Commonwealth Bankshares Inc. Reports Operating Results (10-Q)

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May 17, 2010
Commonwealth Bankshares Inc. (CWBS, Financial) filed Quarterly Report for the period ended 2010-03-31.

Commonwealth Bankshares Inc. has a market cap of $25.83 million; its shares were traded at around $3.75 with and P/S ratio of 0.37.

Highlight of Business Operations:

Deposits are the most significant source of the Companys funds for use in lending and general business purposes. Deposits at March 31, 2010 were $1.1 billion, a decrease of $27.5 million or 2.6% from December 31, 2009. The decline in deposits is a result of the reduction in broker certificates of deposit. Noninterest-bearing demand deposits decreased by $3.0 million or 6.6% and interest-bearing deposits decreased by $24.5 million or 2.4%. Time deposits, excluding broker certificates of deposit, increased $15.7 million during the first three months of 2010, with interest-bearing demand and savings accounts increasing $8.4 million and $666.2

thousand, respectively. Included in time deposits less than $100,000 as of March 31, 2010 and December 31, 2009 are $442.9 million and $492.3 million, respectively, in broker certificates of deposits. The interest rates paid on these deposits are consistent, if not lower, than the market rates offered in our local area. Also included in time deposits less than $100,000 are QwickRate deposits. As of March 31, 2010 and December 31, 2009, the Company had $39.8 million and $37.4 million in QwickRate deposits, respectively. The Company is committed to improving its liquidity position through the generation of core deposits and thus work to eliminate our dependence on out of market time deposits. Management believes the overall growth in core deposits is a result of the Companys competitive interest rates on all deposit products, special promotions and product enhancements, as well as the Companys continued marketing efforts. The Companys core deposit base is predominantly provided by individuals and businesses located within communities served.

The provision for loan losses is the annual cost of maintaining an allowance for inherent credit losses. The amount of the provision each year and the level of the allowance are matters of judgment and are impacted by many factors, including actual credit losses during the period, the prospective view of credit losses, loan performance measures and trends (such as delinquencies and charge-offs), loan growth, the economic environment and other factors, both internal and external, that may affect the quality and future loss experience of the credit portfolio. At March 31, 2010, the Company had total allowance for loan losses of $49.1 million or 4.90% of total loans. As a result of the continued economic uncertainties, the Company made provisions for loan losses of $5.0 million for the first three months of 2010, an increase of $993.7 thousand or 24.8% over the same period of 2009. Loan charge-offs for the three months ended March 31, 2010 totaled $1.8 million and recoveries for the same period totaled $141.6 thousand. Of the $1.8 million in loan charge-offs as of March 31, 2010, substantially the entire amount was comprised of relationships with specific reserve allocations previously established. Net charge-offs as a percentage of average loans outstanding was 0.16% and 0.15% for the three months ended March 31, 2010 and 2009, respectively.

Non-performing assets were $108.4 million or 8.71% of total assets at March 31, 2010 compared to $89.0 million or 6.97% of total assets at December 31, 2009 and $71.1 million or 6.41% of total assets at March 31, 2009. Non-performing loans increased $15.8 million in the first three months of 2010 to $93.4 million. Non-performing loans at March 31, 2010 were comprised of 153 loans, an increase of 29 loans, which is reflective of the unprecedented economic environment which continues to negatively impact our loan portfolio. $89.9 million or 96.2% of the total non-performing loans are comprised of 124 loans secured by real estate, of which $51.6 million are construction and development loans. The Companys Loan Impairment Committee continues to monitor non-performing assets, past due loans, identify potential problem credits and develop action plans to work through these loans as promptly as possible. As all non-performing loans are deemed impaired, the Committee has individually reviewed the underlying collateral value (less cost to sell) on each of these loans as a part of its analysis of impaired loans. As a result of this comprehensive analysis, a $26.2 million specific reserve for loan losses has been established for non-performing loans. Based on current collateral values, we believe our reserve is adequate to cover any short falls resulting from the sale of the underlying collateral. Based on current accounting and regulatory guidelines the Company has provided a reserve based on current market values for these impaired loans however, management plans to work with our customers to get through these unprecedented economic times and to minimize any potential credit exposure. Management has taken a proactive approach to monitoring these loans and will continue to actively manage these credits to minimize losses.

Total noninterest income decreased in the three months ended March 31, 2010 to $695.6 thousand, a decrease of $584.9 thousand or 45.7% from the $1.3 million reported for the same period in 2009. Service charges on deposit accounts decreased $32.0 thousand, or 10.2% in the first quarter of 2010, which was primarily attributable to a decrease of $34.7 thousand, or 13.3% in non-sufficient funds (NSF) fees. Other service charges and fees reflected a slight decrease of $9.0 thousand or 4.1% during the first three months of 2010. Other service charges and fees included increases of $6.3 thousand and $3.8 thousand in checkbook sales and ATM fee income, respectively, which was offset by a reduction in trust service fee income of $17.2 thousand for the quarter ended March 31, 2010. Revenues generated from the Banks mortgage, title and investment subsidiaries, which are included in other noninterest income, were $300.2 thousand for the three months ended March 31, 2010 compared to $394.7 thousand for the same period in 2009. Revenues from the mortgage and title subsidiaries continue to be down from the prior year due to the slow economy and the weak housing markets. For the three months ended March 31, 2010 and 2009, the Company recorded losses on OREO totaling $264.6 thousand and $0, respectively. For 2010, $260.9 thousand relates to losses from valuation adjustments and the remaining $3.7 thousand relates to net losses on the sales of OREO properties.

Salaries and employee benefits decreased by $2.0 million or 78.3% to $542.2 thousand for the three months ended March 31, 2010 compared to the $2.5 million reported during the first three months of 2009. The decrease in salaries and employee benefits was the direct result of the elimination of the executive officer deferred compensation plans. Occupancy expense and furniture and equipment expense had only minimal increases when comparing the first three months of 2010 to 2009. Occupancy expenses increased 0.9% or $9.1 thousand while furniture and equipment expenses increased 2.4% or $12.0 thousand. Other noninterest operating expenses, which includes a grouping of numerous transactions relating to normal banking operations, increased $788.9 thousand for the three months ended March 31, 2010, a 50.4% increase over the comparable period for 2009. The increase was comprised of increases of $530.4 thousand, $95.3 thousand, $144.2 thousand and $95.8 thousand in FDIC insurance, expenses related to OREO properties, professional fees

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