1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________to _________________
Commission file number 333-26699
CORNERSTONE BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
TENNESSEE 62-1173944
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5319 HIGHWAY 153
CHATTANOOGA, TENNESSEE 37343
(Address of principal executive offices)
(423) 877-8181
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 1,011,561 SHARES OF COMMON
STOCK AS OF JUNE 30, 1999.
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
For the Six Months Ended June 30, 1999 and June 30, 1998
and the Year Ended December 31, 1998
Unaudited Unaudited
June 30, December 31, June 30,
----------- ------------- ------------
ASSETS 1999 1998 1998
----------- ------------- ------------
Cash and due from banks 6,654,167 4,268,967 5,466,853
Federal funds sold 5,355,000 8,425,000 2,855,000
Investment securities available for sale 11,955,433 9,280,116 12,214,764
Investment securities held to maturity 6,989,300 9,077,465 12,851,861
Loans, less allowance for loan loss 65,220,182 72,492,549 69,714,387
Premises and equipment, net 1,921,513 1,967,329 1,968,221
Accrued interest receivable 534,078 638,441 720,138
Excess cost over fair value of assets acquired 2,778,539 2,834,124 2,866,474
Other assets 1,853,347 1,522,143 1,145,925
------------ ------------ ------------
Total assets 103,261,559 110,506,134 109,803,624
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non interest bearing 12,259,447 14,151,526 11,048,289
NOW accounts 14,985,198 12,998,223 13,306,067
Savings deposits and money market accounts 9,616,620 10,283,103 11,045,520
Time deposits of $100,000 or more 15,138,652 17,489,618 16,655,901
Time deposits of less than $100,000 39,404,797 43,089,138 45,740,892
------------ ------------ ------------
Total deposits 91,404,714 98,011,608 97,796,669
Other Borrowings 282,191 -- --
Accrued interest payable 183,682 270,634 315,659
Other liabilities 351,544 470,861 329,459
Note Payable 1,250,000 1,250,000 855,000
------------ ------------ ------------
Total Liabilities 93,472,131 100,003,103 99,296,787
------------ ------------ ------------
Redeemable common stock 237,504 478,744 478,744
Stockholders' Equity
Common stock 1,011,561 1,009,461 1,009,461
Additional paid-in capital 9,284,418 9,017,430 9,017,430
Undivided profits (deficit) (664,092) (41,695) (27,719)
Net unrealized gain in securities available for sale (79,963) 39,091 28,920
------------ ------------ ------------
Total Stockholders' Equity 9,789,428 10,503,031 10,506,836
------------ ------------ ------------
Total liabilities and stockholders equity 103,261,559 110,506,134 109,803,624
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
1
3
CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income
For the Three and Six Months Ended June 30, 1999 and June 30, 1998
Unaudited Unaudited
Three months ended Six months ended
June 30, June 30,
--------------------------- --------------------------
1999 1998 1999 1998
---------- --------- ---------- ---------
INTEREST INCOME
Interest and fees on loans 1,485,614 1,501,100 3,062,752 3,075,283
Interest on investment securities 252,250 388,166 528,186 665,950
Interest on federal funds sold 86,568 51,437 125,101 137,080
Interest on other earning aseets -- -- -- --
---------- --------- ---------- ---------
Total interest income 1,824,432 1,940,703 3,716,039 3,878,313
---------- --------- ---------- ---------
INTEREST EXPENSE
Interest bearing demand accounts 56,023 70,271 116,804 133,594
Money market accounts 47,037 73,610 99,107 131,103
Savings accounts 27,257 25,121 53,886 51,523
Time deposits of less than $100,000 521,915 613,230 1,077,686 1,264,545
Time deposits of $100,000 or more 218,842 289,797 456,909 457,366
Federal funds purchased -- -- 732 570
Securities sold under agreements to repurchase 2,040 -- 3,718 --
Other borrowings 28,255 17,296 52,474 35,465
---------- --------- ---------- ---------
Total interest expense 901,369 1,089,324 1,861,316 2,074,166
---------- --------- ---------- ---------
Net interest income 923,063 851,379 1,854,723 1,804,147
Provision for loan losses 605,000 76,174 655,000 123,192
---------- --------- ---------- ---------
Net interest income after the provision for loan losses 318,063 775,205 1,199,723 1,680,955
---------- --------- ---------- ---------
NONINTEREST INCOME
Service charges on deposit accounts 162,486 362,530 253,664 460,287
Net securities gains (losses) -- -- -- --
Other income (3,920) 87,950 33,111 142,938
---------- --------- ---------- ---------
Total noninterest income 158,566 450,480 286,775 603,225
---------- --------- ---------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits 556,833 411,811 1,037,178 824,512
Occupancy and equipment expense 134,338 117,048 262,521 225,436
Other operating expense 518,048 327,350 900,803 636,209
---------- --------- ---------- ---------
Total noninterest expense 1,209,219 856,208 2,200,502 1,686,157
---------- --------- ---------- ---------
Income before provision for income taxes (732,589) 369,476 (714,004) 598,023
Provision for income taxes (113,475) 33,662 (91,607) 161,758
---------- --------- ---------- ---------
NET INCOME (619,114) 335,815 (622,397) 436,265
========== ========= ========== =========
Basic net income per common share (0.61) 0.33 (0.62) 0.43
Diluted net income per common share (0.54) 0.29 (0.54) 0.38
Dividends declared per common share -- -- -- --
The accompanying notes are an integral part of these consolidated financial
statements.
2
4
CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statement of Cash Flows
For the Six Months Ended June 30, 1999 and June 30, 1998
1999 1998
---------- -----------
Cash flows from operating activities:
Net income (622,397) 262,308
Adjustments to reconcile net income (loss)
to net cash provided by operating actvities:
Provision for possible loan losses 655,000 123,192
Provision for depreciation and amortization 176,334 176,076
Accrued interest receivable 104,363 (274,957)
Accrued interest payable (86,952) (142,085)
Changes in other assets and liabilities: (734,809) (295,089)
----------- -----------
Net cash used in operating activities (508,461) (150,555)
----------- -----------
Cash flows from investing activities:
Purchase of investment securities: AFS (6,865,216) (5,115,349)
Purchase of investment securities: HTM -- (8,784,905)
Proceeds from security transactions: AFS 4,580,543 2,327,557
Proceeds from security transactions: HTM 1,960,754 4,929,566
Net increase in loans 6,617,367 (9,559,545)
Purchase of bank premises and equipment (81,272) (127,503)
Net cash used in investing activities 6,212,176 (16,330,179)
----------- -----------
Cash flows from financing activities:
Net increase in deposits (6,606,894) 16,843,967
Net increase in repurchase agreements 282,191 --
Net increase of notes payable -- --
Issuance of common stock 269,088 1,548,382
----------- -----------
Net cash provided by finanacing activities (6,055,615) 18,392,349
----------- -----------
Net increase in cash and cash equivalents (351,900) 1,911,615
Cash and cash equivalents beginning of period 12,693,967 7,303,892
----------- -----------
Cash and cash equivalents end of period 12,009,167 9,215,507
=========== ===========
(684,800) 1,911,615
(332,900) 0
The accompanying notes are an integral part of these consolidated financial
statements.
3
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CORNERSTONE BANCSHARES
PRESENTATION OF FINANCIAL INFORMATION
The 1999 financial information in this report has not been audited. The
information included herein should be read in conjunction with the notes to
consolidated financial statements included in the 1998 Annual Report to
Shareholders which was furnished to each shareholder of the Company in March
1999. The consolidated financial statements presented herein conform to
generally accepted accounting principles and to general industry practices.
Consolidation
The accompanying consolidated financial statements include the accounts of
Cornerstone Bancshares Inc. and its sole subsidiary Cornerstone Community Bank.
Substantially all intercompany transactions, profits and balances have been
eliminated.
Accounting Policies
During interim periods, the company follows the accounting policies set forth
in its 10-K for the year ended December 31, 1998, as filed with the Securities
and Exchange Commission. Since December 1998, there have been no changes in any
accounting principles or practices, or in the method of applying any such
principles or practices.
Interim Financial Data (Unaudited)
In the opinion of the Company management, the accompanying interim financial
statements contain all material adjustments, consisting only of normal
recurring adjustments necessary to present fairly the financial condition, the
results of operations, cash flows for the interim period. Results for interim
periods are not necessarily indicative of the results to be expected for a full
year.
Earnings Per Common Share
Basic earnings per share ("EPS") is computed by dividing income available to
common shareholders (numerator) by the weighted average number of common shares
outstanding (denominator). Diluted EPS is computed by dividing income available
to common shareholders (numerator) by weighted average number of shares
outstanding (denominator). The adjusted weighted average number of shares
outstanding reflects the potential dilution occurring if securities or other
contracts to issue common stock were exercised or converted into common stock
resulting in the issuance of common stock that share in the earnings of the
entity.
Forward-Looking Statements
Certain written and oral statements made by or with the approval of an
authorized executive officer of the Company may constitute "forward-looking
statements" as defined under the Private Securities Litigation Reform Act of
1995. Words or phrases such as "should result, are expected to, we anticipate,
we estimate, we project" or similar expressions are intended to identify
forward-looking statements. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from the
Company's historical experience and its present expectations or projections.
These risks and uncertainties include, but are not limited to, unanticipated
economic changes, interest rate movements and the impact of competition.
Caution should be taken not to place undue reliance on any such forward-
looking statements since such statements speak only as of the date of making
such statements.
4
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
The company ended the first six months of 1999 with total assets
of $103 million, a 6.5% decrease from December 31, 1998, and a 5.9% decrease
from June 30, 1998. The company reported net income for the second quarter
ending June 30, 1999 of $(619,114), or $(0.61) basic earnings per share,
compared to $335,815, or $0.33 basic earnings per share, for the same period in
1998. The decline in earnings represents a 284.4% decrease from the second
quarter 1998 compared to the second quarter of 1999. The company reported net
income for the first six months ending June 30, 1999 of $(622,397), or $(0.62)
basic earnings per share, compared to $436,265, or $0.43 basic earnings per
share, for the same period in 1998. The decline in earnings represents a 242.7%
decrease from the first six months in 1998 compared to the same period in 1999.
The decrease in net income from June 1998 to June 1999 is
primarily due to a two-phase plan to move Cornerstone Bancshares back to high
quality financial institution status. The first phase consisted of a complete
reorganization of the executive staff and an extensive review of lending and
accounting procedures. In the second phase, corrective actions were taken to
improve the loan portfolio's credit quality and accounting charges to correct
the general ledger. The result of the first phase created higher salaries as
the Bank hired expertise needed to remain competitive and in compliance with
all Federal laws. In addition, the Bank incurred higher than normal
professional and legal expenses as management reviewed the loan portfolio. In
the second phase management and the Board charged off all substandard loans and
brought the loan quality back to an acceptable quality level. The result was an
unusually large loan loss provision for the quarter of $605,000.
FINANCIAL CONDITION
Earning Assets. Average earning assets for three months ending
June 30, 1999 decreased $5.7 million or 5.9% below June 1998, while actual
earning assets decreased $8.1 million or 8.3% during the same time period. The
average balance decrease was due to a general pull back from the origination
process while the Bank's lenders concentrated on technical exceptions and
created action plans for their substandard loans
Loan Portfolio. Cornerstone's average loans for the second three
months of 1999 were $66.72 million, no change from the second quarter in 1998,
while actual balances decreased to $66.2 million, an decrease of 6.6% below
$70.8 million in loans in June 1998. Funds generated from the loan runoff
funded an increase in federal funds due to undesirable yields in investment
securities.
Management is anticipating increased loan growth (more than 10%)
for the remainder of the year in actual balances, with a similar increase in
average balances. However, the amount of such growth, if any, will depend upon
general economic conditions.
Investment Portfolio. Cornerstone's investment securities
portfolio decreased by 24.4% or $6.1 million from June 1998 to June 1999. The
management of the Bank decided securities yields were undesirable relative to
federal funds and did not reinvest mortgage runoff until late in the months of
May and June. Cornerstone maintains an investment strategy of making prudent
investment decisions with active management of the portfolio to optimize,
within the constraints of established policies, an adequate return and value.
Investment objectives include Gap Management, Liquidity, Pledging, Return, and
Local Community Support in that order of priority. Cornerstone maintains two
classifications of investment securities: "Held to Maturity" and "Available for
Sale." The "Available for Sale" securities are carried at fair market value,
whereas the "Held to Maturity" securities are carried at book value. As of June
30, 1999, unrealized losses in the "Available for Sale" portfolio amounted to
$121,156 or 1.0% decrease in value of the AFS securities.
Deposits. Cornerstone's average deposits decreased $7.0 million
or 8.1% from June 1998 to June 1999, while actual deposit balances decreased
$6.3 million or 6.5%. The largest portion of decrease was a $7.8 million, or
12.6% decrease in time deposits. This is due to Cornerstone's strategy to only
pay premium rates for certificates of deposit when loan growth dictates
additional funding. Transaction accounts are continuously solicited from new
customers and existing customers. Transaction accounts are the Bank's highest
priority and will provide the bank with an increased net interest margin.
5
7
Capital Resources. Stockholders' equity decreased $0.7 million or
6.8% to $9.8 million as of June 30, 1998, compared with $10.5 at June 30, 1998.
This decrease was primarily due to losses sustained from operations.
RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 1999 COMPARED TO QUARTER ENDED
JUNE 30, 1998
Net Interest Income. Net interest income is the principal
component of a financial institution's income stream and represents the spread
between interest and fee income generated from earning assets and the interest
expense paid on deposits. The following discussion is on a fully taxable
equivalent basis.
Net interest income for the second three months of 1999 decreased
$112,000 or 11.0% below net interest income earned as of June 1998. The
decrease in net interest income as of June 30, 1999 is primarily due to a
decrease in the Bank's net interest spread on earning assets, which dropped
from 3.76% to 3.49% in 1999. Reduced loan yields caused by loans being placed
on non-accrual contributed the majority of the net interest spread reduction.
Interest income decreased $303,000 or 14.4% as of June 1999
compared to June 1998. Interest income produced by the loan portfolio decreased
$203,000 or 12.1% from June 1998 to June 1999 due to the decrease in average
yields for the period. Two factors contributed to the reduction of loan yields.
First, in the above mentioned review of all loans, many loans were placed on
non-accrual and previously booked interest income had to be reversed. In
addition, during this period of corrective actions loan originations paused and
loan fee income was greatly reduced. Interest income on investment securities
and federal funds decreased $101,000 or 23.0% from June 1998 to June 1999, due
primarily to reduced deposit balances and a short maturity duration to protect
against a large interest rate swing.
Total interest expense decreased $191,000 or 17.5% from June 30,
1998 to June 30, 1999. The interest expense decrease from the second quarter of
1998 to the second quarter of 1999 is primarily due to the active management of
the management ALCO committee to reduce certificate of deposit exposure and
lower general rates to the market norm while the loan portfolio review slowed
funding needs.
The trend in net interest income is commonly evaluated in terms
of average rates using the net interest margin and the interest rate spread.
The net interest margin, or the net yield on earning assets, is computed by
dividing fully taxable equivalent net interest income by average earning
assets. This ratio represents the difference between the average yield on
average earning assets and the average rate paid for all funds used to support
those earning assets. The net interest margin at June 30, 1999 was 4.03%. The
yield on earning assets decreased 79 basis points to 8.01% at June 30, 1999
from 8.80% at June 30, 1998.
The interest rate spread measures the difference between the
average yield on earning assets and the average rate paid on interest bearing
sources of funds. The interest rate spread eliminates the impact of noninterest
bearing funds and gives a direct perspective on the effect of market interest
rate movements. As a result of changes in the asset and liability mix during
late 1998 and second quarter 1999, the interest rate spread was 3.49%, a
decrease of 27 basis points from June 1998 to June 1999.
Allowance for Loan Losses. The allowance for possible loan losses
represents management's assessment of the risks associated with extending
credit and its evaluation of the quality of the loan portfolio. Management
analyzes the loan portfolio to determine the adequacy of the allowance for
possible loan losses and the appropriate provisions required to maintain a
level considered adequate to absorb anticipated loan losses. Management
believes that the $1,030,243 for June 1999 in the allowance for loan loss
account reflects the full known extent of credit exposure. This amount includes
a provision of $250,000 suggested by the joint FDIC and State Regulators to
adequately handle classified loans. No assurances can be given, however, that
adverse economic circumstances will not result in increased losses in the loan
portfolio, and require greater provisions for possible loan losses in the
future.
Non-performing Assets. Non-performing assets include
non-performing loans and foreclosed real estate held for sale. Non-performing
loans include loans classified as non-accrual or renegotiated. Cornerstone's
policy is to place a loan on non-accrual status when it is contractually past
due 90 days or more as to payment of principal or interest. At the time a loan
is placed on non-accrual status, interest previously accrued but not collected
may be reversed
6
8
and charged against current earnings. As of June 30, 1999 Cornerstone had
$1,052,287 in non-accrual loans and $1,342,538 in non-performing loans.
Non-interest Income. Non-interest income consists of revenues
generated from a broad range of financial services and activities including
fee-based services and profits and commissions earned through credit life
insurance sales and other activities. In addition, gains or losses realized
from the sale of loans are included in non-interest income. Excluding gains
from the sale of loans, total non-interest income decreased by $291,914 or 65%
from June 1998 to June 1999.
Non-interest Expense. Non-interest expense for the second three
months of 1999 increased by $353,011 or 41.2% as compared to the second three
months in 1998. Salaries and employee benefits increased by $145,022 or 35.2%
in June 1999 over June 1998. Occupancy expense as of June 30, 1999 increased by
$17,290 or 14.8% over the same period in 1998. All other non-interest expenses
at June 30, 1999 increased $190,698 or 58.3% over the non-interest expenses as
of June 30, 1998, primarily due to an increase in professional fees, and
miscellaneous charge-offs.
7
9
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1998
Net Interest Income. Net interest income is the principal
component of a financial institution's income stream and represents the spread
between interest and fee income generated from earning assets and the interest
expense paid on deposits. The following discussion is on a fully taxable
equivalent basis.
Net interest income for the first six months of 1999 decreased
$50,576 or 2.8% below net interest income earned as of June 1998. The decrease
in net interest income as of June 30, 1999 is primarily due to a decrease in
the Bank's net interest spread on earning assets, which dropped from 3.78% to
3.52% in 1999. Reduced loan yields caused by loans being placed on non-accrual
contributed the majority of the net interest spread reduction.
Interest income decreased $162,274 or 4.2% as of June 1999
compared to June 1998. Interest income produced by the loan portfolio decreased
$12,531 or .4% from June 1998 to June 1999 due to the decrease in average
yields for the period. Two factors contributed to the reduction of loan yields.
First, in the above mentioned review of all loans, many loans were placed on
non-accrual and previously booked interest income had to be reversed. In
addition, during this period of corrective actions loan originations paused and
loan fee income was greatly reduced. Interest income on investment securities
and federal funds decreased $149,743 or 18.6% from June 1998 to June 1999, due
primarily to reduced deposit balances and a short maturity duration to protect
against a large interest rate swing.
Total interest expense decreased $212,850 or 10.3% from June 30,
1998 to June 30, 1999. The interest expense decrease from the first half of
1998 to the first half of 1999 is primarily due to the active management of the
management ALCO committee to reduce certificate of deposit exposure and lower
general rates to the market norm while the loan portfolio review slowed funding
needs.
The trend in net interest income is commonly evaluated in terms
of average rates using the net interest margin and the interest rate spread.
The net interest margin, or the net yield on earning assets, is computed by
dividing fully taxable equivalent net interest income by average earning
assets. This ratio represents the difference between the average yield on
average earning assets and the average rate paid for all funds used to support
those earning assets. The net interest margin at June 30, 1999 was 4.07%. The
yield on earning assets decreased 76 basis points to 8.15% at June 30, 1999
from 8.91% at June 30, 1998.
The interest rate spread measures the difference between the
average yield on earning assets and the average rate paid on interest bearing
sources of funds. The interest rate spread eliminates the impact of noninterest
bearing funds and gives a direct perspective on the effect of market interest
rate movements. As a result of changes in the asset and liability mix during
late 1998 and second quarter 1999, the interest rate spread was 3.52%, a
decrease of 26 basis points from June 1998 to June 1999.
Allowance for Loan Losses. The allowance for possible loan losses
represents management's assessment of the risks associated with extending
credit and its evaluation of the quality of the loan portfolio. Management
analyzes the loan portfolio to determine the adequacy of the allowance for
possible loan losses and the appropriate provisions required to maintain a
level considered adequate to absorb anticipated loan losses. Management
believes that the $1,030,243 for June 1999 in the allowance for loan loss
account reflects the full known extent of credit exposure. This amount includes
a provision of $250,000 suggested by the joint FDIC and State Regulators to
adequately handle classified loans. No assurances can be given, however, that
adverse economic circumstances will not result in increased losses in the loan
portfolio, and require greater provisions for possible loan losses in the
future.
Non-performing Assets. Non-performing assets include
non-performing loans and foreclosed real estate held for sale. Non-performing
loans include loans classified as non-accrual or renegotiated. Cornerstone's
policy is to place a loan on non-accrual status when it is contractually past
due 90 days or more as to payment of principal or interest. At the time a loan
is placed on non-accrual status, interest previously accrued but not collected
may be reversed and charged against current earnings. As of June 30, 1999
Cornerstone had $1,052,287 in non-accrual loans and $1,342,538 in
non-performing loans.
Non-interest Income. Non-interest income consists of revenues
generated from a broad range of financial services and activities including
fee-based services and profits and commissions earned through credit life
insurance sales and other activities. In addition, gains or losses realized
from the sale of loans are included in non-interest income. Excluding gains
from the sale of loans, total non-interest income decreased by $316,450 or 52%
from June 1998 to June 1999.
Non-interest Expense. Non-interest expense for the first six
months of 1999 increased by $514,345 or 30.5% as compared to the first six
months in 1998. Salaries and employee benefits increased by $212,666 or 25.8%
in June 1999 over June 1998. Occupancy expense as of June 30, 1999 increased by
$37,085 or 16.4% over the same period in 1998. All other non-interest expenses
at June 30, 1999 increased $264,594 or 41.6% over the non-interest expenses as
of June 30, 1998, primarily due to an increase in professional fees, and
miscellaneous charge-offs.
8
10
ADDITIONAL INFORMATION
The following tables set forth weighted yields earned by Cornerstone on
its earning assets and the weighted average rates paid on its deposits and
other interest-bearing liabilities for the six months and three months ended
June 30, 1999 and June 30, 1998 (fully taxable equivalent; dollars in
thousands).
Six months ended
June 30,
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Assets Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------------------
Earning Assets:
Loans, net of unearned income 69,277 3,063 8.92% 63,632 3,075 9.75%
Investment securities 22,681 653 5.81% 24,153 803 6.70%
Other earning assets -- --
------------------------ ---------------------
Total earning assets 91,958 3,716 8.15% 87,785 3,878 8.91%
Allowance for loan losses (1,116) (802)
Cash and other assets 12,178 15,690
------------------------ ---------------------
TOTAL ASSETS 103,020 102,673
============= ==========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits 13,401 117 1.76% 12,060 134 2.23%
Savings deposits 9,641 153 3.20% 9,817 183 3.75%
Time deposits 40,557 1,078 5.36% 45,573 1,265 5.60%
Time deposits of $100,000 or more 16,073 457 5.73% 13,212 457 6.98%
Federal funds and securities sold under
Agreement to repurchase 193 4 4.65% 20 1 5.75%
Other borrowings 1,250 52 8.47% 855 35 8.37%
------------------------ ---------------------
Total interest bearing liabilities 81,115 1,861 4.63% 81,537 2,074 5.13%
------- --------
Net interest spread 1,855 1,804
======= ========
Noninterest bearing demand deposits 10,597 9,662
Accrued expenses and other liabilities 956 1,112
Stockholders' equity 10,352 10,364
------------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 103,020 102,673
============= ==========
Net interest margin on earning assets 4.07% 4.14%
====== =======
Net interest spread on earning assets 3.52% 3.78%
====== =======
9
11
Three months ended
June 30,
----------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------
Assets Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------------------
Earning Assets:
Loans, net of unearned income 66,671 1,469 8.84% 66,795 1,672 10.04%
Investment securities 23,840 339 5.70% 29,408 440 6.00%
Other earning assets -- --
------------------------ ---------------------
Total earning assets 90,511 1,808 8.01% 96,203 2,111 8.80%
Allowance for loan losses (874) (900)
Cash and other assets 11,393 12,888
------------- ---------------------
TOTAL ASSETS 101,030 108,191
============= ==========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits 13,646 56 1.65% 13,451 70 2.10%
Savings deposits 9,378 74 3.18% 10,596 99 3.74%
Time deposits 39,507 522 5.30% 46,486 613 5.29%
Time deposits of $100,000 or more 15,657 219 5.61% 15,259 290 7.62%
Federal funds and securities sold under
Agreement to repurchase 222 2 3.62% -- 0 0.00%
Other borrowings 1,250 25 8.02% 855 17 7.98%
------------------------ ---------------------
Total interest bearing liabilities 79,660 898 4.52% 86,647 1,089 5.04%
------- --------
Net interest spread 910 1,022
======= ========
Noninterest bearing demand deposits 10,478 9,955
Accrued expenses and other liabilities 692 806
Stockholders' equity 10,201 10,783
----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 101,030 108,191
============= ==========
Net interest margin on earning assets 4.03% 4.26%
====== =======
Net interest spread on earning assets 3.49% 3.76%
====== =======
10
12
The following table presents data related to Cornerstone's reserve for
loan losses at June 30, 1999 and March 31, 1999.
-----------------------------------
1999
-----------------------------------
Quarter Ending June 30 March 31
-----------------------------------
Balance at beginning of period 1,208,311 1,400,000
Loans charged-off (858,844) (304,209)
Loans recovered 75,777 62,520
-----------------------------------
Net Charge-offs (recoveries) (783,068) (241,689)
Provision for loan losses charged
to expense 605,000 50,000
-----------------------------------
Balance at end of period 1,030,243 1,208,311
===================================
Allowance for loan losses as a
percentage of average loans
outstanding for the period 1.545% 1.679%
Allowance for loan losses as a
percentage of nonperforming assets
and loans 90 days past due
outstanding for the period 76.738% 125.368%
Annualized QTD net charge-offs as
a percentage of average loans
outstanding for the period -4.698% -1.344%
Annualized YTD net charge-offs as -3.352% -0.843%
a percentage of average loans
outstanding for the period
YTD Average Outstanding Loans 69,396,000 72,150,000
QTD Average Outstanding Loans 66,670,912 71,950,537
Nonperforming assets and 1,342,538 963,808
loans 90 days past due
11
13
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 -- Financial Data Schedule (For SEC Use Only)
(b) There have been no Current Reports on Form 8-K filed during the
quarter ended June 30, 1999.
12
14
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CORNERSTONE BANCSHARES, INC.
(Registrant)
Date: August 13, 1999
/s/ Gregory B. Jones
----------------------------------------
President & Chief Executive Officer
Date: August 13, 1999 /s/ Nathaniel F. Hughes
----------------------------------------
Chief Financial Officer
13