
branch offices in Norfolk, four branch offices in Virginia Beach, one branch
office in Chesapeake and one branch office in Portsmouth, as well as six off-
premise ATMs. On April 30, 2001, we opened our first office in Portsmouth, and
on July 29, 2000 we opened our first office in Chesapeake. In August of 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.
At March 31, 2001, we had $221.9 million in assets, $167.7 million in loans,
$202.3 million in deposits and $13.2 million in stockholders' 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 conducting 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 to it
the junior subordinated debt securities. 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. However, by creating the Trust
and funding it with the proceeds of this offering followed by the Trust's
purchase of our junior subordinated debt securities, we can include all of these
funds in our regulatory capital. Based on our tier 1 capital at March 31, 2001,
and assuming the sale of all 1,600,000 convertible preferred securities offered
pursuant to this prospectus, approximately $4.4 million of the convertible
preferred securities would be initially included in our 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.
We are a legal entity separate and distinct from the Bank. Our right, and
thus your right, to receive any of the assets of the Bank is subject to the
claims of the Bank's creditors. Our principal source of revenues is dividends
from the Bank.
Because we own the Bank, 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. We receive mail at
our executive offices located at 403 Boush Street, Norfolk, Virginia 23510, and
our telephone number is (757) 446-6900. This is also the address and telephone
number for the Trust.
3
Commonwealth Bankshares Capital Trust I
We formed Commonwealth Bankshares Capital Trust as a financing subsidiary
of Commonwealth Bankshares under Delaware law on November 15, 2000. We and the
trustees of the Trust will sign an agreement, which will contain the terms and
conditions under which the Trust will 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 to the public and the common
securities to us;
. 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 the Trust; and
. engage in other activities that are necessary and incidental to these
purposes, such as receiving payments on the junior subordinated debt
securities, and making distributions to security holders, furnishing
notices and other administrative tasks.
We will purchase all of the common securities of the Trust. The common
securities will entitle us to receive 3% of the Trust's cash distributions. The
convertible preferred securities will entitle you and the other owners to the
remaining 97% of the 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.
The 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 the 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, 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. As owner of all of the Trust's common
securities, only we can remove or replace the administrative trustees.
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 a result of your purchase
of a convertible preferred security, you are agreeing that Anderson & Strudwick
shall have the right to select and direct the remedies to be pursued by the
property trustee in the event of a default and our failure to cure the default.
The Trust has no separate financial statements. The statements would not
be meaningful to you because the Trust has no independent operations. It exists
solely for the reasons summarized above.
4
The Offering
Securities Offered Commonwealth Bankshares Capital Trust is offering
for sale up to 1,600,000 convertible preferred
securities, which represent preferred undivided
interests in the assets of the Trust. Those assets
will consist solely of the junior subordinated
debt securities and payments received on the
junior subordinated debt securities. The Trust
will sell the convertible preferred securities to
the public for cash and will use that cash to buy
the junior subordinated debt securities from us.
Offering Price The offering price is $5.00 for each convertible
preferred security.
Conversion Holders of convertible preferred securities may,
at their option, convert their convertible
preferred securities into common stock of
Commonwealth Bankshares at an initial conversion
price of $8.00 per share of common stock on or
after October 15, 2001. The conversion price is
subject to adjustment under certain conditions as
described in this prospectus. Our common stock is
traded on the Nasdaq National Market under the
symbol "CWBS." The last reported sale price of our
common stock on Nasdaq on July 20, 2001 was $7.00
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 the Trust and
immediately convert the junior subordinated debt
securities into shares of our common stock. You
will receive cash in lieu of fractional shares.
However, you will not receive cash or additional
shares of our 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. You will be permitted to elect to
select a conversion date which will coincide with
an interest payment date so that there will be no
accrued amounts.
Quarterly distributions are You will be entitled to receive cumulative cash
payable to you on the distributions of $0.40 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
October 15, 2001. Your first cash distribution
will be less than the regular quarterly amount
because you are buying your convertible preferred
securities after July 15, 2001. As long as the
convertible preferred securities are represented
by a global security, the record date for
distributions on the convertible preferred
securities will be the business day prior to the
distribution date. We may defer the payment of
cash distributions, as described below.
We have the option to defer We have the right to defer all or part of the
interest payments 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 October 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.
5
If we defer interest payments, If we defer interest payments on the junior
cash distributions to you will subordinated debt securities, the Trust also
be deferred will defer cash distributions on your
convertible preferred securities. Any such
deferral will not constitute a default.
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 8% per year, compounded
quarterly, on any deferred distributions. The
commencement of a deferral period would
likely cause the market price of the
convertible preferred securities and our
common stock to decline. We have no current
intention of exercising our right to defer
payments of interest on the junior
subordinated debt securities.
You will have taxable income You will be required to pay income taxes on
even if we defer cash deferred distributions in advance of
distributions receiving these amounts even if you are a
cash basis taxpayer.
The Nature of Our Guarantee of Our obligations described in this prospectus,
Payment in the aggregate, constitute a guarantee on a
junior subordinated basis by us of the
obligations of the Trust under the
convertible preferred securities. Under the
guarantee agreement, we guarantee the Trust
will use its assets to pay the distributions
on the convertible preferred securities and
the liquidation amount upon liquidation of
the Trust. However, the guarantee does not
apply when the Trust does not have sufficient
funds to make the payments. If we do not make
payments on the junior subordinated debt
securities, the Trust will not have
sufficient funds to make payments on the
convertible preferred securities. In this
event, your remedy is to institute a legal
proceeding directly against us for
enforcement of payments under the junior
subordinated debt securities.
Ranking of Convertible If we default in the payments on our junior
Preferred Securities subordinated debt securities, payments to you
on the convertible preferred securities will
be made, including all accumulated and unpaid
distributions, 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 3%
of the distributions by the 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 ourobligations to you. It
also means that if we default, all of our
senior debt will be paid before you are paid.
At March 31, 2001, we had $479 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 the 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 as well as existing and future
liabilities of our subsidiaries.
The junior subordinated debt We have guaranteed on a junior subordinated
securities are scheduled to basis that the Trust will pay you $5.00 per
mature on October 15, 2031 convertible preferred security, plus accrued
distributions, when the junior subordinated
debt securities are redeemed at or before
maturity. The stated maturity of the junior
subordinated debt securities is October 15,
2031.
6
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
October 15, 2006 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 the
Trust to issue a press release and mail a
written notice to all registered holders of
the convertible preferred securities and to
Anderson & Strudwick announcing the date on
which the conversion rights will be
terminated. The press release and notice 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
the Trust issues the press release and mails
the notice.
We can redeem the junior We have the right at any time on or after
subordinated debt securities October 15, 2006 to redeem the junior
any time after October 15, 2006 subordinated debt securities at the
liquidation amount of $5.00 per convertible
preferred security plus accrued and unpaid
distributions, without the payment of any
premium amount. We also have the right at any
time before October 15, 2006 to redeem the
junior subordinated debt securities if any of
three things happen:
. if tax law changes prevent us from
deducting interest payments;
. if changes in banking regulations prevent
us from counting the Trust's assets as
tier 1 capital; or
. a change in the Investment Company Act of
1940 that requires the Trust to register
under that law.
We will not redeem the junior subordinated
debt securities prior to maturity unless we
have received the prior approval of the Board
of Governors of the Federal Reserve, if
required.
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.
No Interest on Escrowed Funds You will not receive interest on any funds
you deposit before this offering closes.
Use of Proceeds The 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 to increase our regulatory capital
and support the growth of Bank of the
Commonwealth. Pending any such application,
we may invest the net proceeds in interest-
bearing assets.
Approved Nasdaq National Market CWBSP
Symbol
7
We may distribute the junior We may, at any time, liquidate the Trust and
subordinated debt securities distribute the junior subordinated debt
directly to you securities to you, subject to the prior
approval of the Federal Reserve, if required.
If we liquidate the Trust, the junior
subordinated debt securities will be
convertible into our common stock on the same
terms, and subject to the same conditions,
that the convertible preferred securities are
convertible into our common stock. If we
distribute the junior subordinated debt
securities, we will use our best efforts to
list them on a national securities exchange
or comparable automated quotation system,
subject to any applicable listing
requirements or limitations.
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 10 of this prospectus, as
well as the other information contained in
this prospectus, before you buy any
convertible preferred securities.
You will not receive The convertible preferred securities will be
certificates represented by a global security that will be
deposited with and registered in the name of
The Depository Trust Company, New York, New
York, or its nominee. This means that you
will not receive a certificate for the
convertible preferred securities, and your
ownership interest will be recorded through
the DTC book-entry system.
8
SUMMARY FINANCIAL INFORMATION
The following consolidated summary contains selected financial data for
Commonwealth Bankshares 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 30, 1996, (ii) a 6% stock dividend
on April 30, 1997, (iii) an 8% stock dividend on April 30, 1998, and (iv) a 50%
stock dividend on May 27, 1999. Ratios for the three months ended March 31,
2001 and 2000 have been annualized.
Three Months
Ended March 31,/(1)/ Year Ended December 31,
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2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
Income Statement Data:
Interest income $ 4,296 $ 3,305 $ 14,592 $ 10,861 $ 9,547 $ 8,553 $ 7,744
Interest expense 2,717 1,767 8,151 5,502 5,060 4,410 4,201
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Net interest income 1,579 1,538 6,441 5,359 4,487 4,143 3,543
Provision for loan losses 91 45 1,155 110 102 50 1
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Net interest income after provision
for loan losses 1488 1,493 5,286 5,249 4,385 4,093 3,542
Non-interest income 355 267 1,182 1,209 1,186 869 871
Non-interest expense 1,669 1,356 6,162 4,856 3,984 3,605 3,213
-------- -------- -------- -------- -------- -------- --------
Income before income taxes 174 404 306 1,602 1,587 1,357 1,200
Income taxes 34 111 4 447 482 427 364
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Net income $ 140 $ 293 $ 302 $ 1,155 $ 1,105 $ 930 $ 836
======== ======== ======== ======== ======== ======== ========
Per Share Data:
Net income, basic $ 0.08 $ 0.18 $ 0.18 $ 0.71 $ 0.68 $ 0.57 $ 0.51
Net income, diluted 0.07 0.16 0.16 0.64 0.62 0.53 0.48
Cash dividends 0.035 0.035 0.14 0.105 0 0 0
Book value at period end 7.79 7.57 7.62 7.43 7.12 6.48 5.88
Balance Sheet Data:
Total assets $221,890 $172,207 $205,735 $157,016 $132,237 $116,106 $106,170
Total loans (net of unearned income) 167,669 133,789 157,942 125,045 91,576 78,251 65,835
Total deposits 202,320 153,542 184,615 138,358 116,170 100,760 90,262
Long-term debt 479 505 505 531 557 583 609
Stockholders' equity 13,172 12,597 12,827 12,227 11,580 10,531 9,568
Performance Ratios:
Return on average assets 0.26% 0.71% 0.17% 0.83% 0.90% 0.85% 0.79%
Return on average stockholders'
equity 4.34 9.41 2.34 9.63 9.91 9.35 8.85
Average stockholders' equity to
average total assets 5.94 7.56 7.20 8.60 9.11 9.13 8.91
Net interest margin 2.91 3.73 4.00 4.25 4.04 4.21 3.77
Dividend payout 42.24 19.83 77.52 14.79 -- -- --
Asset Quality Ratios:
Net charge-offs to average loans --% --% 0.12% 0.14% 0.12% 0.02% 0.49%
Allowance to period end loans 1.20 0.73 1.22 0.74 1.06 1.23 1.42
Allowance to nonperforming loans 104.79 86.21 324.87 78.76 73.91 61.56 41.51
Nonaccrual loans to loans 0.76 0.83 0.31 0.89 1.21 1.85 3.14
Nonperforming assets to loans and
foreclosed properties 1.39 1.32 0.46 1.36 2.28 3.74 5.60
Capital Ratios:
Tier 1 risk-based capital 7.45% 9.54% 7.86% 10.10% 12.00% 12.82% 13.19%
Total risk-based capital 8.59 10.25 9.02 10.80 13.00 14.00 14.44
Leverage capital ratio 6.07 7.95 6.68 8.30 8.90 9.18 9.10
Total equity to total assets 5.94 7.32 6.23 7.79 8.76 9.07 9.01
_________________
(1) Unaudited
9
RISK FACTORS
An investment in the convertible preferred securities involves a number of
risks. We urge you to read all of the information contained in this prospectus.
In additions, we urge you to consider carefully the following factors in
evaluating an investment in Commonwealth Bankshares and the Commonwealth
Bankshares Capital Trust before you purchase any of the convertible preferred
securities offered by this prospectus.
Because (i) the Trust will rely on the payments it receives on the junior
subordinated debt securities it owns to fund all payments on the convertible
preferred securities, (ii) the Trust may distribute the junior subordinated debt
securities it owns to fund all payments on the convertible preferred securities,
and (iii) the Trust may distribute the junior subordinated debt securities it
owns in exchange for the convertible preferred securities that it issues, you
are making an investment decision that relates to the junior subordinated debt
securities being issued by us as well as the convertible preferred securities.
You should carefully review the information in this prospectus about the
convertible preferred securities, the junior subordinated debt securities and
the guarantee. Additionally, because the convertible preferred securities are
convertible into our common stock as described in this prospectus, prospective
purchasers of convertible preferred securities are also making an investment
decision with regard to our common stock. For this reason, you should also
carefully review the information in this prospectus about our business and our
common stock.
Risks Related To An Investment In The Convertible Preferred Securities
If we do not make interest payments under the junior subordinated debt
securities, the Trust will be unable to pay distributions and liquidation
amounts. The guarantee would not apply because the guarantee covers payments
only if the Trust has funds available.
The Trust will depend solely on our payments on the junior subordinated
debt securities to pay amounts due to you on the convertible preferred
securities. If we do not make interest or liquidation payments on the junior
subordinated debt securities, the Trust will not have sufficient funds to pay
distributions or the liquidation amount on the convertible preferred securities.
In that case, you will not be able to rely on the guarantee for payment of these
amounts because the guarantee only applies if the Trust has sufficient funds to
make distributions or to pay the liquidation amount. Instead, you or the
property trustee will have to institute direct action against us to enforce the
property trustee's rights under the indenture relating to the junior
subordinated debt 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 March 31, 2001, we had $479 thousand of senior debt
outstanding. Any additional debts we incur in the future are likely to be
senior debt. There is no limit to our ability or Bank of the Commonwealth's
ability to incur additional debts, including senior debt, guarantees or other
liabilities. For additional information, please refer to "Description of Junior
Subordinated Debt Securities - What Does Subordination Mean to You?", which
begins on page 70.
The ability of the 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, the 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 indenture relating to
the junior subordinated debt securities.
Our right, and thus your right, to receive any assets of the Bank is
subject to the claims of the Bank's creditors, including depositors. At March
31, 2001, the Bank had total liabilities, including deposits, of $202.3 million.
Because the junior subordinated debt securities will be subordinated to all
existing and future liabilities of our subsidiaries, including the Bank's
deposit liabilities, you should look only to our assets, and not assets of our
subsidiaries, for payments on the junior subordinated debt securities.
10
Our ability to make interest payments to the Trust on the junior subordinated
debt securities may be restricted.
We may also be precluded from making interest payments on the junior
subordinated debt securities by our regulators in order to address any perceived
deficiencies in our liquidity or regulatory capital levels. Such regulatory
action would require us to obtain consent from our regulators prior to resuming
paying dividends on our common stock or interest on the junior subordinated debt
securities. In the event our regulators withheld their consent to our payment
of interest on the junior subordinated debt securities, we would exercise our
right to defer interest payments on the junior subordinated debt securities, and
the Trust would not have funds available to make distributions on the
convertible preferred securities during such period. The commencement of a
deferral period would likely cause the market price of the convertible preferred
securities and our common stock to decline. We cannot assure you that our
subsidiaries will be able to pay dividends in the future or that our regulators
will not attempt to preclude us from making interest payments on the junior
subordinated debt securities.
If banking regulations prohibit the Bank 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 the
Bank. Almost all of our consolidated assets are owned by the Bank. We will
rely almost entirely on dividends from the Bank 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. The ability of the Bank to pay dividends is
also subject to its profitability, financial condition, capital expenditures and
other cash flow requirements. We cannot assure you that the Bank 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 71.
We have the option to defer interest payments on the junior subordinated debt
securities for substantial periods without creating an event of default.
We may, at one or more times, defer interest payments on the junior
subordinated debt securities for up to 20 consecutive quarters. If we defer
interest payments on the junior subordinated debt securities, the Trust will
defer distributions on the convertible preferred securities during any deferral
period. During a deferral period, you will be required to recognize as income
for federal income tax purposes the amount approximately equal to the interest
that accrues on your proportionate share of the junior subordinated debt
securities held by the Trust in the tax year in which that interest accrues,
even though you will not receive these amounts until a later date.
You will also not receive the cash related to any accrued and unpaid
interest from the Trust if you sell the convertible preferred securities before
the end of any deferral period. During a deferral period, accrued but unpaid
distributions will increase your tax basis in the convertible preferred
securities. If you sell the convertible preferred securities during a deferral
period, your increased tax basis will decrease the amount of any capital gain or
increase the amount of any capital loss that you may have otherwise realized on
the sale. A capital loss, except in certain limited circumstances, cannot be
applied to offset ordinary income. As a result, deferral of distributions could
result in ordinary income, and a related tax liability for the holder, and a
capital loss that may only be used to offset a capital gain.
We do not currently intend to exercise our rights to defer interest
payments on the junior subordinated debt securities. However, if we do defer
interest payments, the market price of the convertible preferred securities and
our common stock would likely decline. The convertible preferred securities may
trade at a price that does not fully reflect the value of accrued but unpaid
interest on the junior subordinated debt securities. If you sell the
convertible preferred securities during a deferral period, you may not receive
the same return on investment as someone who continues to hold the convertible
preferred securities. Because of our right to defer interest payments, the
market price of the convertible preferred securities may be more volatile than
the market prices of other securities without the deferral feature.
11
By purchasing convertible preferred securities, you are agreeing that Anderson &
Strudwick will have the right to select and direct the remedies to be pursued by
the property trustee upon an event of default under the trust documents.
By purchasing convertible preferred securities, you are agreeing to permit
Anderson & Strudwick, our selling agent in this offering, to select and direct
the proceedings to be taken by the property trustee if there is a default under
the trust documents. If a default occurs, Anderson & Strudwick may select
remedies different from those that holders of convertible preferred securities
would select. You are not likely to have any legal recourse against Anderson &
Strudwick if it selects remedies with which you do not agree. Anderson &
Strudwick will continue to hold these powers unless it resigns in this capacity
or unless holders of 25% of the outstanding convertible preferred securities
elect to take these powers away from Anderson & Strudwick.
You must rely on the property trustee to enforce your rights if there is an
event of default under the indenture.
You may not be able to directly enforce your rights against us under the
indenture if an event of default occurs. If an event of default under the
indenture occurs and is continuing, this event will also be an event of default
under the trust agreement. In that case, you must rely on the enforcement by
the property trustee of its rights as holder of the junior subordinated debt
securities against us. Anderson & Strudwick, or if Anderson & Strudwick is not
then authorized to act upon an event of default, the holders of a majority in
liquidation amount of the convertible preferred securities, will have the right
to direct the property trustee to enforce its rights. If the property trustee
does not enforce its rights following an event of default and a request to do
so, Anderson & Strudwick (or a record holder) may, to the extent permitted by
applicable law, take legal action directly against us to enforce the property
trustee's rights. If an event of default occurs under the trust agreement that
is attributable to our failure to pay interest or principal on the junior
subordinated debt securities, or if we default under the guarantee, Anderson &
Strudwick (or a record holder) may proceed directly against us. Anderson &
Strudwick (or a record holder) will not be able to exercise directly any other
remedies available to the holders of the junior subordinated debt securities,
unless the property trustee fails to do so.
We have made only limited covenants in the indenture and the trust agreement.
The indenture governing the junior subordinated debt securities and the
trust agreement governing the Trust do not require us to maintain any financial
ratios or specified levels of net worth, revenues, income, cash flow or
liquidity. The instruments do not protect holders of the junior subordinated
debt securities or the convertible preferred securities in the event we
experience significant adverse changes in our financial condition or results of
operations. In addition, neither the indenture nor the trust agreement limit
our ability or the ability of any subsidiary to incur additional indebtedness.
Therefore, you should not consider the provisions of these governing instruments
as a significant factor in evaluating whether we will be able to comply with our
obligations under the junior subordinated debt securities or the guarantee.
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 October 15, 2006 without the payment of a premium. Moreover, we also
have the right at any time before October 15, 2006 to redeem the junior
subordinated debt securities if any of three things happen. We can pay off the
junior subordinated debt securities before October 15, 2006 if tax law changes
prevent us from deducting interest payments or if changes in banking regulations
prevent us from counting the Trust's assets as capital. A change in the
Investment Company Act of 1940 that requires the Trust to register under that
law also would permit us to pay off the junior subordinated debt securities
before October 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 redeem 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 54.
12
If we liquidate the 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 the Trust and cause the
junior subordinated debt securities to be distributed to you. If we liquidate
the Trust, the junior subordinated debt securities will be convertible into our
common stock on the same terms, and subject to the same conditions, that the
convertible preferred securities are convertible into our common stock. 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,
the Trust were taxable as a corporation at the time of dissolution of the 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 the Trust and Distribution of
Junior Subordinated Debt Securities", which begins on page 56.
We give no assurance about the liquidity or 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
the 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 the 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 the Trust, and the exercise
of the 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
the 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 the
Trust will not be required to register as an "investment company" under the
Investment Company Act of 1940, 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 60.
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.
Anderson & Strudwick has informed us that it intends to make a market in the
convertible preferred securities. However, Anderson & Strudwick 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.
Even if an active public market does develop, there is no guarantee that the
market price for the convertible preferred securities will equal or exceed the
price you pay for the convertible preferred securities. The initial public
offering price of the convertible preferred securities has been set at the
applicable liquidation amount of the convertible preferred securities and may be
greater than the market price of the security following the offering.
13
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 convertible
preferred securities into our common stock at any time after October 15, 2006 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, the
Trust will issue a press release and mail a written notice to all registered
holders of the convertible preferred securities and Anderson & Strudwick and you
will have the ability to convert your convertible 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 and notice, as determined by us. If we
exercise our conversion termination rights, you will lose your right to convert
your convertible preferred securities into our common stock unless you make a
decision to convert within the period specified by the press release and notice.
For additional information, please refer to "Description of Convertible
Preferred Securities - Conversion Rights - Termination of Conversion Rights,"
which begins on page 54.
Risks Related To Us
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 will increase our legal lending limit under
federal law, which in turn will 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.
Our focus on commercial loans may increase the risk of substantial credit
losses.
We offer a variety of loan products, including commercial, construction,
consumer and residential mortgage loans. At March 31, 2001, approximately 69%
of the Bank's loans were commercial loans, including those secured by real
estate. We expect that, as we grow, this percentage will remain about the same.
Commercial lending is more risky than mortgage and consumer lending because loan
balances are greater and the borrower's ability to repay is contingent on the
successful operations of a business. Risk of loan defaults is unavoidable in
the banking industry, and we try to limit exposure to this risk by monitoring
carefully the amount of loans in specific industries and by exercising prudent
lending practices. However, we cannot eliminate this risk, and substantial
credit losses could result in reduced earnings or losses.
Our allowance for loan losses may prove to be insufficient to absorb potential
losses in our loan portfolio.
We maintain an allowance for loan losses that we believe is appropriate to
provide for any potential losses in our loan portfolio. The amount of this
allowance is determined by management through a periodic review and
consideration of several factors, including:
. an ongoing review of the quality, size and diversity of our loan
portfolio;
. evaluation of nonperforming loans;
. historical loan loss experience; and
. the amount and quality of collateral, including guarantees, securing
the loans.
Although we believe our loan loss allowance is adequate to absorb probable
losses in our loan portfolio, we cannot predict such losses or that our
allowance will be adequate. Excess loan losses could have a material adverse
effect on our financial condition and results of operations. For example, in
the fourth quarter of 2000, banking regulators asked us to increase our loan
loss allowance. After discussions with those regulators, we agreed to take a
one time additional loan loss allowance of $1 million in the fourth quarter of
2000. This additional loan loss allowance, which is accounted for as an
expense, materially adversely affected our financial results in 2000. At March
31, 2001, our loan loss allowance as a percentage of loans was 1.2%.
14
Our profitability depends on interest rates generally.
Our profitability depends in substantial part on our net interest margin,
which is the difference between the rates we receive on loans and investments
and the rates we pay for deposits and other sources of funds. Our net interest
margin depends on many factors that are partly or completely outside of our
control, including competition, federal economic, monetary and fiscal policies,
and economic conditions generally. Recently, net interest margins for some
financial institutions have changed in response to these and other factors.
Changes in interest rates will affect our operating performance and financial
condition. We try to minimize our exposure to interest rate risk, but are
unable to completely eliminate this risk.
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 the
senior executive officers of the Bank, including in particular Edward J.
Woodard, Jr., our 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 and possibly
result in reduced revenues.
We may be adversely affected by changes in government monetary policy.
As a bank holding company, our business is affected by the monetary
policies established by the Board of Governors of the Federal Reserve System,
which regulates the national money supply in order to mitigate recessionary and
inflationary pressures. In setting its policy, the Federal Reserve may utilize
techniques such as the following:
. engaging in open market transactions in United States government
securities;
. setting the discount rate on member bank borrowings; and
. determining reserve requirements.
These techniques may have an adverse effect on our deposit levels, net
interest margin, loan demand or our business and operations.
Our future success will depend on our ability to compete effectively in the
highly competitive financial services industry.
We face substantial competition in all phases of our operations from a
variety of different competitors. In particular, there is very strong
competition for financial services in the Greater Hampton Roads region of
Virginia in which we conduct our business. Our future growth and success will
depend on our ability to compete effectively in this highly competitive
financial services environment. Many of our competitors offer products and
services which we do not, and many have substantially greater resources, name
recognition and market presence that benefit them in attracting business. In
addition, larger competitors may be able to price loans and deposits more
aggressively than we do. Some of the financial services organizations with
which we compete are not subject to the same degree of regulation as is imposed
on bank holding companies and federally insured state-chartered banks, national
banks and federal savings institutions. As a result, these nonbank competitors
have certain advantages over us in accessing funding and in providing various
services.
We continually encounter technological change, and we may have fewer resources
than many of our competitors to continue to invest in technological
improvements.
The financial services industry is undergoing rapid technological changes,
with frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success will depend, in part, upon our ability to address the needs of our
customers by using technology to provide products and services that will satisfy
customer demands for convenience, as well as to create additional efficiencies
in our operations. Many of our competitors have substantially greater resources
to invest in technological improvements. We may not
15
be able to effectively implement new technology-driven products and services or
be successful in marketing these products and services to our customers.
We cannot offer assurance that economic conditions in the markets in which we
operate will remain favorable.
Our financial success is dependent to a certain extent upon the general
economic conditions in the geographic market in which we operate. Future
economic conditions in this market will depend on factors outside of our
control. Adverse changes in economic conditions in our geographic market would
likely impair our ability to collect loans and could otherwise have a negative
effect on our financial condition.
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 those
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;
. a tightening in the difference between our cost of funds and what we
earn on the loans we make; or
. changes in governmental regulations affecting our business.
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 apply the net
proceeds from the sale of the junior subordinated debt securities to increase
our regulatory capital and support the growth of the Bank of the Commonwealth.
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.
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.
16
MARKET FOR COMMON STOCK
Our common stock began trading on the Nasdaq National Market on October 30,
2000 under the symbol "CWBS." Prior to trading on the Nasdaq National Market,
our common stock traded on the OTC Bulletin Board, an NASD sponsored and
operated inter-dealer quotation system for equity securities not traded on the
Nasdaq Stock Market. The following table shows the high and low closing sales
prices of our common stock and the dividends declared per share for the periods
indicated. For periods during which our common stock traded on the OTC Bulletin
Board, the information below reflects inter-dealer prices, without retail mark-
up, mark-down or commission and may not represent actual transactions.
High Low Cash Dividend Declared
---- --- ----------------------
2001
Third Quarter (through
July 20)....................... $ 7.00 $6.44 $ --
Second Quarter................... 7.50 4.90 0.035
First Quarter.................... 7.50 6.31 0.035
2000
Fourth Quarter................... 7.00 5.63 0.035
Third Quarter.................... 7.12 6.38 0.035
Second Quarter................... 7.25 5.50 0.035
First Quarter.................... 7.50 6.00 0.035
1999
Fourth Quarter................... 9.50 8.00 0.035
Third Quarter.................... 10.25 8.00 0.035
Second Quarter................... 10.25 9.50 0.035
First Quarter.................... 10.25 9.83 --
As of March 31, 2001, there were 1,690,176 shares of our common stock
outstanding held by approximately 750 shareholders of record.
We have declared and paid cash dividends for the past eight fiscal
quarters. Declarations of dividends are at the discretion of our board of
directors, and we cannot assure that dividends will be declared at any time in
the future. We will depend on dividends we receive from Bank of the Commonwealth
to provide funding for future dividends, if any, on our common stock. As a
banking corporation organized under Virginia law, the Bank is restricted as to
the maximum amount of dividends it may pay to us. A Virginia bank may not pay
dividends from its original capital. All dividends must be paid out of net
undivided profits on hand, after deducting expenses, losses, interest, and taxes
accrued and contributions to capital necessary for the Bank's original capital
to be restored to its initial level.
The Board of Governors of the Federal Reserve System recommends that
banking organizations pay dividends only if the net income available to
shareholders in the past year fully funds those dividends and the expected rate
of earnings retention is consistent with capital needs, asset quality and
overall financial condition. Our dividend policy complies with this
recommendation.
MARKET FOR CONVERTIBLE PREFERRED SECURITIES
The convertible preferred securities are a new issue of securities with no
established trading market. The convertible preferred securities have been
approved for quotation on the Nasdaq National Market under the symbol "CWBSP."
We have been advised by Anderson & Strudwick that it will make a market in the
convertible preferred securities. Anderson & Strudwick, however, is not
obligated to make a market in the convertible preferred securities and it can
discontinue market making at any time without notice. Neither we, Anderson &
Strudwick nor the Trust can provide any assurance that an active trading market
for the convertible preferred securities will develop.
17
COMMONWEALTH BANKSHARES CAPITAL TRUST I
Commonwealth Bankshares Capital Trust I is a statutory business trust
formed pursuant to the Delaware Business Trust Act under a trust agreement
executed by us, as sponsor for the Trust, and the trustees, and a certificate of
trust has been filed with the Delaware Secretary of State. The trust agreement
will be amended and restated in its entirety in the form filed as an exhibit to
the registration statement of which this prospectus is a part, as of the date
the convertible preferred securities are initially issued. The trust agreement
will be qualified under the Trust Indenture Act of 1939. The rights of the
holders of the convertible preferred securities are as set forth in the trust
agreement, the Delaware Business Trust Act and the Trust Indenture Act.
The Trust exists for the exclusive purposes of:
. issuing and selling the common securities to us and the convertible
preferred securities to the public;
. using the proceeds from the sale of the common securities and
convertible preferred securities to purchase the junior subordinated
debt securities from us; and
. engage in other activities that are necessary and incidental to
these purposes, such as receiving payments on the junior
subordinated debt securities and making distributions to security
holders, furnishing notices and other administrative tasks.
The junior subordinated debt securities will be the sole assets of the
Trust, and payments under the junior subordinated debt securities will be the
sole revenues of the 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 the Trust. The Trust has a term of approximately
40 years, but may terminate earlier as provided in the amended and restated
declaration of trust. The 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 Anderson & Strudwick, acting
on behalf of the holders 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 the Trust
and the offering of the convertible preferred securities and will pay, directly
or indirectly, all ongoing costs, expenses and liabilities of the 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
18
SELECTED FINANCIAL INFORMATION
The following consolidated summary contains selected financial data for
Commonwealth Bankshares 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 30, 1996, (ii) a 6% stock dividend
on April 30, 1997, (iii) an 8% stock dividend on April 30, 1998, and (iv) a 50%
stock dividend on May 27, 1999. Ratios for the three months ended March 31,
2001 and 2000 have been annualized.
Three Months
Ended March 31,/(1)/ Year Ended December 31,
--------------------------- ----------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
Income Statement Data:
Interest income $ 4,296 $ 3,305 $ 14,592 $ 10,861 $ 9,547 $ 8,553 $ 7,744
Interest expense 2,717 1,767 8,151 5,502 5,060 4,410 4,201
-------- -------- -------- -------- -------- -------- --------
Net interest income 1,579 1,538 6,441 5,359 4,487 4,143 3,543
Provision for loan losses 91 45 1,155 110 102 50 1
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for loan losses 1488 1,493 5,286 5,249 4,385 4,093 3,542
Non-interest income 355 267 1,182 1,209 1,186 869 871
Non-interest expense 1,669 1,356 6,162 4,856 3,984 3,605 3,213
-------- -------- -------- -------- -------- -------- --------
Income before income taxes 174 404 306 1,602 1,587 1,357 1,200
Income taxes 34 111 4 447 482 427 364
-------- -------- -------- -------- -------- -------- --------
Net income $ 140 $ 293 $ 302 $ 1,155 $ 1,105 $ 930 $ 836
======== ======== ======== ======== ======== ======== ========
Per Share Data:
Net income, basic $ 0.08 $ 0.18 $ 0.18 $ 0.71 $ 0.68 $ 0.57 $ 0.51
Net income, diluted 0.07 0.16 0.16 0.64 0.62 0.53 0.48
Cash dividends 0.035 0.035 0.14 0.105 0 0 0
Book value at period end 7.79 7.57 7.62 7.43 7.12 6.48 5.88
Balance Sheet Data:
Total assets $221,890 $172,207 $205,735 $157,016 $132,237 $116,106 $106,170
Total loans (net of unearned income) 167,669 133,789 157,942 125,045 91,576 78,251 65,835
Total deposits 202,320 153,542 184,615 138,358 116,170 100,760 90,262
Long-term debt 479 505 505 531 557 583 609
Stockholders' equity 13,172 12,597 12,827 12,227 11,580 10,531 9,568
Performance Ratios:
Return on average assets 0.26% 0.71% 0.17% 0.83% 0.90% 0.85% 0.79%
Return on average stockholders'
equity 4.34 9.41 2.34 9.63 9.91 9.35 8.85
Average stockholders' equity to
average total assets 5.94 7.56 7.20 8.60 9.11 9.13 8.91
Net interest margin 2.91 3.73 4.00 4.25 4.04 4.21 3.77
Dividend payout 42.24 19.83 77.52 14.79 -- -- --
Asset Quality Ratios:
Net charge-offs to average loans --% --% 0.12% 0.14% 0.12% 0.02% 0.49%
Allowance to period end loans 1.20 0.73 1.22 0.74 1.06 1.23 1.42
Allowance to nonperforming loans 104.79 86.21 324.87 78.76 73.91 61.56 41.51
Nonaccrual loans to loans 0.76 0.83 0.31 0.89 1.21 1.85 3.14
Nonperforming assets to loans and
foreclosed properties 1.39 1.32 0.46 1.36 2.28 3.74 5.60
Capital Ratios:
Tier 1 risk-based capital 7.45% 9.54% 7.86% 10.10% 12.00% 12.82% 13.19%
Total risk-based capital 8.59 10.25 9.02 10.80 13.00 14.00 14.44
Leverage capital ratio 6.07 7.95 6.68 8.30 8.90 9.18 9.10
Total equity to total assets 5.94 7.32 6.23 7.79 8.76 9.07 9.01
______________
(1) Unaudited
19
CAPITALIZATION
The following table sets forth (i) our consolidated capitalization at March
31, 2001, (ii) our consolidated capitalization giving effect to the issuance of
1,200,000 of the 1,600,000 convertible preferred securities being offered by the
Trust and our receipt of the net proceeds from the corresponding sale of the
junior subordinated debt securities to the Trust, as if the sale of 1,200,000
convertible preferred securities occurred on March 31, 2001 and (iii) our
consolidated capitalization giving effect to the issuance of all 1,600,000
convertible preferred securities being offered by the Trust and our receipt of
the net proceeds from the corresponding sale of the junior subordinated debt
securities to the Trust, as if the sale of 1,600,000 convertible preferred
securities occurred on March 31, 2001. This table is based on, and is qualified
in its entirety by, our historical consolidated financial statements, including
the related notes, which are included elsewhere in this prospectus. This table
should be read in conjunction with these financial statements.
At March 31, 2001
Actual As Adjusted/(1)/ As Adjusted/(2)/
------ ---------------- ----------------
(Dollars in thousands)
Long-term debt $ 479 $ 479 $ 479
Junior subordinated debt securities -- $ 6,000 $ 8,000
Shareholders' equity:
Common stock, $2.50 par value, 5,000,000 shares
Authorized, 1,690,176 shares outstanding 4,225 4,225 4,225
Additional paid-in capital 5,427 5,427 5,427
Retained earnings 3,516 3,516 3,516
Accumulated other comprehensive income (loss) 4 4 4
------- ------- -------
Total stockholders' equity $13,172 $13,172 $13,172
------- ------- -------
Total capitalization $13,651 $19,651 $21,651
======= ======= =======
Consolidated capital ratios /(3)/
Equity to assets 5.94% 5.78% 5.73%
Tier 1 capital /(4)/ 7.45 9.67 9.59
Total capital /(4)/ 8.59 11.67 12.66
Leverage capital /(5)/ 6.07 8.09 8.09
________________________
(1) As adjusted assuming the sale of 1,200,000 convertible preferred
securities on March 31, 2001.
(2) As adjusted assuming the sale of 1,600,000 convertible preferred
securities on March 31, 2001.
(3) The capital ratios, as adjusted, are computed including the total
estimated net proceeds from the sale of the convertible preferred
securities in a manner consistent with Federal Reserve regulations.
(4) The convertible preferred securities have been structured to qualify as
tier 1 capital. However, in calculating the amount of tier 1 qualifying
capital the convertible preferred securities may only be included up to
the amount constituting 25% of tier 1 core capital elements.
(5) The leverage ratio is tier 1 capital divided by average quarterly
assets, after deducting intangible assets and net deferred tax assets
in excess of regulatory maximum limits.
20
ACCOUNTING TREATMENT
The financial statements of the 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 our consolidated statements of income. Our
financial statement footnotes will reflect that the sole asset of the Trust will
be the amount of the junior subordinated debt securities maturing on October 15,
2031. All future reports we file under the Securities Exchange Act of 1934 will
present information regarding the 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
March 31, 2001, and assuming the sale of all 1,600,000 convertible preferred
securities offered pursuant to this prospectus, approximately $4.4 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. For
a further discussion of tier 1 and tier 2 capital, see "Business - Supervision
and Regulation - Regulatory Capital Requirements" beginning on page 32 of this
prospectus.
21
BUSINESS
General
Bank of the Commonwealth was organized in 1970 and began operations in
April 1971. In 1988, Commonwealth Bankshares was formed to become the bank
holding company of the Bank. Our only material activity is to own and control
all of the capital stock of the Bank.
Headquartered in Norfolk, Virginia, we serve the retail and commercial
financial market as a deposit and loan specialist from nine full service branch
offices located in Norfolk, Virginia Beach, Chesapeake, and Portsmouth, Virginia
and six off-premises ATM locations.
Our principal business is the acquisition of deposits from the general
public through our branch offices and use of these deposits to fund our loan and
investment portfolios. The Bank 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.
Our principal sources of revenue are interest and fees on loans 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 five year period ended December 31, 2000,
our total loans increased from $65.8 million at December 31, 1996 to $157.9
million at December 31, 2000, an increase of $92.1 million or 140%. At March
31, 2001, our total loans equaled $167.7 million.
Today, the principal lending activity of the Bank 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, or SBA. The Bank is an active lender in the Richmond District of
the SBA. The SBA 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. The SBA's 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 SBA 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
The Bank offers an extensive array of commercial real estate loans in
addition to the SBA programs described above. Outstanding commercial real estate
loans totaled $94.2 million at March 31, 2001, which represented approximately
56.0% of our loans receivable. Of these outstanding loans, $89.2 million were
permanent and $5.0 million were construction loans. These loans are secured by
real estate with loan-to-values averaging less
22
than 70%. During the five year period ended December 31, 2000, our total
commercial real estate loans increased from $30.7 million at December 31, 1996
to $85.3 million at December 31, 2000, an increase of $54.6 million or 177.9%.
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 the Bank. 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, the
Bank utilizes the SBA 7(a) loan program to reduce the inherent risk associated
with this type of lending. Outstanding commercial business loans totaled $26.8
million at March 31, 2001, which represented approximately 15.9% of our loans
receivable. During the five year period ended December 31, 2000, our total
commercial business loans increased from $11.1 million at December 31, 1996 to
$25.3 million at December 31, 2000, an increase of $14.2 million or 127.9%.
Residential Lending
The Bank 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. The Bank also makes residential construction loans and
permanent loans to retain in its own loan portfolio individual single family and
other residential properties. The Bank does not underwrite residential mortgages
for sale in the secondary market. Residential 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, the Bank
typically lends up to 80% of the appraised value of single-family residences.
Outstanding residential mortgage loans totaled $33.9 million at March 31,
2001, which represented approximately 20.1% of our loans receivable. During the
five year period ended December 31, 2000, our total residential mortgage loans
increased from $17.2 million at December 31, 1996 to $36.5 million at December
31, 2000, an increase of $19.3 million or 112.2%.
Consumer Lending
The Bank 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 $13.4 million at March 31, 2001, which represented
approximately 8.0% of our loans receivable. During the five year period ended
December 31, 2000, our total consumer loans increased from $7.0 million at
December 31, 1996 to $11.4 million at December 31, 2000, an increase of $4.4
million or 62.9%.
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 79.7% of the Bank's total revenue for the three months ended March
31, 2001.
23
Loan Portfolio Composition
The following table sets forth the composition of our loan portfolio
at the dates indicated:
Three Months Ended Year Ended
March 31, December 31,
------------------------------------- --------------------------------------------------------
2001 2000 2000 1999 1998
----------------- ----------------- ----------------- ----------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- ------- -------
(Dollars in thousands)
Commercial Real Estate -
Construction $ 4,968 3.0% $ 3,493 2.6% $ 3,659 2.3% $ 1,712 1.4% $ 1,522 1.7%
Commercial Real Estate -
Permanent 89,235 53.0 71,637 53.4 81,627 51.5 65,986 52.6 46,379 50.5
Commercial Business 26,770 15.9 22,731 16.9 25,300 16.0 23,307 18.6 15,990 17.4
Residential Mortgage 33,883 20.1 26,974 20.1 36,452 23.0 25,146 20.0 19,577 21.3
Consumer Loans 13,395 8.0 9,437 7.0 11,439 7.2 9,355 7.4 8,382 9.1
Gross loans $168,251 100.0% $134,272 100.0% $158,477 100.0% $125,506 100.0% $91,850 100.0%
===== ===== ===== ===== =====
Less:
Deferred fees 582 483 535 461 274
Allowance for loan losses 2,014 979 1,920 931 969
-------- -------- -------- -------- -------
Total loans $165,655 $132,810 $156,022 $124,114 $90,607
======== ======== ======== ======== =======
1997 1996
----------------- -----------------
Amount Percent Amount Percent
------- ------- ------- -------
(Dollars in thousands)
Commercial Real Estate - Construction $ 1,601 2.0% $ 1,868 2.0%
Commercial Real Estate - Permanent 35,091 44.7 28,797 44.7
Commercial Business 13,861 17.7 11,079 17.7
Residential Mortgage 19,836 25.3 17,206 25.3
Consumer Loans 8,056 10.3 7,049 10.3
Gross loans $78,445 100.0% $65,999 100.0%
===== =====
Less:
Deferred fees 194 164
Allowance for loan losses 969 932
------- -------
Total loans $77,282 $64,903
======= =======
The following table sets forth the scheduled maturity of selected
loans as of March 31, 2001:
Over 1 Year
Through 5 Years Over 5 Years
------------------------ ---------------------
One Year Fixed Floating Fixed Floating
or Less Rate Rate Rate Rate Total
------- ---- ---- ---- ---- -----
(Dollars in thousands)
Commercial Business $ 6,236 $5,426 $2,381 $ 5,970 $ 6,757 $ 26,770
Commercial Real Estate -
Construction 2,609 -- 108 2,010 241 4,968
Commercial Real Estate -
Permanent 11,988 1,765 2,261 26,434 46,787 89,235
------- ------ ------ ------- ------- --------
Total $20,833 $7,191 $4,750 $34,414 $53,785 $120,973
======= ====== ====== ======= ======= ========
24
The following table sets forth the scheduled maturity of selected loans as
of December 31, 2000:
Over 1 Year
Through 5 Years Over 5 Years
--------------------------- -------------------------
One Year Fixed Floating Fixed Floating
or Less Rate Rate Rate Rate Total
------- ---- ---- ---- ---- -----
(Dollars in thousands)
Commercial Business $10,814 $3,972 $ 4,372 $ 6,142 -- $ 25,300
Commercial Real Estate - 2,598 -- -- 1,061 -- 3,659
Construction
Commercial Real Estate -
Permanent 20,744 3,165 28,485 20,873 8,360 81,627
------- ------ ------- ------- ------ --------
Total $34,156 $7,137 $32,857 $28,076 $8,360 $110,586
======= ====== ======= ======= ====== ========
Loan Underwriting Policies
Because of the credit risk associated with the extension of loans, leases,
certain securities, and financial guarantees, the Bank has established policies
and procedures to manage both on and off-balance sheet risk. The Bank
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.
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
lending officers and credit policy personnel 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 lending officers 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 the Bank's
headquarters facility.
An independent credit review group conducts ongoing reviews of the loan
portfolio, reexamining on a regular basis risk assessments for loans and overall
compliance with policy. To limit credit exposure, the Bank 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. These property valuations are reviewed by the
vice president of real estate lending, who reports his findings annually to the
Bank's board of directors. The Bank obtains real property as security for some
loans that are made on the basis of general creditworthiness of a borrower,
notwithstanding that the loan proceeds are not used for real estate related
purposes.
For loans secured by real estate, the Bank'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
the Bank makes disbursements for items such as real estate taxes and hazard and
flood insurance.
The Bank has a standing credit committee comprised of bank officers. The
members of this committee have defined lending authorities as individuals and in
combination. These individual authorities are determined by our 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 our 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.
25
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 the Bank'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 the Bank are
affected primarily by competitive market factors. These factors include general
economic conditions, monetary policies of the Federal Reserve Board, legislative
tax policies and government budgetary matters.
When a borrower fails to make a required payment, the Bank 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, the Bank 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 the Bank may participate as a bidder. If the Bank is the
successful bidder, the acquired real estate property is held by us as real
estate owned until the property is sold. Real estate owned is 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 as an operating expense.
The aggregate amount of loans that the Bank may make to one borrower is
limited to 15% of the Bank's unimpaired capital and surplus. At March 31, 2001,
the maximum amount of loans the Bank was permitted to make to one borrower was
approximately $1.9 million. As of March 31, 2001, the Bank had six borrowers
each of which had aggregate outstanding loans with the Bank with balances
approaching $1.9 million. All of the loans to these borrowers were fully
secured.
Past Due Loans and Nonperforming Assets
The following table sets forth information regarding our past due loans and
nonperforming assets as of the periods indicated:
At March 31, At December 31,
-------------------- ---------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
Accruing Loans 90 Days or More Delinquent:
Real Estate $ 90 $ -- $ 17 $ -- $ -- $ -- $ 102
Installment 2 6 2 13 10 7 9
Credit Cards and Related Plans 1 22 5 22 57 41 20
Commercial (Time and Demand) and Other Loans 555 1 83 38 135 76 49
--------------------------------------------------------------------
Total $ 648 $ 29 $ 107 $ 73 $ 202 $ 124 $ 180
====================================================================
Nonperforming Loans:
Real Estate Loans $ 80 $ 855 $ 50 $ 881 $1,054 $1,343 $1,869
Installment Loans 27 195 194 184 41 28 16
Commercial (Time and Demand) and Other Loans 1,167 57 240 44 14 79 180
--------------------------------------------------------------------
Subtotal 1,274 1,107 484 1,109 1,109 1,450 2,065
--------------------------------------------------------------------
Real Estate Owned 413 632 131 601 999 1,533 1,720
--------------------------------------------------------------------
Total Nonperforming Assets $1,687 $1,739 $ 615 $1,710 $2,108 $2,983 $3,785
====================================================================
Nonperforming Assets to Total Assets 0.76% 1.01% 0.30% 1.09% 1.59% 2.57% 3.57%
====================================================================
Of the $648 thousand of commercial loans 90 days or more delinquent as of
March 31, 2001, approximately $500 thousand of these loans were delinquent as a
result of pre-approved, temporary overdrafts. We approved these overdrafts as
part of our customary borrowing arrangements with these borrowers. Since March
31, 2001, the various borrowers have repaid the overdrafts.
26
Of the $1.7 million of nonperforming assets as of March 31, 2001, $1.1
million is attributable to a loan with a long standing borrower that is not, and
never has been, delinquent in its payments. We classified this loan as
nonperforming after discussions with banking regulators regarding the current
financial condition of the borrower.
At March 31, 2001, loans totaling $3.5 million were classified as potential
problem loans that are not reported in the table above because they were not 90
days or more past due. The loans are subject to management attention and their
classification is reviewed on a quarterly basis. At March 31, 2001, all of the
potential problem loans were current in payments under the terms of the
borrowing arrangements and 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 quarter the board
of directors considers a review of the loans in the Bank'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. We perform 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 discussions with banking regulators, the Bank agreed to take a
one time additional loan loss allowance of $1 million in the fourth quarter of
2000.
27
The following table summarizes activity in our allowance for loan
losses during the periods indicated.
Three Months Ended
March 31, Year Ended December 31,
---------------------- -------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
Allowance at Beginning of Period $ 1,920 $ 931 $ 931 $ 969 $ 969 $ 932 $ 1,256
======== ========= ======== ======== ======= ======= =======
Provision for Losses 91 45 1,155 110 102 50 -
Charge offs:
Commercial -- -- 30 49 21 -- 59
Commercial Construction -- -- -- -- -- -- --
Commercial Mortgage -- -- 79 -- 32 -- 174
Residential Mortgage -- -- 36 -- -- -- --
Installment Loans to Individuals -- -- 10 53 41 27 62
Other -- -- 17 55 11 4 43
-------- --------- -------- -------- ------- ------- ---------
Total Charge-offs -- -- 172 157 105 31 338
-------- --------- -------- -------- ------- ------- --------
Recoveries:
Commercial -- -- -- -- -- -- 3
Commercial Construction -- -- -- -- -- -- --
Commercial Mortgage -- -- -- 2 -- 11 1
Residential Mortgage -- -- -- -- -- -- --
Installment Loans to Individuals 3 3 5 7 2 3 6
Other -- -- 1 -- 1 4 4
Total recoveries: 3 3 6 9 3 18 14
-------- --------- -------- -------- ------- ------- --------
Net Charge-offs (3) (3) 166 148 102 13 324
-------- --------- -------- -------- ------- ------- --------
Allowance at end of period 2,014 979 1,920 931 969 969 932
-------- --------- -------- -------- ------- ------- --------
Loans at end of period $167,669 $ 133,789 $157,942 $125,045 $91,576 $78,251 $ 65,835
======== ========= ======== ======== ======= ======= ========
Ratio of allowance to loans 1.20% 0.73% 1.22% 0.74% 1.06% 1.23% 1.42%
The following table summarizes the composition of our allowance for loan losses.
At March 31, At December 31,
----------------------------- ------------------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----- ---- ------------- ------------ ------------ ----------- -----------
Amt % Amt % Amt % Amt % Amt % Amt % Amt %
(Dollars in thousands)
Commercial $ 155 13.00% $ 188 31.28% $ 173 14.48% $ 332 57.14% $ 262 31.64% $ 34 6.25% $ 12 16.83%
Commercial
real estate -
construction 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00
Commercial
real estate -
permanent 1,028 86.27 334 55.57 1,012 84.68 177 30.46 420 50.73 222 40.81 249 46.58
Residential
Mortgage 3 0.25 44 7.32 0 0 47 8.09 84 10.15 211 38.78 26 26.13
Consumer
Loans to
Individuals 5 0.42 4 0.67 5 0.42 3 0.52 5 0.60 36 6.62 10 6.74
Other Consumer
Loans 1 0.09 31 5.16 5 0.42 22 3.79 57 6.88 41 7.54 20 3.72
Unallocated 822 N/A 378 N/A 725 N/A 350 N/A 141 N/A 425 N/A 615 N/A
------ ------ ----- ------ ------ ------ ----- ------ ------ ------ ----- ------ ----- ------
Total $2,014 100.00% $ 979 100.00% $1,920 100.00% $ 931 100.00% $ 969 100.00% $ 969 100.00% $ 932 100.00%
====== ====== ====== ====== ====== ====== ===== ====== ====== ====== ===== ====== ===== ======
In the table above, we have allocated our allowance
according to the amount we deem reasonably necessary to provide for
losses incurred within the various categories of loans. These figures
are based on gross loans. The allocation of the allowances as shown in
the table 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.
28
Investment Activities
The following table sets forth our investment portfolio as of the
periods indicated:
March 31, December 31,
---------------- ----------------------------------------------
2001 2000 1999 1998
---- ---- ---- ----
(Dollars in thousands)
Available-for-sale securities, at fair value:
U.S. Government and agency securities $ 2,995 $ 4,222 $ 4,208 $ 3,504
Mortgage-backed securities 5,657 6,637 6,900 8,736
State and municipal securities 4,495 4,179 4,148 4,589
Other debt securities 250 0 - -
Other equities 250 230 222 -
-------- -------- -------- --------
$ 13,647 $ 15,268 $ 15,478 $ 16,829
======== ======== ======== ========
Held-to-maturity securities, at amortized cost:
U.S. Government and agency securities $ 750 $ 750 $ 750 $ 1,072
Mortgage-backed securities 1,742 2,091 2,171 2,814
State and municipal securities 1,793 1,787 1,786 1,780
-------- -------- -------- --------
$ 4,285 $ 4,628 $ 4,707 $ 5,666
======== ======== ======== ========
Source of Funds
Deposits
Deposit accounts are our primary source of funds for use in lending,
making other investments, and for other general business purposes. In addition
to deposits, we obtain 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.
The following tables show the average balances and rates, presented on
a monthly average basis, for our deposits for the periods indicated:
Three Months
Ended March 31, Year Ended December 31,
-------------------- ----------------------------------------------------------------------
2001 2000 1999 1998
---- ---- ---- ----
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ---- ------- ----
(Dollars in thousands)
Noninterest-bearing demand deposits $ 17,876 0.00% $ 17,850 0.00% $ 14,946 0.00% $ 13,500 0.00%
Interest-bearing demand deposits 18,731 2.11 19,206 2.31 18,479 2.42 17,027 2.93
Savings deposits 5,347 2.19 6,110 2.35 6,288 2.30 6,082 2.98
Certificates of deposit:
Less than $100,000 121,705 6.61 90,395 6.22 64,119 5.76 57,110 6.04
$100,000 or more 33,245 6.62 23,804 6.32 16,674 5.59 12,605 5.85
-------- -------- -------- --------
$196,904 $157,365 $120,506 $106,324
======== ======== ======== ========
29
The following table sets forth by time remaining until maturity our
certificates of deposit of $100,000 or more as of the periods indicated:
Maturity Period March 31, 2001 December 31, 2000
--------------- -------------- -----------------
(Dollars in thousands)
Three months or less $ 2,724 $ 1,591
Over three months through twelve months 13,251 11,868
Over twelve months 18,931 20,041
-------- -------
Total $ 34,906 $33,500
======== =======
Borrowings
Our borrowings consist of short-term and long-term advances from the
Federal Home Loan Bank of Atlanta, repurchase agreements, and federal funds
purchased from correspondent banks. The following table sets forth information
regarding our borrowings for the periods indicated:
Three Months
Ended
March 31, Year Ended December 31,
-------------------- --------------------------------------------
2001 2000 1999 1998
---- ---- ---- ----
(Dollars in thousands)
Ending Balance $3,240 $5,382 $ 4,156 $2,484
Average Balance for the Period 4,018 5,865 4,798 2,854
Maximum Month-end Balance During the Period 3,924 7,801 10,008 3,948
Average Interest Rate for the Period 5.17% 5.43% 6.57% 5.03%
Weighted Average Interest Rate at the End of the Period 4.95% 5.40% 4.36% 4.25%
Supervision and 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 in this prospectus, is not necessarily complete and is qualified in
its entirety by reference to these laws and regulations.
General
We are a bank holding company within the meaning of the Bank Holding
Company Act of 1956. As a bank holding company, we are supervised by the Board
of Governors of the Federal Reserve System. We are 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. We are also affected by rules and regulations of the
Federal Deposit Insurance Corporation. The various laws and regulations
administered by all of these 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 may
affect our earnings. The future impact of these policies and of continuing
regulatory changes in the financial services industry cannot be predicted. The
supervision, regulation and examination of the Bank are intended primarily for
the protection of depositors rather than our shareholders.
Bank Holding Company Regulation
We are required to file with the Federal Reserve periodic reports and
any additional information the Federal Reserve may require. The Federal Reserve
examines us periodically and may examine our subsidiaries. The State Corporation
Commission also may examine us.
30
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 to banking.
The activities permissible for 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.
We are a legal entity separate and distinct from the Bank. Section 23A
of the Federal Reserve Act restricts loans from the Bank to us. 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 the
Bank and us or our other subsidiaries be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the Bank as those prevailing at the time for transactions with
unaffiliated companies.
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, the
Bank 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 the Bank's operations,
including reserves, loans, mortgages, payments of dividends and the
establishment of branches.
Various statutes limit the ability the Bank to pay dividends, extend
credit or otherwise supply funds to us and our non-bank subsidiaries. Dividends
from the Bank are expected to constitute our major source of funds.
Limits on Dividends and Other Payments
Virginia law restricts distributions of dividends to our shareholders.
We may not make any distribution to our shareholders if, after giving effect to
the distribution, we would not be able to pay our debts as they become due in
the usual course of business or our total assets would be less than our 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
31
distributions charged against capital. As of March 31, 2001, the Bank had the
capacity to pay us no more than $1.5 million in total dividends..
The Bank 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
The Federal Reserve has promulgated capital adequacy regulations for
all bank holding companies with assets in excess of $150 million. The Federal
Reserve's capital adequacy regulations are based upon a risk based capital
determination, whereby a bank holding company's capital adequacy is determined
in light of the risk, both on and off balance sheet, contained in the company's
assets. Different categories of assets are assigned risk weightings and are
counted at a percentage of their book value.
The regulations divide capital between tier 1 capital (core capital)
and tier 2 capital. For a bank holding company, tier 1 capital consists
primarily of common stock, related surplus, noncumulative perpetual preferred
stock, minority interests in consolidated subsidiaries and a limited amount of
qualifying cumulative preferred securities. Goodwill and certain other
intangibles are excluded from tier 1 capital. Tier 2 capital consists of an
amount equal to the allowance for loan and lease losses up to a maximum of 1.25%
of risk weighted assets, limited other types of preferred stock not included in
tier 1 capital, hybrid capital instruments and term subordinated debt.
Investments in and loans to unconsolidated banking and finance subsidiaries that
constitute capital of those subsidiaries are excluded from capital. The sum of
tier 1 and tier 2 capital constitutes qualifying total capital. The tier 1
component must comprise at least 50% of qualifying total capital.
Every bank holding company has to achieve and maintain a minimum
tier 1 capital ratio of at least 4.0% and a minimum total capital ratio of at
least 8.0%. In addition, banks and bank holding companies are required to
maintain a minimum leverage ratio of tier 1 capital to average total
consolidated assets (leverage capital ratio) of at least 3.0% for the most
highly-rated, financially sound banks and bank holding companies and a minimum
leverage ratio of at least 4.0% for all other banks. The Federal Deposit
Insurance Corporation and the Federal Reserve define tier 1 capital for banks in
the same manner for both the leverage ratio and the risk-based capital ratio.
However, the Federal Reserve defines tier 1 capital for bank holding companies
in a slightly different manner.
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 level without
significant reliance on intangible assets. The guidelines also indicate that the
Federal Reserve will continue to consider a "tangible tier 1 leverage ratio" in
evaluating proposals for expansion or new activities. Tangible tier 1 leverage
ratio is the ratio of tier 1 capital, less intangibles not deducted from tier 1
capital, to quarterly average total assets.
The chart below sets forth our regulatory capital ratios at March 31,
2001 as well as various regulatory standards.
Minimum Ratios
---------------------------------------------------------------------
Commonwealth Adequately
Bankshares Well Capitalized Capitalized Undercapitalized
---------- ---------------- ----------- ----------------
Tier 1 Capital Ratio 7.45% 6% 4% 3%
Total Capital Ratio 8.59% 10% 8% 6%
Leverage Capital Ratio 6.07% 5% 4% 3%
32
Deposit Insurance
The deposits of the Bank 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.
Community Reinvestment Act
Commonwealth Bankshares and the Bank are subject to the provisions of
the Community Reinvestment Act of 1977. 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, this 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 this record may be the basis for denying the application. Following
its Community Reinvestment Act examination in November 1999, the Bank 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. As a
result, our earnings and growth are 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 their
policies and their effect on us cannot be predicted.
Federal Home Loan Bank System
We are a member of the Federal Home Loan Bank System, which consists
of 12 district Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board. The Federal Home Loan Banks provide a central
credit facility for member institutions. As a member of the Federal Home Loan
Bank of Atlanta, we are 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 our unpaid residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, or 5% of our
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 March 31, 2001, we had no outstanding borrowings from the Federal Home Loan
Bank of Atlanta.
Federal Reserve System
The Federal Reserve Board 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
33
a noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce our earning assets.
Competition
We experience 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 March 31, 2001, we employed 89 full-time equivalent persons.
Management considers its relations with its employees to be good. None of our
employees is covered by a collective bargaining agreement.
Properties
We conduct our banking business from the Bank's main office in
Norfolk, Virginia and from eight additional branch offices and six remote ATM
locations. The following table sets forth certain information with respect to
our offices:
Office Location Owned or Leased Lease Expiration Date Date Facility Opened
Home Office:
- -----------
403 Boush Street Owned/(1)/ 11/08 2/86/(2)/
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/(3)/
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
4940 W. Norfolk Road Owned N/A 4/01
Portsmouth, VA
_____________________
(1) This facility is 54.4% owned by Commonwealth Bankshares, subject to a
leasehold interest and purchase option as further described in the section
of this prospectus titled "Certain Relationships and Related Transactions -
Business Relationships and Transactions with Management."
(2) The main office originally opened at a different location in Norfolk in
April 1971.
(3) This branch originally opened at a different location in Virginia Beach in
July 1983.
34
Legal Proceedings
We are not a party to, nor is any of our property the subject of, any
material pending legal proceedings incidental to our business other than those
arising in the ordinary course of business. Although the amount of any ultimate
liability with respect to these ordinary course litigation matters cannot be
determined, in the opinion of management any such liability will not have a
material adverse effect on our consolidated financial position or results of
operations.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Net Income. Net income for the three months ended March 31, 2001 was
$140 thousand, a decrease of $153 thousand from net income of $293 thousand for
the three month period ended March 31, 2000. Diluted earnings per share were
$0.07 for the three months ended March 31, 2001, or a decrease of $0.09 from
diluted earnings per share of $0.16 in the three months ended March 31, 2000.
The decline in net income was attributable in part to the opening of two new
branch locations and five new ATM machines in the second half of 2000. These
branches and ATMs adversely affected our net income in the first quarter of 2001
because we are incurring fixed operating costs and expenses at the locations but
the locations do not yet generate income earning assets or service fees at the
same levels as our established branches and ATM locations. We also incurred
construction costs during the three months ended March 31, 2001 for our new
Portsmouth branch that opened in April. In addition, since March 31, 2000, the
Federal Reserve has decreased interest rates seven times, which has adversely
affected our net interest margin. The average number of diluted shares
outstanding increased from 1,815,198 in the three months ended March 31, 2000 to
1,872,131 for the three months ended March 31, 2001.
Balance Sheet. Total assets were $221.9 million at March 31, 2001, an
increase of $49.7 million from $172.2 million at March 31, 2000. The increase in
total assets was attributable mainly to an increase of $33.9 million in loans,
net of deferred fees, to $167.7 million at March 31, 2001 from $133.8 million at
March 31, 2000 and an increase of $16.5 million in cash and overnight deposits
to $29.1 million at March 31, 2001 from $12.6 million at March 31, 2000. Total
investment securities declined $1.8 million to $18.7 million. Total deposits
increased $48.8 million to $202.3 million at March 31, 2001, from $153.5 million
at March 31, 2000.
Loans. Loans, net of deferred fees, were $167.7 million at March 31,
2001, an increase of $33.9 million, or 25.3%, from $133.8 million at March 31,
2000. During the twelve months ended March 31, 2001, we continued to emphasize
commercial mortgage lending and lending to small and medium sized businesses,
including loans through various lending programs of the SBA. Commercial loans
were $121.0 million, an increase of $23.1 million, or 23.6% from $97.9 million.
Residential mortgage loans were $33.9 million at March 31, 2001, an increase of
$6.9 million, or 25.6%, from $27.0 million at March 31, 2000 and installment
loans to individuals were $10.8 million at March 31, 2001, an increase of $4.2
million, or 63.6%, from $6.6 million at March 31, 2000.
Investment Securities. Investment securities declined over the last
twelve months and were $18.7 million at March 31, 2001, a reduction of $1.7
million, or 8.3%, from $20.4 million at March 31, 2000. The portfolio of
investment securities at March 31, 2001 consisted of $4.3 million in securities
classified as held-to-maturity and $13.6 million classified as
available-for-sale. The portfolio of securities held-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 March 31, 2001 were $202.3 million, an
increase of $48.8 million, or 31.8%, over deposits of $153.5 million at March
31, 2000. The weighted average interest rate for all accounts increased to 5.94%
at March 31, 2001 from 5.29% at March 31, 2000.
There were no advances from the Federal Home Loan Bank of Atlanta at
the periods ending March 31, 2001 and March 31, 2000.
36
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 our 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 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
Three Months Ended
March 31, Year Ended December 31,
---------------------- -------------------------------------------------------------------
2001 2000 1999 1998
---- ---- ---- ----
Average Average Average Average Average Average Average Average
balance yield/rate balance yield/rate balance yield/rate balance yield/rate
------- ---------- ------- ---------- ------- ---------- ------- ----------
(Dollars in thousands)
Interest-earning assets
(taxable-equivalent basis(1)):
Loans receivable (net of
unearned discount(2)) $163,261 9.11% $141,769 9.27% $106,664 8.95% $ 84,917 9.25%
Investments 43,352 5.78 25,803 6.51 23,495 5.73 28,951 5.88
-------- -------- -------- --------
Total interest-earning assets 206,614 8.41 167,572 8.84 130,160 8.48 113,868 8.47
-------- -------- -------- --------
Interest-bearing liabilities
Deposits 179,029 5.94 139,515 5.59 105,560 4.99 92,823 5.29
Borrowings 4,497 5.25 6,370 6.62 5,329 4.49 3,411 4.49
-------- -------- -------- --------
Total interest-bearing liabilities 183,526 5.92 145,885 5.64 110,889 4.96 96,234 5.26
-------- -------- -------- --------
Average dollar difference
Between interest-earning assets
and interest-bearing liabilities $ 23,088 $ 21,687 $ 19,271 $ 17,634
======== ======== ======== ========
Interest rate spread 2.49 3.20 3.52 3.21
Interest margin 3.00 3.69 4.25 4.04
______________
(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.
37
The following table presents information regarding changes in interest
income and interest expense for the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, 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.
Rate/Volume Analysis
Three Months Ended March 31, 2001 Year Ended December 31, 2000 Year Ended December 31, 1999
compared to compared to compared to
Three Months Ended March 31, 2000 Year Ended December 31, 1999 Year Ended December 31, 1998
---------------------------------- ----------------------------- ----------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- ----- ------ ---- -----
(Dollars in thousands)
Interest Income
Investment securities $ (44) $ (72) $ (116) $ (134) $ 40 $ (94) $ (23) $ (53) $ (76)
Federal funds sold 201 792 993 252 31 283 (249) (30) (279)
Loans 3,027 60 3,087 3,224 320 3,544 1,930 (255) 1,675
------ ----- ------ ------ ---- ------ ------ ----- ------
Total interest income 3,184 780 3,964 3,342 391 3,733 1,658 (338) 1,320
------ ----- ------ ------ ---- ------ ------ ----- ------
Interest Expense
Savings and time
Deposits 2,826 922 3,748 1,842 695 2,537 607 (251) 356
Short term debt 82 (26) 56 52 58 110 85 3 88
Long term debt (2) (2) (4) (1) 3 2 (1) (1) (2)
------ ----- ------ ------ ---- ------ ------ ----- ------
Total interest expense 2,906 894 3,800 1,893 756 2,649 691 (249) 442
------ ----- ------ ------ ---- ------ ------ ----- ------
Increase (Decrease) in
Net interest income $ 278 $(114) $ 164 $1,449 $(365) $1,084 $ 967 $ (89) $ 878
------ ----- ------ ------ ----- ------ ------ ----- ------
Comparison of the Three Month Period ended March 31, 2001 with the Three Month
Period ended March 31, 2000
Our net income for the three months ended March 31, 2001 was $140
thousand, a decrease of $153 thousand from net income of $293 thousand for the
three months ended March 31, 2000. The decrease in net income was attributable
in part to the opening of two new branch locations and five new ATM machines in
the second half of 2000. These branches and ATMs adversely affected our net
income in the first quarter of 2001 because we are incurring fixed operating
costs and expenses at the locations but the locations do not yet generate income
earning assets or service fees at the same levels as our established branches
and ATM locations. We also incurred construction costs during the three months
ended March 31, 2001 for our new Portsmouth branch that opened in April. In
addition, since March 31, 2000, the Federal Reserve has decreased interest rates
seven times, which has adversely affected our net interest margin. Diluted
earnings per share for the three months ended March 31, 2001 were $0.07, a
decrease of $0.09, or 56.3%, from $0.16 per share for the three months ended
March 31, 2000. The weighted average number of diluted shares of common stock
outstanding was 1,872,131 for the three months of 2001 ended March 31 and
1,815,198 for the comparable three months of 2000.
Net Interest Income. Net interest income before provisions for loan
losses was $1.6 million for the three months ended March 31, 2001, an increase
of $41 thousand, or 2.7%, over $1.5 million for the three months ended March 31,
2000. This increase was due to the growth in the average level of earning assets
from $155.0 million to $206.6 million, which more than offset a small decline in
the interest rate spread from 3.38% in the first three months of 2000 to 2.49%
in the first three months of 2001.
Total Interest Income. Total interest income was $4.3 million for the
three months ended March 31, 2001, an increase of $1.0 million over $3.3 million
for the three months of 2000 ended March 31. This increase resulted from growth
in interest earning assets. Average loans receivable, net of unearned discount,
increased by $33.3 million, or 25.6%, and average investment securities
decreased from $20.6 million in the first three months of 2000 to $19.9 million
in the first three months of 2001.
The yield on interest earning assets was 8.4% for the three months
ended March 31, 2001, which decreased from 8.7% for the three months ended March
31, 2000. For the three months ended March 31, 2001, the yield on average loans
receivable was 9.11%, up from 9.06% for the three months ended March 31, 2000,
while the yield on
38
average investment securities decreased from 6.71% during the first three months
of 2000 to 6.36% during the first three months of 2001.
Total Interest Expense. Total interest expense for the three months
ended March 31, 2001 was $2.7 million, an increase of $950 thousand over $1.8
million for the three months ended March 31, 2000. This increase was due
primarily to growth in the average balance of deposits, which were $196.9
million for the three months ended March 31, 2001 compared to $146.4 million for
the three months ended March 31, 2000. The average effective rate paid on
interest-bearing liabilities was 5.93% for the three months ended March 31,
2001, an increase of 65 basis points from 5.27% for the three months ended March
31, 2000.
Provision for Loan Losses. The provision for loan losses amounted to
$91 thousand for the three months ended March 31, 2001, an increase of $46
thousand over the provision of $45 thousand for the three months ended March 31,
2000. 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, the Bank agreed to
take a one time additional loan loss allowance of $1 million in the fourth
quarter of 2000. The allowance for loan losses at March 31, 2001 was $2.0
million, or 1.2% of total loans receivable, compared to $1.0 million, or 0.7% of
loans receivable, at March 31, 2000.
Other Income. Other income totaled $355 thousand for the three months
ended March 31, 2001, an increase of 33.0%, from $267 thousand for the three
months ended March 31, 2000.
Other Expenses. Other expenses for the three months ended March 31,
2001 were $1.7 million, an increase of 21.4% from $1.4 million for the three
months ended March 31, 2000. Other expenses for the three months ended March 31,
2001 included the cost of staffing a new branch and opening five new 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 $159 thousand to $435
thousand for the three months ended March 31, 2001 compared to the first three
months of 2000, while salaries and employee benefits increased $146 thousand
over the same respective periods. The increases in expenses are primarily
attributable to the opening of the two new branches and five ATM machines during
the second half of 2000.
Comparison of the Year Ended December 31, 2000 with the Year Ended December 31,
1999
We recorded net income for the year ended December 31, 2000 of $302
thousand, a decrease of 73.9% compared to net income of $1.2 million for the
year ended December 31, 1999. The decline in our net income occurred for several
reasons related to our growth, including in particular a one time $1.0 million
special provision for loan losses that we recorded in the fourth quarter of 2000
after discussions with banking regulators. This special provision for loan
losses reflects the rapid growth of our loan portfolio in 1999 and 2000.
Outstanding loans grew $33.7 million in 1999, a 36.6% increase over the prior
year, and grew an additional $33.0 million in 2000, a 26.3% increase over 1999.
Expenses that we incurred to grow our branch network also negatively
impacted our net income in 2000. During 2000, we established a new branch in
Chesapeake, Virginia, established a new branch at Old Dominion University in
Norfolk, Virginia through a partnership with a large United States bank,
incurred some expenses for the Portsmouth, Virginia branch that we recently
opened and also expanded our ATM network from 6 to 11.
Diluted earnings per share for the year ended December 31, 2000 were
$0.16 per share compared to $0.64 per share for the year ended December 31,
1999. The weighted average number of diluted shares of common stock outstanding
was 1,856,698 for the year ended December 31, 2000 and 1,804,201 for the year
ended December 31, 1999.
39
Net Interest Income. Net interest income before provision for loan
losses was $6.4 million for the year ended December 31, 2000, an increase of
18.5% over $5.4 million for the year ended December 31, 1999. In 2000, our net
interest margin was 4.0% compared to a net interest margin of 4.25% in 1999.
This decrease of 25 basis points in our net interest margin occurred because the
cost of our funding sources increased more rapidly during 2000 than the rate of
return on our loans and securities portfolio.
Total Interest Income. Our total interest income was $14.6 million for
the year ended December 31, 2000, an increase of 33.9% over $10.9 million for
the year ended December 31, 1999. This increase primarily resulted from growth
in gross loans from $126 million at December 31, 1999 to $158 million at
December 31, 2000.
Total Interest Expense. Our total interest expense for the year ended
December 31, 2000 was $8.2 million, an increase of 49.1% over $5.5 million for
the year ended December 31, 1999. This significant increase occurred primarily
because our total deposits grew from $138.4 million at December 31, 1999 to
$184.6 million at December 31, 2000, an increase of 33.4%. In addition, the
average effective rate paid on our interest bearing liabilities was 5.64% for
the year ended December 31, 2000, an increase of 68 basis points from 4.96% for
the year ended December 31, 1999.
Provision for Loan Losses. As discussed above, we took a one time $1.0
million special provision for loan losses in 2000. Our provision for loan losses
in 1999 was $110 thousand. The allowance for loan losses at December 31, 2000
was $1.9 million, or 1.2% of year end gross loans, compared to $931 thousand, or
0.7% of year end gross loans, at December 31, 1999.
Other Income. Other income totaled $1.2 million for the year ended
December 31, 2000, a decrease of 2.3% from the year ended December 31, 1999. The
decrease occurred as result of a decline in service charges on deposit accounts
from $842 thousand in 1999 to $710 thousand in 2000.
Other Expenses. Other expenses for the year ended December 31, 2000
were $6.2 million, an increase of 26.5% from $4.9 million for the year ended
December 31, 1999. This increase is largely attributable to the overall growth
of Bank of the Commonwealth. Salaries and employee benefit expenses totaled $3.0
million for the year ended December 31, 2000 compared to $2.3 million for the
year ended December 31, 1999, an increase of 30.4%. Net occupancy expense
increased $148 thousand in 2000, primarily due to the growth in our branch
network. Other operating expenses increased to $1.8 million for the year ended
December 31, 2000 compared to $1.5 million for the year ended December 31, 1999,
an increase of 20.0%.
Comparison of the Year Ended December 31, 1999 with the Year Ended December 31,
1998
We recorded net income for the year ended December 31, 1999 of $1.2
million, an increase of 9.1% over net income of $1.1 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 included a 14.7% increase in interest
on loans and investments and loan fees; an increase of 8.7% in interest on
deposits and short-term borrowings; and an increase of 20.0% in net interest
income from 1998 levels. Diluted earnings per share for the year ended December
31, 1999 were $0.64 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 $5.4 million for the year ended December 31, 1999, an increase of
20.0% over $4.5 million for the year ended December 31, 1998. In 1999 the net
interest margin of 4.25% represented an increase of 21 basis points over the net
interest margin of 4.04% recorded in 1998. This increase in net interest margin
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.
Total Interest Income. Total interest income was $10.9 million for the
year ended December 31, 1999, an increase of 14.7% over $9.5 million for the
year ended December 31, 1998. This increase primarily resulted from growth in
gross loans from $92 million at December 31, 1998 to $126 million at December
31, 1999 and an increased rate of return on the loan portfolio.
40
Total Interest Expense. Total interest expense for the year ended
December 31, 1999 was $5.5 million, an increase of 7.8% over $5.1 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
$110 thousand for the year ended December 31, 1999, an increase over the
provision of $102 thousand for the year ended December 31, 1998. The allowance
for loan losses at December 31, 1999 was $931 thousand, or 0.7% of year-end
gross loans compared to $969 thousand, or 1.1% of year-end gross loans at
December 31, 1998.
Other Income. Other income totaled $1.2 million for the year ended
December 31, 1999, an increase of 21.9% from 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 $4.9 million, an increase of 22.5% from $4.0 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 $2.3
million for the year ended December 31, 1999 compared to $1.9 million for the
year ended December 31, 1998, an increase of 21.1%. Net occupancy expense
increased $29 thousand in 1999, primarily due to necessary modifications and
improvements to Bank of the Commonwealth's physical facilities. Other operating
expenses increased to $1.5 million for the year ended December 31, 1999 from
$1.1 million for the prior year, an increase of $355 thousand or 31.2%.
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, the Bank'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. The Bank, 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 the Bank'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 the Bank. 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 March 31, 2001.
41
Sensitivity of Market Value of Portfolio Equity
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
------------ ------ ---- ---- ------ ----------
(Dollars in thousands)
Up 200 $10,763 ($2,674) (19.90%) 4.75% 83.99%
Base 13,437 0 0 5.93 104.85
Down 200 15,466 2,029 15.10 6.82 120.69
The Bank'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
Change in Adjusted Net
Interest Rates Interest Income Net Interest Margin
------------------------------------ ---------------------------------------
In Basis Points % Change % Change
(Rate Shock) Amount From Base Percent From Base
------------ ------ --------- ------- ---------
(Dollars in thousands)
Up 200 $7,477 9.31% 3.45% 15.00%
Base 6,840 0 3.00 0
Down 200 6,090 (10.96) 2.81 (6.33)
Certain shortcomings are inherent in the methodology used in the
interest rate risk measurements above. 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
tables above 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 net worth and net interest income.
Liquidity and Capital Resources
The Bank'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 March 31, 2001, we had $19.7 million of undisbursed loan funds and
$6.3 million of approved loan commitments. The amount of certificate of deposit
accounts maturing in the second quarter of 2001 is $8.3 million. We anticipate
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 March 31, 2001, and available lines of credit with Bank
of America, SunTrust and the Federal Home Loan Bank, which totaled approximately
$17.8 million at March 31, 2001.
42
Impact of Inflation and Changing Prices
The financial statements and related notes presented in this prospectus
have been prepared in accordance with generally accepted accounting principles.
These require the measurement of financial position and operating results 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 our liabilities 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.
43
MANAGEMENT
Directors and Executive Officers
The following contains information concerning our directors and
executive officers as of July 1, 2001, each of whom is expected to continue to
serve in the following capacities for us and Bank of the Commonwealth after this
offering.
Name Age Position
---- --- --------
George H. Burton, Jr. 90 Director
Morton Goldmeier 77 Director
William P. Kellam 86 Director
Thomas W. Moss, Jr. 73 Director
William D. Payne 65 Director
Herbert Perlin 61 Director
Richard J. Tavss 61 Director
Edward J. Woodard, Jr. 58 Director; Chairman of the Board,
President and Chief Executive
Officer
Kenneth J. Young 50 Director
John H. Gayle 61 Executive Vice President and
Secretary
Simon Hounslow 35 Senior Vice President and
Commercial Loan Officer
George H. Burton, Jr. 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.
Morton Goldmeier 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.
William P. Kellam 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.
Thomas W. Moss, Jr. 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.
William D. Payne, M.D. has practiced as a general, laproscopic and
endoscopic surgeon for, and served as President of, Drs. Payne, Ives, and
Holland, Inc. since 1974. Dr. Payne has served as a director of Commonwealth
Bankshares since 1988 and as a director of Bank of the Commonwealth since 1988.
Herbert Perlin 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.
Richard J. Tavss has served as Senior Counsel of the law firm of Tavss,
Fletcher, Maiden & King, P.C. in Norfolk, Virginia, 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.
Edward J. Woodard, Jr., CLBB 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. Mr.
44
Woodard is also a Director and President of BOC Title of Hampton Roads, Inc. and
Director and President of BOC Insurance Agency of Hampton Roads, Inc., each of
which are wholly owned subsidiaries of Commonwealth Bankshares.
Kenneth J. Young 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.
John H. Gayle has served as Executive Vice President and Secretary of
Commonwealth Bankshares and Executive Vice President and Cashier of Bank of the
Commonwealth since 1990. He also serves as Director, Vice President, Secretary
and Treasurer of BOC Title of Hampton Roads, Inc. and as Director, Vice
President and Treasurer of BOC Insurance Agency of Hampton Roads, Inc.
Simon Hounslow has served as Senior Vice President and Commercial Loan
Officer of Bank of the Commonwealth since 1993.
Board Structure
Our board of directors is divided into three classes serving staggered
three year terms. The terms of Messrs. Burton, Moss, Perlin and Young expire in
2002, the terms of Messrs. Kellam and Woodard expire in 2003, and the terms of
Messrs. Goldmeier, Payne and Tavss expire in 2004.
Director Compensation
Each of our directors is paid $900 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, we have 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.
Executive Officer Compensation
The following table presents information concerning the compensation of
Mr. Woodard. None of our other executive officers earned combined salary and
bonus in excess of $100,000 in 2000. This table presents compensation for
services rendered by Mr. Woodard in all capacities to Commonwealth Bankshares
and Bank of the Commonwealth during 2000, 1999 and 1998.
Summary Compensation Table
Long Term
Annual Compensation Compensation
---------------------------- ------------------
Securities
Name and Principal Underlying All Other Annual
Position Year Salary($) Bonus($) Options (#) Compensation($)(1)
- ------------------------------- -------- ------------- ----------- ------------------ ---------------------
Edward J. Woodard, Jr. 2000 $187,500 $ -- 5,000 $28,400
Chairman of the Board, 1999 182,500 18,500 2,500 23,600
President and Chief 1998 175,000 15,000 2,500 16,300
Executive Officer
_______________
(1) Includes directors' fees, 401(k) matching contribution and deferred
compensation accrual.
45
The following table sets forth information for the year ended December
31, 2000 regarding grants of stock options to Mr. Woodard.
Option Grants in Year Ended December 31, 2000
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Number of Percent of Total Appreciation for
Securities Options Granted to Option Term
Underlying Options Employees in Exercise Expiration -------------
Name Granted(#) Fiscal Year Price ($/sh) Date 5%($) 10%($)
---- -------------------- ----------- ------------ ------------ ----- ------
Edward J. Woodard, Jr. 5,000 37% $9.30 12/31/09 $75,744 $120,609
The table below sets forth information concerning stock option
exercises by Mr. Woodard during 2000 and the value of exercisable and
unexercisable options held by Mr. Woodard as of December 31, 2000.
Option Exercises and Fiscal Year-End Option Values
Shares Number of Securities Value of Unexercised
Acquired on Value Underlying Unexercised In-the-Money Options at
Exercise (#) Realized ($) Options at December 31, 2000 December 31, 2000(1)
-------------- ------------- ------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
Edward J. Woodard, Jr. 5,064 10,229/(2)/ 24,133 -- 12,624 --
_____________
(1) On December 31, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $6.00 per share. Under Securities and
Exchange Commission rules, an option was "in the money" on December 31,
2000 if the exercise price per share was less than $6.00.
(2) The exercise price of these options was $4.81 per share and the closing
price of our common stock on the Nasdaq National Market on February 17,
2000, the date of exercise, was $6.83.
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 the Bank. The agreement provides for
Mr. Woodard's employment until the earlier of December 31, 2001, his death or
his physical or mental disability; provided, however, the employment agreement
allows for the termination of employment by either the Bank or Mr. Woodard in
the event of a "change of control" of Commonwealth Bankshares or the Bank, or by
Mr. Woodard for "good reason." On an ongoing basis, 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 the Bank prior to a change of control, but not for
good cause, Mr. Woodard will be entitled to receive 12 equal monthly payments,
which, in total, equal his annual base salary at the time plus directors' fees.
In the event of a termination of the employment agreement by Mr. Woodard for
good reason, or by Commonwealth Bankshares or the Bank subsequent to a change of
control, but not for good cause, Mr. Woodard will be entitled to receive 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" is defined as:
. any third party acquiring, or entering into a definitive
agreement to acquire, more than 25% of the stock of either
Commonwealth Bankshares or the Bank;
. a change in the majority of the members of the board of directors
of either Commonwealth Bankshares or the Bank during any one year
period; or
46
. Commonwealth Bankshares ceasing to be the owner of all of the
Bank'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 duties
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 the Bank.
Mr. Woodard has also entered into an amended and restated deferred
supplemental compensation agreement with the Bank. Under the supplemental
agreement, Mr. Woodard or his beneficiary is entitled to a lump sum payment of
$250,000 if Mr. Woodard is employed by the Bank at the age of 65 and his
employment thereafter terminates for any reason, including death. 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. Under the supplemental
agreement, Mr. Woodard is obligated to make himself available to the Bank after
his retirement, so long as he receives payments under the supplemental
agreement, for occasional consultation which the Bank 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 the Bank
determines in good faith that Mr. Woodard is performing services of any kind for
a firm or other entity competitive with the business of the Bank during the
period that he is receiving payments under the supplement agreement.
Stock Option and Employee Benefit Plans
1990 Stock Option Plan. On February 20, 1990, our board of directors
approved a non-qualified stock option plan for the issuance of 25,000 shares of
our common stock to eligible officers and key employees of Commonwealth
Bankshares and the Bank at prices not less than the market value of our common
stock on the date of grant. On April 29, 1997, our 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.
401(k) Profit Sharing Plan. In 1993, the Bank adopted a thrift and
profit sharing plan qualified under Section 401(k) of the Internal Revenue Code
to replace the Bank's former profit sharing plan. Employees who have attained
the age of 20 years and six months and completed six months of service with the
Bank 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 may make a matching contribution, the amount of which, if
any, will be determined by the Bank each year. The Bank contributed a matching
contribution of $26,721 and a discretionary profit sharing contribution of
$23,279 to the 401(k) plan during 2000.
Non-Employee Director Stock Compensation Plan. On April 25, 1995, our
shareholders approved a non-employee director stock compensation plan. This plan
provided for the issuance of options to acquire 50,000 shares of our 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 the 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, our shareholders approved
the Commonwealth Bankshares, Inc. 1999 Stock Incentive Plan. This plan provides
for the issuance of up to the lesser of (i) 15% of our 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 our common stock that may be subject to award under this plan, 60%
are available for issuance to our non-employee directors, and 40% are available
for issuance to our employees. All the employees of Commonwealth Bankshares and
the Bank, and all other members of our board of directors, are eligible to
receive awards under this plan.
47
Certain Relationships and Related Transactions
Loans to Officers and Directors. Certain directors and officers of
Commonwealth Bankshares and the Bank, members of their immediate family, and
corporations, partnerships and other entities with which they are associated,
are customers of the Bank. Accordingly, some of these individuals have engaged
in transactions with the Bank in the ordinary course of business and will have
additional transactions with the Bank in the future. All loans, or commitments
to lend, extended by the Bank to any of these individuals are made in the
ordinary course of business upon substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with affiliated persons, and do not involve more than the normal
risk of collectibility or present other unfavorable features. As of December 31,
2000, the amount of loans from the Bank to all officers and directors of
Commonwealth Bankshares the Bank, or entities in which they are associated, was
approximately $3.8 million. This amount represented 29.7% of our stockholders'
equity as of December 31, 2000. The amount of such loans as of March 31, 2001
was approximately $3.8 million, which represented 29.2% of our stockholders'
equity at that date.
Business Relationships and Transactions with Management. In the
ordinary course of our business, we have engaged in certain transactions with
our officers and directors in which they 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,
the Bank has from time to time retained the Norfolk, Virginia law firm of Tavss,
Fletcher, Maiden and King, P.C., of which Richard J. Tavss, a director of
Commonwealth Bankshares and the Bank, is senior counsel, to perform certain
legal services for Commonwealth Bankshares and the Bank.
In 1984, the Bank entered into a lease with Boush Bank Building
Associates, a limited partnership, to rent the headquarters building of
Commonwealth Bankshares and the Bank. The general partner of the partnership is
Boush Bank Building Corporation. All of the limited partners of the partnership,
Messrs. Woodard, Burton and Kellam, are directors of Commonwealth Bankshares and
the Bank. The lease requires the Bank to pay all taxes, maintenance and
insurance. The term of the lease is twenty-three years and eleven months, and
began on December 19, 1984. In connection with this property, the lessor has
secured financing in the form of a $1.6 million 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 the
Bank is equal to interest on the above bond, plus any interest associated with
secondary financing provided the lessor by the Bank. The Bank has the right to
purchase, at its option, an undivided interest in the property at undepreciated
original cost, and is obligated to purchase in each January after December 31,
1986, an undivided interest in an amount equal to 90% of the legal amount
allowed by banking regulations for investments in fixed properties, unless the
Bank's return on average assets is less than seven-tenths of one percent. Under
this provision the has purchased 54.4% of this property for a total of $999,611.
No purchases have been made after 1988. We believe the terms of the lease are no
less favorable than could be obtained from a non-related party in an arms length
transaction.
Additionally, in 1998, the Bank entered into a lease with respect to
its branch at 1217 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
Commonwealth Bankshares and the Bank. Richard J. Tavss, also one of the
landlords under the lease, is also a member of the board of directors of
Commonwealth Bankshares and the Bank. Annual payments under the lease currently
are $95,136. Our board of directors reviewed two independent appraisals with
respect to this property before 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.
48
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of June 15, 2001,
relating to the beneficial ownership of our common stock by each of our
directors, any other person known by us to own 5% or more of our common stock,
and all of our directors and executive officers as a group. Except as otherwise
set forth below, we are not aware of any person or group of affiliated persons
who owns more than 5% of our common stock. The addresses of each of the persons
in this table is c/o Commonwealth Bankshares, Inc., 403 Boush Street, Norfolk,
Virginia 23510. Beneficial ownership as reported in the table below has been
determined in accordance with Rule 13d-3 of the Securities and Exchange
Commission under the Securities Exchange Act of 1934 and includes shares which
an individual has the right to acquire within 60 days through the exercise of
stock options.
Name Number of Shares Percent of Class
---- ---------------- ----------------
George H. Burton, Jr. 67,391(1) 3.96%
Morton Goldmeier 75,997(2) 4.45
William P. Kellam 35,319(3) 2.07
Thomas W. Moss, Jr. 2,484(4) *
William D. Payne, M.D. 22,698(5) 1.33
Herbert Perlin 44,820(6) 2.39
Richard J. Tavss 122,301(7) 7.16
Edward J. Woodard, Jr. 43,242(8) 2.52
Kenneth J. Young 2,518(9) *
All Directors and Executive
Officers (11 persons) 452,452 24.48%
John Hancock Mutual Life
Insurance Company (10) 92,187(11) 5.45%
______________
*Percentage of ownership is less than one percent of the outstanding shares of
Commonwealth Bankshares common stock.
(1) Includes (i) 13,177 shares which Mr. Burton has the right to acquire
through the exercise of stock options and (ii) 8,440 shares registered
in the name of the Clarice B. Burton revocable trust.
(2) Includes (i) 18,000 shares which Mr. Goldmeier has the right to acquire
through the exercise of stock options and (ii) 13,715 shares owned by
Mr. Goldmeier's wife, for which Mr. Goldmeier disclaims beneficial
ownership.
(3) Includes (i) 18,000 shares which Mr. Kellam has the right to acquire
through the exercise of stock options and (ii) 16,563 shares owned by
Mr. Kellam's wife, for which Mr. Kellam disclaims beneficial ownership.
(4) Includes 2,000 shares which Mr. Moss has the right to acquire through
the exercise of stock options.
(5) Includes (i) 18,000 shares which Dr. Payne has the right to acquire
through the exercise of stock options, (ii) 621 shares registered in
the name of Dr. Payne's wife, for which Dr. Payne disclaims beneficial
ownership, and (iii) 3,233 shares registered in the name of Payne
Pension and Profit Sharing Plan FBO William D. Payne of which Dr. Payne
is acting trustee.
(6) Includes (i) 18,000 shares which Mr. Perlin has the right to acquire
through the exercise of stock options, (ii) 18,531 shares registered in
the name of Herbert L. Perlin, Profit Sharing Trust, of which Mr.
Perlin is Acting trustee, (iii) 4,000 shares owned jointly by Mr.
Perlin and his wife and (iv) 3,674 shares registered in the name of the
Perlin Revocable Living Trust.
(7) Includes (i) 18,000 shares which Mr. Tavss has the right to acquire
through the exercise of stock options, (ii) 1,244 shares registered in
the name of Richard J. Tavss, Custodian for Bobbie J. Tavss, (iii) 281
shares registered in the name of Richard J. Tavss, Custodian for Sander
T. Schoolar (iv) 277 shares registered in the name of Richard J. Tavss,
Custodian for Zachary Maiden and (v) 228 shares registered in the name
of Richard J. Tavss, Custodian for Taylor Tavss Schoolar V.
(8) Includes (i) 24,133 shares which Mr. Woodard has the right to acquire
through the exercise of stock options, (ii) 635 shares registered in
the name of E. J. Woodard, Jr., Custodian for Troy Brandon Woodard,
(iii) 1,509 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) 8,743 shares owned jointly by Mr. Woodard and his wife.
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(9) Includes 2,000 shares which Mr. Young has the right to acquire through
the exercise of stock options.
(10) The address of this beneficial owner is P.O. Box 111, Boston,
Massachusetts 02117.
(11) Share information is based on a Schedule 13G filed February 5, 2001 by
the beneficial owner with the Securities and Exchange Commission.
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 the 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 $8.0 million
aggregate liquidation amount at any one time outstanding. The liquidation amount
for each convertible preferred security is $5.00. The convertible preferred
securities will rank equally with the common securities except as described
under "Subordination of Common Securities" on page 57. Legal title to the junior
subordinated debt securities will be held by the property trustee on behalf of
the 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 the Trust when the Trust
does not have funds on hand available to make those payments.
Distributions
The convertible preferred securities represent ownership interests in
the Trust. Distributions on each capital security will be payable at 8% per
annum of the stated liquidation amount of $5.00. 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 October 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 the
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
October 15, 2031. If we defer interest payments on the junior subordinated debt
securities, quarterly distributions on the convertible preferred securities by
the 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 8% per annum thereof, compounded
quarterly from the relevant payment date for such distributions during any
interest deferral period.
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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 in our own common stock or make distributions in our own
common stock;
. declare a dividend in connection with a shareholders' 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;
. 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 October 15, 2031. When any
interest deferral period ends and we pay all amounts then accrued and unpaid on
the junior subordinated debt securities, together with interest at 8% 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 five 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 five
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. We will also issue a press release if we
elect to begin an interest deferral period. 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 the 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.
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Conversion Rights
General. Holders of convertible preferred securities may convert their
convertible preferred securities into our common stock 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 our common stock that
equals the number obtained by dividing (i) $5.00 by (ii) $8.00, the conversion
price. This conversion price is subject to adjustment as further described
below. The 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 the Trust on
converted convertible preferred securities with respect to any distribution date
subsequent to the date of conversion and neither we nor the Trust 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
convertible preferred securities or the Trust issues a press release and mails a
written notice to all registered holders of the convertible preferred securities
and to Anderson & Strudwick 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. We 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 our common
stock on the date such convertible preferred securities are surrendered for
conversion.
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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 reclassifications 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 us
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.
"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 15 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 our common stock pursuant to any present or future plan providing for
the reinvestment of dividends or interest payable on our securities 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 in the conversion
53
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 we become a party to any transaction, including without
limitation, and with certain exceptions:
. a recapitalization or reclassification of the common stock;
. our consolidation with, or our merger into, any other person, or any
merger of another person into us;
. any sale, transfer or lease of all or substantially all of our assets;
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
the 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 we were acquired
in a cash merger, each convertible preferred security would become convertible
solely into cash and would no longer be convertible into securities with a value
that would vary depending on our future prospects 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 our rights to redeem the
convertible preferred securities under the circumstances described in this
prospectus, we will also have the right to terminate your ability to convert
convertible preferred securities into our common stock under certain conditions.
Specifically, we may terminate your conversion rights at any time after October
15, 2006 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 must first cause the Trust to issue a press
release and mail a written notice to all registered holders of the convertible
preferred securities and to Anderson & Strudwick announcing the date on which we
will terminate your conversion rights. The press release and notice must also
state the conversion price that is then applicable and the closing price for
both the convertible preferred securities and our 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 the Trust issues the press release and mails the
written notice. In the event we exercise our conversion termination rights,
conversion rights will expire at the end of the business day on the date set
forth in the press release and notice 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
54
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 October 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 the 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:
. the 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
. the 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 the Trust of an opinion of
the Trust's counsel experienced in such matters that, as a result of a change in
law or regulation or a written change, 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 the 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 the Trust has occurred and is continuing and the 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 the Trust on the
outstanding convertible preferred securities and common securities of the Trust
will not be reduced as a result of any additional taxes, duties and other
governmental charges to which the 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
55
extent that the Trust has funds on hand available for the payment of the
redemption price. See also "Subordination of Common Securities" on page 57.
If the 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 and 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
the 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.
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 the 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. If we liquidate the Trust, the
junior subordinated debt securities will be convertible into our common stock on
the same terms, and subject to the same conditions, that the convertible
preferred securities are convertible into our common stock. Our right to
liquidate the Trust in this manner is subject to prior approval of the Federal
Reserve if then required under applicable capital guidelines or policies of the
Federal Reserve. If junior subordinated debt securities are distributed to you
as a result of our election to liquidate the Trust, we will use our best efforts
to list the junior subordinated debt securities on a national securities
exchange or comparable automated quotation system, subject to any then
applicable listing requirements or limitations. For a discussion of the income
tax consequences of liquidating the 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
77.
The Trust will automatically terminate and liquidate upon the first to
occur of:
. our bankruptcy, dissolution or liquidation;
56
. 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 the 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 the Trust; and
. the entry of an order for the dissolution of the Trust by a court
of competent jurisdiction.
If an early termination occurs, unless the common securities and
convertible preferred securities are redeemed, the Trust will be liquidated by
the trustees as expeditiously as the trustees determine to be possible. After
satisfaction of liabilities to creditors of the 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 the 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 the
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.
If we elect not to redeem the junior subordinated debt securities prior
to maturity and the 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
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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 68;
or
. default by the 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 the Trust in the payment of any redemption price of
any common security or convertible preferred security when it
becomes due and payable; or
. 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 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.
Designation of Anderson & Strudwick to act upon an Event of Default
By purchasing convertible preferred securities, you are agreeing to
permit Anderson & Strudwick to select and direct the proceedings to be taken by
the property trustee if there is a default under the trust documents. If a
default occurs, Anderson & Strudwick may select remedies different from those
that holders of convertible preferred securities would select. Upon an event of
default, remedies that Anderson & Strudwick may pursue on your behalf include
removing and replacing the property trustee and suing us directly to enforce
payments under the junior subordinated debt securities. Anderson & Strudwick
will continue to hold these powers unless it resigns in this capacity or unless
holders of 25% of the outstanding convertible preferred securities elect to take
these powers away from Anderson & Strudwick.
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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 Anderson & Strudwick, or if Anderson & Strudwick is not then
authorized to act upon an event of default, then 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 the 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 the
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
The 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.
The 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 the 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;
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. the successor entity must have a purpose identical and limited to
that of the Trust;
. before any transaction, we must receive an opinion from
independent counsel to the 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 the 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.
The 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 the 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
. modify, eliminate or add to any provisions necessary to ensure
that the 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 the 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 the 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.
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As long as any junior subordinated debt securities are held by the
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 the 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
the 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 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 the 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 the
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 the Trust;
. the fees and expenses of the trustees and the costs and expenses
of operating the 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
the Trust might become subject.
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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 the 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.
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
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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.
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 we, the Trust nor the trustees of the 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 the 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, the 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.
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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 the 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;
. the 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, the 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 the
Trust, disbursement of such payments to 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 the 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 the Trust, but upon payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange. The 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
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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 the
Trust so that the 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 the
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.
The 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
The 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 8%
per annum, payable quarterly in arrears on the 15th day of January, April, July
and October of each year, commencing October 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 the 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 8% 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 October 15, 2031.
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The junior subordinated debt securities will be unsecured and will rank
junior and be subordinate in right of payment to all senior debt. Because we are
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 the Bank and our principal source of cash is
receipt of dividends from the Bank. We are a legal entity separate and distinct
from the Bank. Federal law restricts loans from the Bank to us. Those
restrictions prevent us from borrowing from the Bank unless the loans are
secured by various types of collateral. In addition, dividend payments to us by
the Bank 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.
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 the Trust, the form, denomination, book-entry and transfer
procedures for the convertible preferred securities as described under
"Description of Convertible Preferred
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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.
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 October 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 8% 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 October 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 the
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 the 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 the Trust
will not be reduced.
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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.
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);
. 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;
. 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;
. our bankruptcy, insolvency or reorganization; or
. the voluntary or involuntary dissolution, winding-up or
termination of the 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 the Trust, the redemption of all of the common
securities and convertible preferred securities of the 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.
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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 us 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.
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, Anderson & Strudwick may sue us on your behalf, or if
Anderson & Strudwick is not then authorized to act upon an event of default, you
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.
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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.
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,
. securities contracts and foreign currency exchange
contracts,
. 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
. 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;
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. 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 March 31, 2001, we
had $479 thousand of senior debt outstanding. 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 agree to pay in full on a junior 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 the Trust may have or assert other than the defense
of payment. We guarantee the following payments, if not paid by or on behalf of
the Trust:
. any accrued and unpaid distributions required to be paid on the
common securities and convertible preferred securities, to the
extent that the 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
the Trust has funds on hand available for redemption payments;
and
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. upon a voluntary or involuntary dissolution, winding up or
liquidation of the 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 the Trust has funds available and the amount of assets of
the Trust remaining available for distribution to holders of the
common securities and convertible preferred securities upon
liquidation of the Trust after satisfaction of liabilities to
creditors of the Trust as required by applicable law.
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 the Trust to pay.
The guarantee will be an irrevocable guarantee on a junior subordinated
basis of the Trust's obligations under the common securities and convertible
preferred securities, although it will apply only to the extent that the 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 the 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 60. 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.
Anderson & Strudwick, or if Anderson & Strudwick is not then authorized to act
upon an event of default, 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 the Trust, the guarantee
trustee or any other person or entity.
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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 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 the 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 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 guarantee on a junior subordinated
basis 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 guarantee on a junior subordinated basis of the Trust's
obligations under the convertible preferred securities. If we do not make
payments on the junior subordinated debt securities, the Trust will not pay
distributions or other amounts due on the convertible preferred securities. The
guarantee does not cover payment of distributions when the 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;
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. 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;
. we will pay for all costs, expenses and liabilities of the Trust
except the 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 the 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, the 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
the Trust, and the 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 the Trust involving the liquidation of the junior subordinated
debt securities, after satisfaction of the liabilities of creditors of the
Trust, the holders of the common securities and convertible preferred securities
will be entitled to receive, out of assets held by the 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 the Trust (other than the 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 our articles of incorporation, we are 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 June 15, 2001, we had
1,690,176 issued and outstanding shares of common stock held by 750 shareholders
of record. All
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outstanding shares of common stock are fully paid and nonassessable. We have not
issued any shares of preferred stock.
Common Stock
Holders of our common stock are entitled to receive dividends when our
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 we are 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 our assets available for distribution, but
only after we have paid or provided for the payment of our debts and
liabilities, including the junior subordinated debt securities, and after
distributions or provisions for distributions are made to holders of any series
or class of stock having preference over common stock in our liquidation,
dissolution or winding up.
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 our
board of directors elects to issue. In addition, holders of common stock do not
have any conversion or redemption rights.
Preferred Stock
Our 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, our board of directors has not authorized the issuance of any
class or series of preferred stock. If our 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
Our 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 us or our 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.
Our articles of incorporation further provide that we will indemnify
our 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 our request 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, we 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 our 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.
Our articles of incorporation provide that we 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 we would have the power to
provide indemnification to such person.
To the extent that our officers and directors may be indemnified from
liabilities arising under the Securities Act of 1933 pursuant to the foregoing
provisions, we have been informed that in the opinion of the Securities and
75
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 (i)
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, (ii) whose functional currency is
not the United States dollar or (iii) 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, the Trust will not be classified as an
association taxable as a corporation for United States federal income tax
purposes. Moreover, the 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 our indebtedness 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 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
76
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 the 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 the Trust
were to occur because the 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 the Trust would be a taxable event to the 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 the Trust. A U.S. holder will
include interest in respect of the junior subordinated debt securities received
from the 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, 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,
77
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 the 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 us 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 our assets or earnings and profits 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 our current or accumulated earnings
and profits. 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.
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 the 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:
78
. the holder does not actually or constructively own 10% or more of
the total combined voting power of all our classes of stock
entitled to vote;
. the holder is not a controlled foreign corporation that is
related to us through stock ownership; and
. either the holder certifies to the 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 the 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 the 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
Employee benefit plans that are subject to the Employee Retirement
Income Security Act of 1974, or section 4975 of the Internal Revenue Code,
generally may purchase convertible preferred securities, subject to the
investing fiduciary's determination that the investment in convertible preferred
securities satisfies ERISA's fiduciary standards and other requirements
applicable to investments by the plan.
We and/or any of our affiliates may be considered a "party in interest"
(within the meaning of ERISA) or a "disqualified person" (within the meaning of
Section 4975 of the Internal Revenue Code) with respect to certain plans. These
plans generally include plans maintained or sponsored by, or contributed to by,
any such persons with respect to which we or any of our affiliates provide
services. The acquisition and ownership of convertible preferred securities by a
plan (or by an individual retirement arrangement or other plans described in
Section 4975(e)(1) of the Internal Revenue Code) with respect to which we or any
of our affiliates are considered a party in interest or a disqualified person
may constitute or result in a prohibited transaction under ERISA or Section 4975
of the Internal Revenue Code, unless the convertible preferred securities are
acquired pursuant to and in accordance with an applicable exemption. As a
result, plans with respect to which we or any of our affiliates or any of its
affiliates are a party in interest or a disqualified person should not acquire
convertible preferred securities unless the convertible preferred securities are
acquired pursuant to and in accordance with an applicable exemption. Any other
plans or other entities whose assets include plan assets subject to ERISA or
Section 4975 of the Internal Revenue Code proposing to acquire convertible
preferred securities should consult with their own counsel.
PLAN OF DISTRIBUTION
The convertible preferred securities are being sold on a "best efforts"
basis on behalf of Commonwealth Bankshares Capital Trust and Commonwealth
Bankshares by Anderson & Strudwick Incorporated, 707 East Main Street, 20th
Floor, Richmond, Virginia 23219, the selling agent.
79
Both Commonwealth Bankshares and the Trust have executed a selling
agency agreement with Anderson & Strudwick. While Anderson & Strudwick will use
its best efforts to sell the securities, it will be under no obligation to sell
any or all of the convertible preferred securities and will not be obligated to
purchase any of the convertible preferred securities.
The convertible preferred securities are being offered subject to prior
sale, withdrawal, cancellation or modification of the offer, including its
structure, terms and conditions, without notice. The convertible preferred
securities are being offered to the public at the public offering price set
forth on the cover page of this prospectus. Anderson & Strudwick may also offer
the convertible preferred securities to certain securities dealers at the public
offering price, less a concession not in excess of $0.125 per convertible
preferred security. Anderson & Strudwick may allow, and the selected dealers may
reallow, a concession not in excess of $0.125 per convertible preferred security
to certain brokers and dealers. Anderson & Strudwick reserves the right, in its
sole discretion, to reject in whole or in part any offer to purchase the
convertible preferred securities.
In view of the fact that the proceeds from the sale of the convertible
preferred securities will be used to purchase the junior subordinated debt
securities of Commonwealth Bankshares, the selling agency agreement provides
that Commonwealth Bankshares will pay as compensation to Anderson & Strudwick a
selling commission equal to 4.0% of the total liquidation amount of the
convertible preferred securities sold in this offering as a placement fee, or an
aggregate of $320,000 if all of the 1,600,000 convertible preferred securities
being offered are sold. We will also 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 $150,000.
The convertible preferred securities are new securities with no
established trading market. The convertible preferred securities have been
approved for quotation on the Nasdaq National Market under the symbol "CWBSP,"
and trading is expected to commence on delivery of the securities. We have been
advised by Anderson & Strudwick that it will make a market in the convertible
preferred securities. Anderson & Strudwick, however, is not obligated to make a
market in the convertible preferred securities and it can discontinue market
making at any time without notice. Neither we nor Anderson & Strudwick can
provide any assurance that an active and liquid market will develop or, if
developed, that the market will continue. The offering price and distribution
rate have been determined by negotiations among representatives of Commonwealth
Bankshares and Anderson & Strudwick, and the offering price of the convertible
preferred securities may not be indicative of the market price following the
offering.
Anderson & Strudwick has agreed in accordance with the provisions of
SEC Rule 15c2-4 to cause all funds received for sale of a convertible preferred
security to be promptly deposited in an escrow account maintained by Wilmington
Trust Company as escrow agent for the investors in the offering upon the receipt
of funds by Anderson & Strudwick by or before noon of the next business day
following the sale of the convertible preferred securities, i.e. the date of
closing.
Payment for the convertible preferred securities may be made (i) by
check, bank draft or money order made payable to "Wilmington Trust Company" or
"Anderson & Strudwick Incorporated" and delivered to Anderson & Strudwick no
less than four business days before the date of closing, or (ii) by
authorization of withdrawal from securities accounts maintained with Anderson &
Strudwick. If payment is made by authorization of withdrawal from securities
accounts, the funds authorized to be withdrawn from a securities account will
continue to accrue interest, if any interest is to accrue on such amounts, at
the contractual rates until closing or termination of the offering, but a hold
will be placed on such funds, thereby making them unavailable to the purchaser
until closing or termination of the offering. If a purchaser authorizes Anderson
& Strudwick to withdraw the amount of the purchase price from his securities
account, Anderson & Strudwick will do so as of the date of closing. Anderson &
Strudwick will inform prospective purchasers of the anticipated date of closing.
If we have not received an adequate number of subscriptions for the
convertible preferred securities (an amount to be determined at our discretion),
we will return to the subscribers all funds placed in the escrow account without
interest. Once an adequate number of subscriptions for the convertible preferred
securities have been attained, one or more closings will be held and the escrow
agent will release all funds to the Trust.
80
In the selling agency agreement, the obligations of Anderson &
Strudwick are subject to approval of certain legal matters by its counsel and to
various other conditions. The selling agency agreement also provides that we and
the Trust will indemnify Anderson & Strudwick against certain liabilities,
including liabilities under the Securities Act, or contribute to payments
Anderson & Strudwick may be required to make in respect of any such liabilities.
Because the National Association of Securities Dealers, Inc. may view
the convertible preferred securities as interests in a direct participation
program, the offer and sale of the securities is being made in compliance with
the provisions of Rule 2810 under the National Association of Securities Dealers
Conduct Rules.
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 the 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
Professional Corporation, Norfolk, Virginia. Kaufman & Canoles will rely on the
opinion of Richards, Layton & Finger as to matters of Delaware law. Certain
matters in this offering will be passed upon for Anderson & Strudwick
Incorporated by LeClair Ryan, A Professional Corporation, Richmond, Virginia.
EXPERTS
The consolidated financial statements of Commonwealth Bankshares as of
December 31, 2000 and 1999 and for each of the years in the three year period
ended December 31, 2000 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.
WHERE YOU CAN FIND MORE INFORMATION
We file 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, 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 with the
Commission. Because the rules and regulations of the Commission allow 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. 333-63314.
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 nor the Trust is making an offer of
the convertible preferred securities in any state where the offer is not
permitted. You should
81
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.
82
INDEX
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PAGE
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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-8
Notes to consolidated financial statements F-9
F-1
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, 2000 and
1999, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with generally accepted
accounting principles.
POTI, WALTON & ASSOCIATES, PC
Richmond, Virginia
January 12, 2001
F-2
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
------
March 31,
2001 December 31,
(Unaudited) 2000 1999
------------- ------------- -------------
Cash and cash equivalents:
Cash and due from banks $ 22,954,585 $ 14,458,458 $ 6,320,567
Federal funds sold 6,111,930 7,181,134 -
------------- ------------- -------------
Total cash and cash equivalents 29,066,515 21,639,592 6,320,567
Investment securities:
Available for sale 13,647,229 15,087,131 15,478,387
Held to maturity 4,285,121 4,345,966 4,706,761
Equity securities, restricted, at cost 733,051 726,751 548,078
Loans receivable:
Commercial 26,769,574 25,300,477 23,306,635
Commercial construction 4,968,202 3,659,197 1,711,924
Commercial mortgage 89,235,227 81,627,100 65,985,847
Residential mortgage 33,883,055 36,451,466 25,146,370
Installment loans to individuals 10,780,170 7,756,748 6,538,126
Other 2,614,621 3,682,353 2,816,716
------------- ------------- -------------
Gross loans 168,250,849 158,477,341 125,505,618
Unearned income (581,838) (535,058) (460,527)
Allowance for loan losses (2,014,044) (1,920,000) (931,000)
------------- ------------- -------------
Loans, net 165,654,967 156,022,283 124,114,091
Premises and equipment, net 4,872,290 4,537,213 2,822,142
Foreclosed real estate 413,608 130,609 601,101
Accrued interest receivable 1,370,371 1,346,527 1,044,211
Other assets 1,847,322 1,898,474 1,380,269
------------- ------------- -------------
$ 221,890,474 $ 205,734,546 $ 157,015,607
============= ============= =============
F-3
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31,
2001 December 31,
(Unaudited) 2000 1999
-------------- --------------- --------------
Liabilities:
Deposits:
Noninterest-bearing demand deposits $ 19,228,022 $ 17,339,931 $ 15,071,902
Interest-bearing:
Demand deposits 20,155,209 18,053,072 18,241,708
Savings deposits 5,475,282 5,173,633 4,658,485
Other time deposits 157,461,573 144,048,327 100,385,874
-------------- --------------- --------------
Total deposits 202,320,086 184,614,963 138,357,969
Short-term borrowings 3,239,533 5,382,245 4,156,193
Long-term debt 478,720 504,832 530,944
Accrued interest payable 1,029,859 906,164 550,917
Other liabilities 1,650,130 1,499,472 1,192,986
-------------- --------------- --------------
Total liabilities 208,718,328 192,907,676 144,789,009
Stockholders' equity:
Common stock, par value $2.50, 5,000,000
shares authorized; 1,690,176, 1,683,562, and
1,644,743 shares issued and outstanding in
2001, 2000, and 1999, respectively 4,225,439 4,208,906 4,111,858
Additional paid-in capital 5,426,589 5,400,499 5,274,788
Retained earnings 3,516,134 3,435,372 3,367,585
Accumulated other comprehensive income
(loss) 3,984 (217,907) (527,633)
-------------- --------------- --------------
Total stockholders' equity 13,172,146 12,826,870 12,226,598
-------------- --------------- --------------
$221,890,474 $205,734,546 $157,015,607
============== =============== ==============
The accompaning notes are an intregal part of these consolidated financial
statements.
F-4
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31, Year Ended December 31,
--------------------------- ---------------------------------------------
2001 2000
(Unaudited) (Unaudited) 2000 1999 1998
------------- ------------ ------------ ------------ -------------
Interest income:
Loans, including fees $ 3,706,252 $ 2,933,741 $ 13,056,166 $ 9,512,833 $ 7,837,677
Investment securities 280,390 309,688 1,201,907 1,296,281 1,379,586
Other interest income 309,660 61,739 334,029 51,463 329,628
------------ ------------ ------------ ------------ ------------
Total interest income 4,296,302 3,305,168 14,592,102 10,860,577 9,546,891
Interest expense:
Deposits 2,657,535 1,721,399 7,799,662 5,262,773 4,906,526
Other interest expense 59,034 45,592 351,077 238,804 153,547
------------ ------------ ------------ ------------ ------------
Total interest expense 2,716,569 1,766,991 8,150,739 5,501,577 5,060,073
------------ ------------ ------------ ------------ ------------
Net interest income 1,579,733 1,538,177 6,441,363 5,359,000 4,486,818
Provision for loan losses 90,694 45,000 1,154,582 109,823 101,738
------------ ------------ ------------ ------------ ------------
Net interest income after provision for loan
losses 1,489,039 1,493,177 5,286,781 5,249,177 4,385,080
Noninterest income (loss):
Service charges on deposit accounts 224,812 162,755 710,075 842,240 824,827
Other service charges and fees 109,454 67,416 507,715 386,706 369,776
Other 20,376 36,216 (35,948) (19,750) (7,933)
------------ ------------ ------------ ------------ ------------
Total noninterest income 354,642 266,387 1,181,842 1,209,196 1,186,670
Noninterest expenses:
Salaries and employee benefits 797,500 652,062 2,983,840 2,290,700 1,862,484
Net occupancy expense 180,418 124,014 612,199 464,458 435,770
Furniture and equipment expense 255,125 164,091 722,300 609,499 548,691
Other operating expense 436,318 415,685 1,845,128 1,491,902 1,137,214
------------ ------------ ------------ ------------ ------------
Total noninterest expenses 1,669,361 1,355,852 6,163,467 4,856,559 3,984,159
------------ ------------ ------------ ------------ ------------
Income before income taxes 174,320 403,712 305,156 1,601,814 1,587,591
Provision for income taxes 34,492 110,800 3,651 446,424 482,339
------------ ------------ ------------ ------------ ------------
Net income $ 139,828 $ 292,912 $ 301,505 $ 1,155,390 $ 1,105,252
============ ============ ============ ============ ============
Per share data:
Basic $ .08 $ .18 $ .18 $ .71 $ .68
============ ============ ============ ============ ============
Diluted $ .07 $ .16 $ .16 $ .64 $ .62
============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2000, 1999, and 1998
----------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
-------------- -------------- -------------- --------------- ---------------
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 gain 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
Comprehensive income:
Net income - - 301,505 - 301,505
Net change in unrealized loss on
securities available for sale - - - 309,726 309,726
---------------
Total comprehensive income 611,231
Issuance of common stock - 38,819 shares 97,048 125,711 - - 222,759
Cash dividend - $.14 per share - - (233,718) - (233,718)
-------------- -------------- -------------- --------------- ---------------
Balance, December 31, 2000 $4,208,906 $5,400,499 $3,435,372 $ (217,907) $12,826,870
============== ============== ============== =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2001 and 2000 (Unaudited)
---------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
------------- ------------- ------------- --------------- --------------
Balance, December 31, 1999 $4,111,858 $5,274,788 $3,367,585 $ (527,633) $12,226,598
Comprehensive income:
Net income for the three-month period
ended March 31, 2000 - - 292,912 - 292,912
Net change in unrealized loss on
securities available for sale - - - 30,618 30,618
--------------
Total comprehensive income 323,530
Issuance of common stock -
19,743 shares 48,683 56,105 - - 104,788
Cash dividend - $.035 per share - - (58,080) - (58,080)
------------- ------------- ------------- --------------- --------------
Balance, March 31, 2000 $4,160,541 $5,330,893 $3,602,417 $ (497,015) $12,596,836
============= ============= ============= =============== ==============
Balance, December 31, 2000 $4,208,906 $5,400,499 $3,435,372 $ (217,907) $12,826,870
Comprehensive income:
Net income for the three-month period
ended March 31, 2001 - - 139,828 - 139,828
Net change in unrealized loss on
securities available for sale - - - 221,891 221,891
--------------
Total comprehensive income 361,719
Issuance of common stock -
6,614 shares 16,533 26,090 - - 42,623
Cash dividend - $.035 per share - - (59,066) - (59,066)
------------- ------------- ------------- --------------- --------------
Balance, March 31, 2001 $4,225,439 $5,426,589 $3,516,134 $ 3,984 $13,172,146
============= ============= ============= =============== ==============
The accompanying notes are an integral part of these consolidated financial
statements
F-7
COMMONWEALTH BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31, Year Ended December 31,
----------------------------- -----------------------------------------------
2001 2000
(Unaudited) (Unaudited) 2000 1999 1998
---------------- -------------- --------------- --------------- ---------------
Operating activities:
Net income $ 139,828 $ 292,912 $ 301,505 $ 1,155,390 $ 1,105,252
Adjustments to reconcile net income to net cash
from operating activities:
Provision for loan losses 90,694 45,000 1,154,582 109,823 101,738
Depreciation and amortization 163,955 108,345 490,385 411,795 370,417
Other, net 21,924 2,000 (327,729) (15,477) 133,279
Net change in:
Accrued interest receivable (23,844) (157,759) (302,316) (187,753) (55,545)
Accrued interest payable 123,695 77,930 355,247 169,850 (22,772)
Other assets 87,502 159,947 34,069 362,897 (616,565)
---------------- -------------- --------------- --------------- ---------------
Net cash from operating activities 603,754 528,375 1,705,743 2,006,525 1,015,804
Investing activities:
Purchase of securities held to maturity - - - - (992,619)
Purchase of securities available for sale - - (288,746) (3,773,059)
(12,599,300)
Purchase of equity securities, restricted (6,300) - (178,673) (44,400) (352,000)
Net purchase of premises and equipment (499,032) (270,025) (2,211,660) (494,140) (782,043)
Net expenditures on foreclosed real estate (18,923) (33,069) (74,786) (30,448) (157,811)
Net change in loans (10,009,378) (8,689,707) (32,597,774) (33,692,449) (13,465,516)
Proceeds from:
Maturities of securities held to maturity 64,950 78,982 360,795 959,072 6,138,292
Sales and maturities of securities
available for sale 1,771,996 257,235 1,149,285 4,386,431 7,394,086
Sale of real estate acquired in
settlement of loans - - 8,866 434,194 670,000
---------------- -------------- --------------- --------------- ---------------
Net cash used in investing activities (8,696,687) (8,656,584) (33,832,693) (32,254,799) (14,146,911)
Financing activities:
Net change in:
Other time deposits 13,413,246 10,080,128 43,662,453 22,848,926 11,745,243
Demand, interest bearing demand and
savings deposits 4,291,877 5,108,133 2,594,541 (660,772) 3,664,522
Short-term borrowings (2,142,712) (748,364) 1,226,052 1,672,468 (276,343)
Other (42,555) (30,705) (37,071) (53,665) (28,815)
---------------- -------------- --------------- --------------- ---------------
Net cash from financing activities 15,519,856 14,409,192 47,445,975 23,806,957 15,104,607
---------------- -------------- --------------- --------------- ---------------
Net increase (decrease) in cash and cash
equivalents 7,426,923 6,280,983 15,319,025 (6,441,317) 1,973,500
Cash and cash equivalents, beginning of period 21,639,592 6,320,567 6,320,567 12,761,884 10,788,384
---------------- -------------- --------------- --------------- ---------------
Cash and cash equivalents, end of period $ 29,066,515 $12,601,550 $ 21,639,592 $ 6,320,567 $ 12,761,884
================ ============== =============== =============== ===============
Supplemental disclosure of cash paid during the
period for:
Interest $ 2,592,874 $ 1,689,061 $ 7,795,494 $ 5,331,577 $ 5,082,993
Income taxes - - 481,101 562,366 631,174
The accompanying notes are an integral part of these consolidated financial
statements
F-8
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(Includes Information Applicable to Unaudited Periods)
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,
Virginia Beach and Chesapeake, Virginia through its eight 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. Actual results could differ from those estimates. A material
estimate that is particularly susceptible to significant change in the
near term relates to the determination of the allowance for loan
losses.
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
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(Includes Information Applicable to Unaudited Periods)
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
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(Includes Information Applicable to Unaudited Periods)
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 - 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:
Three Months Ended
March 31, Year Ended December 31,
----------------------------- ---------------------------------
2001 2000
(Unaudited) (Unaudited) 2000 1999 1998
----------- ----------- --------- --------- ---------
Weighted average shares outstanding used
to compute basic earnings per share 1,684,494 1,651,102 1,667,329 1,631,684 1,626,107
Incremental shares issuable upon the
assumed exercise of stock options 187,637 164,096 189,369 172,517 162,879
--------- --------- --------- --------- ---------
Shares used to compute diluted earnings
per share 1,872,131 1,815,198 1,856,698 1,804,201 1,788,986
========= ========= ========= ========= =========
On April 27, 1999, the Board of Directors declared a 3 for 2 stock
split effected in the form of a 50 percent stock dividend. Accordingly,
outstanding shares of common stock were increased by 541,954 shares and
a transfer of $1,354,885, representing the par value of additional
shares issued, was made from retained earnings to common stock. The
Company's prior years per share data has been restated to reflect the
1999 stock dividend.
F-11
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(Includes Information Applicable to Unaudited Periods)
Note 1 Summary of Significant Accounting Policies (Continued)
Financial Instruments - In the ordinary course of business the Bank has
---------------------
entered into off-balance sheet financial instruments consisting of
commitments to extend credit, commitments under credit card
arrangements, commercial letters of credit, and standby letters of
credit. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or
received.
Fair Value of Financial Instruments - The carrying value of cash and
-----------------------------------
cash equivalents, accrued interest receivable, demand deposits, savings
deposits, and short-term borrowings approximates fair value. The fair
value of securities is based on quoted market prices. The remainder of
the recorded financial instruments were valued based on the present
value of estimated future cash flows, discounted at various rates in
effect for similar instruments at year end.
Fair values for off-balance sheet lending commitments approximate the
contract or notional value taking into account the remaining terms of
the agreements and the counterparties' credit standings.
Cash and Cash Equivalents - For purposes of the consolidated statements
-------------------------
of cash flows, cash and cash equivalents includes cash and due from
banks and federal funds sold.
Reclassifications - Certain prior year amounts have been reclassified
-----------------
to conform to the 2000 presentation. These reclassifications have no
effect on previously reported net income.
Note 2 Concentrations of Credit Risk
At December 31, 2000, the Bank's cash and due from banks included three
commercial bank deposit accounts aggregating $11,832,836 ($20,493,432
at March 31, 2001 [unaudited]) in excess of the Federal Deposit
Insurance Corporation limit of $100,000 per institution.
F-12
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(Includes Information Applicable to Unaudited Periods)
Note 3 Investment Securities
The carrying and market values of investment securities are as follows:
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
------------ ---------- ---------- ------------
March 31, 2001 (Unaudited)
Available for sale:
U.S. Government and agency securities $ 3,000,000 $ 3,945 $ (8,750) $ 2,995,195
Mortgage-backed securities 5,692,015 7,176 (41,973) 5,657,218
State and municipal securities 4,449,171 55,868 (10,223) 4,494,816
Other 500,000 - - 500,000
------------ -------- ---------- ------------
$ 13,641,186 $ 66,989 $ (60,946) $ 13,647,229
============ ======== ========== ============
Held to maturity:
U.S. Government and agency securities $ 750,000 $ - $ (51,562) $ 698,438
Mortgage-backed securities 1,741,814 10,665 (9,003) 1,743,476
State and municipal securities 1,793,307 33,303 - 1,826,610
------------ -------- ---------- ------------
$ 4,285,121 $ 43,968 $ (60,565) $ 4,268,524
============ ======== =========== ============
December 31, 2000
Available for sale:
U.S. Government and agency securities $ 4,500,000 $ - $ (74,557) $ 4,425,443
Mortgage-backed securities 5,969,200 1,712 (133,056) 5,837,856
State and municipal securities 4,448,092 483 (75,899) 4,372,676
Other equities 500,000 - (48,844) 451,156
------------ -------- ---------- ------------
$ 15,417,292 $ 2,195 $ (332,356) $ 15,087,131
============ ======== ========== ============
Held to maturity:
U.S. Government and agency securities $ 750,000 $ - $ (69,375) $ 680,625
Mortgage-backed securities 1,804,190 4,119 (19,357) 1,788,952
State and municipal securities 1,791,776 14,608 (2,022) 1,804,362
------------ -------- ---------- ------------
$ 4,345,966 $ 18,727 $ (90,754) $ 4,273,939
============ ======== ========== ============
F-13
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(Includes Information Applicable to Unaudited Periods)
Note 3 Investment Securities (Continued)
Carrying Unrealized Unrealized Market
Amount Gains Losses Value
---------------- ---------------- ------------- -------------
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 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
============ ============= =========== ===========
A maturity schedule of investment securities as of March 31, 2001
(unaudited) is as follows:
Available for Sale Held to Maturity
---------------------------- ---------------------------
Carrying Market Carrying Market
Amount Value Amount Value
-------------- ------------ ------------- -------------
Due:
In one year or less $ 250,000 $ 250,000 $ 650,582 $ 653,964
After one year through
five years 1,937,196 1,950,420 1,260,299 1,213,268
After five years through
ten years 1,500,611 1,519,690 632,423 657,816
After ten years 3,761,364 3,769,901 - -
------------ ------------ ------------ ------------
7,449,171 7,490,011 2,543,304 2,525,048
Mortgage-backed securities 5,692,015 5,657,218 1,741,817 1,743,476
Other 500,000 500,000 - -
------------ ------------ ------------ ------------
$ 13,641,186 $ 13,647,229 $ 4,285,121 $ 4,268,524
============ ============ ============ ============
F-14
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(Includes Information Applicable to Unaudited Periods)
Note 3 Investment Securities (Continued)
A maturity schedule of investment securities as of December 31, 2000
is as follows :
Available for Sale Held to Maturity
--------------------------- --------------------------
Carrying Market Carrying Market
Amount Value Amount Value
------------ ------------ ----------- -----------
Due:
In one year or less $ 250,000 $ 244,688 $ 190,044 $ 189,960
After one year through five years 1,187,895 1,176,438 1,721,098 1,649,910
After five years through ten years 3,751,245 3,711,476 630,634 645,116
After ten years 3,758,952 3,665,517 - -
------------ ------------ ----------- -----------
8,948,092 8,798,119 2,541,776 2,484,986
Mortgage-backed securities 5,969,200 5,837,856 1,804,190 1,788,953
Equity securities 500,000 451,156 - -
------------ ------------ ----------- -----------
$ 15,417,292 $ 15,087,131 $ 4,345,966 $ 4,273,939
============ ============ =========== ===========
Securities with a carrying value of $19,223,297 and $20,667,040 and
market value of $18,870,720 and $19,757,340 at December 31, 2000 and
1999, respectively, were pledged as collateral to secure public
deposits and for other purposes. All non-equity securities were pledged
at March 31, 2001.
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,
2000 1999
---------- ------------
Commercial real estate operators $23,800,000 $21,900,000
Hotel/motel 14,700,000 13,200,000
F-15
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(Includes Information Applicable to Unaudited Periods)
Note 4 Loans Receivable (Continued)
A summary of transactions in the allowance for loan losses follows:
March 31,
2001 December 31,
(Unaudited) 2000 1999 1998
-------------- ---------- ------------ ------------
Balance at beginning of period $1,920,000 $ 931,000 $969,000 $969,000
Provision charged to operating expense 90,694 1,154,582 109,823 101,738
Loan charge-offs - (171,935) (156,963) (105,218)
Loan recoveries 3,350 6,353 9,140 3,480
---------- ---------- -------- --------
Balance at end of period $2,014,044 $1,920,000 $931,000 $969,000
========== ========== ========= ========
Note 5 Premises and Equipment
Premises and equipment are summarized as follows:
March 31,
2001 December 31,
(Unaudited) 2000 1999
-------------- ----------- -----------
Land $ 263,802 $ 263,802 $ 263,802
Buildings and improvements 2,084,929 2,074,704 1,603,264
Leasehold improvements 478,100 478,100 370,853
Furniture and equipment 4,367,458 4,247,963 2,775,892
Construction in progress 723,489 353,360 220,301
----------- ----------- -----------
7,917,778 7,417,929 5,234,112
Less accumulated depreciation 3,045,488 2,880,716 2,411,970
----------- ----------- -----------
$ 4,872,290 $ 4,537,213 $ 2,822,142
=========== =========== ===========
F-16
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(Includes Information Applicable to Unaudited Periods)
Note 6 Deposits
The aggregate amount of time deposits with minimum denominations of
$100,000, was approximately $33,498,000 and $17,205,000 at December 31,
2000 and 1999, respectively.
At December 31, 2000, the scheduled maturities of certificates of deposit
included in other time deposits on the balance sheet are as follows:
2001 $ 57,075,124
2002 54,008,437
2003 3,197,824
2004 7,669,958
2005 11,642,225
Thereafter 16,978
------------
$133,610,546
============
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 2001, the Bank can
initiate dividend payments without said regulatory approvals of
approximately $1,315,000 plus an additional amount equal to the Bank's net
earnings for 2001 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 $7,801,453 and $5,412,468 during 2000 and 1999,
respectively. The average daily balance was $5,865,425 and $3,763,912
during 2000 and 1999, respectively. The securities underlying these
agreements were under the Bank's control.
F-17
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(Includes Information Applicable to Unaudited Periods)
Note 9 Income Taxes
The current and deferred components of income tax expense are as follows:
Three Months Ended
March 31, Year Ended December 31,
----------------------------- ------------------------------------
2001 2000
(Unaudited) (Unaudited) 2000 1999 1998
------------ ------------- ---------- ----------- ----------
Current $ 73,410 $157,437 $ 389,176 $540,657 $563,490
Deferred (38,918) (46,637) (385,525) (94,233) (81,151)
-------- -------- --------- -------- --------
Provision for income taxes $ 34,492 $110,800 $ 3,651 $446,424 $482,339
======== ======== ========= ======== ========
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:
Three Months Ended
March 31, Year Ended December 31,
----------------------------- ------------------------------------
2001 2000
(Unaudited) (Unaudited) 2000 1999 1998
------------ ------------- ---------- ----------- ----------
Income tax expense at statutory
rates $ 59,269 $ 137,262 $ 103,753 $ 544,617 $ 539,781
Increase (decrease) due to:
Tax exempt income (24,895) (23,731) (127,283) (98,220) (61,303)
Other 118 (2,731) 27,181 27 3,861
-------- --------- --------- --------- ---------
Provision for income taxes $ 34,492 $ 110,800 $ 3,651 $ 446,424 $ 482,339
======== ========= ========= ========= =========
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:
March 31,
2001 2000 December 31,
(Unaudited) (Unaudited) 2000 1999
------------- ------------- ------------ -------------
Deferred tax asset $1,275,009 $1,090,757 $1,336,446 $1,060,531
Deferred tax liability (229,657) (165,120) (215,704) (165,757)
---------- ---------- ---------- ----------
Net deferred tax asset $1,045,352 $ 925,637 $1,120,742 $ 894,774
========== ========== ========== ==========
F-18
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(Includes Information Applicable to Unaudited Periods)
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:
March 31,
2001 December 31,
(Unaudited) 2000 1999
------------- ------------ ------------
Beginning of period $3,812,829 $3,161,389 $2,493,226
Additional borrowings 302,500 1,316,885 1,724,906
Curtailments (268,341) (665,445) (1,056,743)
---------- ---------- ----------
End of period $3,846,988 $3,812,829 $3,161,389
========== ========== ==========
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, 2000 and 1999, that the Parent and the Bank met all
capital adequacy requirements to which they are subject.
F-19
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(Includes Information Applicable to Unaudited Periods)
Note 11 Regulatory Matters (Continued)
As of December 31, 2000, the most recent notification from the Federal
Reserve Bank categorized the Bank as adequately 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, 2000
and 1999 are also presented in the table.
Minimum To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirement Action Provisions
-------------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- --------- -------
(Dollars in thousands)
As of December 31, 2000:
Total capital to risk weighted
assets:
Consolidated $14,965 9.0% $13,277 8.0% N/A N/A
Bank 14,585 8.8 13,254 8.0 $16,568 10.0%
Tier I capital to risk weighted assets:
Consolidated 13,045 7.9 6,639 4.0 N/A N/A
Bank 12,665 7.6 6,627 4.0 9,941 6.0
Tier I capital to average assets:
Consolidated 13,045 6.7 7,811 4.0 N/A N/A
Bank 12,665 6.5 7,803 4.0 9,754 5.0
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
F-20
COMMONWEALTH BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
(Includes Information Applicable to Unaudited Periods)
Note 12 Disclosures About Fair Value of Financial Instruments
Fair value and the carrying value of the Bank's recorded financial
instruments are as follows (in thousands):
December 31, 2000 December 31, 1999
------------------------ ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ----------- ------------- ------------
Cash and cash equivalents $ 14,418 $ 14,418 $ 6,298 $ 6,298
Investment securities 19,433 19,361 20,185 20,047
Net loans 155,560 158,776 123,720 123,195
Deposits 184,673 187,963 138,430 138,408
Short-term borrowings 5,382 5,382 4,156 4,156
Long-term debt 505 517 531 476
The contract or notional amount of financial instruments with
off-balance sheet risk are as follows:
March 31,
2001 December 31,
(Unaudited) 2000 1999
------------- ------------- -------------
Commitments to extend credit $26,598,065 $22,444,891 $20,590,217
Standby letters of credit 594,518 594,518 440,941
F-21
TABLE OF CONTENTS
-----------------
Page
----
PROSPECTUS SUMMARY........................................................ 3
SUMMARY FINANCIAL INFORMATION............................................. 9
RISK FACTORS.............................................................. 10
FORWARD LOOKING STATEMENTS................................................ 16
USE OF PROCEEDS........................................................... 16
MARKET FOR COMMON STOCK................................................... 17
MARKET FOR CONVERTIBLE PREFERRED SECURITIES............................... 17
COMMONWEALTH BANKSHARES CAPITAL TRUST I................................... 18
SELECTED FINANCIAL INFORMATION............................................ 19
CAPITALIZATION............................................................ 20
ACCOUNTING TREATMENT...................................................... 21
REGULATORY TREATMENT...................................................... 21
BUSINESS.................................................................. 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... 36
MANAGEMENT................................................................ 44
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS............ 49
DESCRIPTION OF CONVERTIBLE PREFERRED SECURITIES........................... 50
DESCRIPTION OF JUNIOR SUBORDINATED DEBT SECURITIES........................ 65
DESCRIPTION OF GUARANTEE.................................................. 71
RELATIONSHIP AMONG THE CONVERTIBLE PREFERRED SECURITIES,
THE JUNIOR SUBORDINATED DEBT SECURITIES AND THE GUARANTEE............... 73
DESCRIPTION OF COMMONWEALTH BANKSHARES, INC. COMMON STOCK................. 74
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES............................. 76
ERISA CONSIDERATIONS...................................................... 79
PLAN OF DISTRIBUTION...................................................... 79
VALIDITY OF SECURITIES.................................................... 81
EXPERTS................................................................... 81
WHERE YOU CAN FIND MORE INFORMATION....................................... 81
INDEX TO FINANCIAL STATEMENTS............................................. F-1
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Up to 1,600,000 Convertible Preferred Securities
COMMONWEALTH BANKSHARES CAPITAL TRUST I
8% Convertible Trust Preferred Securities
(liquidation amount $5 per convertible preferred security)
Guaranteed on a junior subordinated basis, as described in this prospectus, by
[Bank of Commonwealth Logo]
------------------
PROSPECTUS
July 23, 2001
------------------
Anderson & Strudwick
Incorporated
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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.
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