<PAGE> 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 MARCH 31, 1998
[ ] 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: 1,009,061 SHARES OF COMMON
STOCK AS OF MAY 1, 1998.
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---- ----
<S> <C> <C>
Cash and due from banks....................................... $ 6,166,368 $ 6,173,892
Federal fund sold............................................. 14,310,000 1,130,000
Investment securities available for sale...................... 9,375,520 7,544,579
Investment securities held to maturity ....................... 8,687,672 10,779,662
Loans, less allowances for loan losses ....................... 63,759,536 60,589,987
Premises and equipment, net................................... 2,455,463 2,444,219
Accrued interest receivable................................... 676,599 584,446
Excess cost over fair value of assets acquired................ 2,338,954 2,362,580
Other assets.................................................. 1,220,424 1,093,520
------------ -----------
Total assets............................................... $108,990,536 $92,702,885
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Non-interest bearing....................................... $ 10,975,143 $ 9,272,695
NOW accounts .............................................. 13,314,076 13,009,450
Savings deposits and money market accounts................. 10,764,728 9,879,431
Time deposits.............................................. 62,072,266 49,688,229
------------- -----------
Total deposits...................................... 97,126,213 81,849,805
Accrued interest payable...................................... 342,958 325,551
Other liabilities............................................. 331,220 600,647
Note payable.................................................. 855,000 855,000
------------ -----------
Total liabilities 98,655,391 83,631,003
Stockholders' equity:
Common stock................................................. 1,009,061 874,954
Additional paid-in capital .................................. 9,480,460 8,444,238
Undivided profits (deficit).................................. (202,101) (290,027)
Net unrealized gain on securities available for sale,
net of tax.................................................. 47,725 42,717
------------ -----------
Total stockholders' equity 10,335,145 9,071,882
------------- -----------
Total liabilities and stockholders' equity $108,990,536 $92,702,885
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1
<PAGE> 3
CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income
For The Three Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest Income:
Interest and fees on loans............................. $1,530,852 $1,132,000
Interest on investment securities:..................... 363,427 307,000
Other interest income.................................. -- 41,000
---------- ----------
Total interest income........................ 1,894,279 1,480,000
---------- ----------
Interest expense............................................ 984,841 748,000
---------- ----------
909,438
Provision for possible loan losses.......................... 47,018 92,000
---------- ---------
Net interest income after provision for possible
loan losses............................................ 862,420 640,000
Non-interest income:
Service charges on deposits............................ 122,046 --
Other operating income ................................ 61,438 125,000
---------- ---------
Total other income.......................... 183,484 125,000
Other expense:
Salaries and employee benefits......................... 412,723 --
Net occupancy and equipment expense.................... 102,412 --
Other operating expense................................ 314,695 709,000
---------- ----------
Total other expense......................... 829,830 709,000
---------- ----------
Income before income taxes ................................. 216,074 56,000
Income tax expense (benefit) ............................... 128,148 (1,000)
--------- ----------
Net income................................. $ 87,926 $ 57,000
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE> 4
CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statement of Cash Flows
For The Three Months Ended March 31, 1998 (1)
<TABLE>
<CAPTION>
1998
----
<S> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 87,926
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Deferred income taxes (19,912)
Provision for possible loan losses 47,018
Provision for depreciation and amortization 73,602
changes in other assets and liabilities:
Accrued interest receivable..................................... (92,153)
Accrued interest payable ....................................... 17,407
Other .......................................................... (396,331)
-----------
Net cash used in operating activities.............................. (282,443)
-----------
Cash Flows from Investing Activities:
Purchase of investment securities available for sale .............. (1,822,040)
Proceeds from security transactions:
Securities available for sale................................. 1,068,387
Securities held to maturity .................................. 492,604
Net increase in loans.............................................. (3,169,549)
Purchasse of bank premises and equipment........................... (61,220)
Net cash used in investing activities (3,491,818)
-----------
Cash Flows from Financing Activities:
Net increase in deposits .......................................... 15,276,408
Issuance of common stock .......................................... 1,670,329
-----------
Net cash provided by financing activities.......................... 16,946,737
Net Increase in cash and cash equivalents............................. 13,172,476
Cash and cash equivalents beginning of period......................... 7,303,892
-----------
Cash and cash equivalents end of period............................... $20,476,368
===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 949,265
Income taxes $ -0-
</TABLE>
- -------------------
(1) Information for March 31, 1997 is not presented due to the fact that pro
forma cash flow is not meaningful. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Management Opinion
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of Cornerstone Bancshares, Inc.
contain all adjustments, consisting of only normal, recurring
adjustments, necessary to fairly present the financial results for the
interim periods presented. The results of operations for any interim
period is not necessarily indicative of the results to be expected for
an entire year. These interim financial statements should be read in
conjunction with the annual financial statements and notes thereto.
4
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The 1997 financial information represents historical financial
information presented on a pro forma basis as if the merger of The Bank of East
Ridge and Cornerstone Community Bank occurred as of January 1, 1997. Financial
information presented on the pro forma basis provides comparable data that is
reasonable and meaningful to the combined banking operations that began on the
merger date of October 15, 1997.
SUMMARY
The first three months of 1998 reflect net income of $88,000, a
54% increase from Cornerstone's net income of $57,000 earned for the first three
months of 1997. Net income per common share for March 1998 remained $.09, the
same as it was at March 31, 1997. Pretax income for March 1998 increased $55,000
from March 1997 pretax income of $161,000.
The increase in net income from March 1997 to March 1998 is
primarily due to a 37% increase in interest-earning assets. The increase was
also due in part to a 46% increase in non-interest income by only a 17% increase
in non-interest expenses.
FINANCIAL CONDITION
Earning Assets. Average earning assets for March 31, 1998
increased $11 million or 15% over March 1997 was primarily due to an increase in
average loans outstanding and an increase in the average Federal Funds sold. The
loan and federal funds growth was primarily funded by an increase in overall
deposits.
Loan Portfolio. Cornerstone's average loans for the first three
months of 1998 were $61 million, an increase of 36% over $45 million in average
loans for the first three months of 1997. Loan growth for 1998 has been
primarily funded through increased deposit growth. The increase in ending
balances from March 1997 to March 1998 was consistent with the increase in
average balances.
Investment Portfolio. Cornerstone's investment securities
portfolio increased by 6% or $1.1 million from March 1997 to March 1998.
Cornerstone maintains an investment strategy of seeking portfolio yields within
acceptable risk levels, as well as providing liquidity. 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 March
31, 1998, unrealized gains in the "Available for Sale" portfolio amounted to
$77,000.
Deposits. Cornerstone's average deposits increased $21.8 million
or 33% from March 1997 to March 1998. Total deposits increased $24 million or
34% for the same period. The largest portion of growth was a $15.6 million, or
34% increase in time deposits. This is due to Cornerstone's strategy of
increasing time deposits by offering competitive rates to customers. From March
1997 to March 1998 interest-bearing transaction deposits increased $4.2 million
or 42% and savings deposits increased $1.9 million or 22%.
Capital Resources. Stockholders' equity increased $4.3 million or
72% to $10.3 million as of March 31, 1998, compared with $6.0 at March 31, 1997.
This increase was primarily due to warrants being exercised by shareholders.
RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED
MARCH 31, 1997
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.
5
<PAGE> 7
Net interest income for the first three months of 1998 increased
$130,000 or 18% over net interest income earned as of March 1997. The increase
in net interest income as of March 31, 1998 is primarily due to an increase in
interest-earning assets.
Interest income increased $414,000 or 28% as of March 1998
compared to March 1997. Interest income produced by the loan portfolio increased
$399,000 or 35% from March 1997 to March 1998 due to the increase in average
loans for the period. Interest income on investment securities increased $29,000
or 9% from March 1997 to March 1998.
Total interest expense increased $219,000 or 29% from March 31,
1997 to March 31, 1998. The interest expense increase from the first quarter of
1997 to the first quarter of 1998 is primarily due to the increase in average
time and demand deposits.
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
ration represents the different 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 March 31, 1998 was 4.19%. The net cost of
funds, defined as interest expense divided by average-earning assets, increased
34 basis points from 4.22% on March 31, 1997 to 4.57% in 1997. The yield on
earning assets increased 35 basis points to 9.02% at March 31, 1998 from 8.67%
at March 31, 1997.
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
1997, the interest rate spread decreased 17 basis points from March 1997 to
March 1998.
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
$871,000 for March 1998 in the allowance for loan losses account was sufficient
to absorb known risks in the portfolio. 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.
Nonperforming Assets. Nonperforming assets include nonperforming
loans and foreclosed real estate held for sale. Nonperforming loans include
loans classified as nonaccrual or renegotiated. Cornerstone's policy is to place
a loan on nonaccrual 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 nonaccrual
status, interest previously accrued but not collected may be reversed and
charged against current earnings. As of March 31, 1998 Cornerstone had $35,000
in nonperforming assets.
Noninterest Income. Noninterest 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 noninterest income. Excluding gains from the
sale of loans, total noninterest income decreased by $54,000 or 43% from March
1997 to March 1998.
Noninterest Expense. Noninterest expense for the first three
months of 1998 increased by $121,000 or 17% as compared to the first three
months in 1997. Salaries and employee benefits increased by $21,000 or 5% in
March 1998 over March 1997. Occupancy expense as of March 31, 1998 increased by
$55,000 or 125% over the same period in 1997. This increase is attributed to the
additional expense of adding the Fountain Square location at 610 Georgia Avenue
in May 1997 and the upgrading of computer equipment. All other noninterest
expenses at March 31, 1998 increased $68,000 or 31% over the noninterest
expenses as of March 31, 1997, primarily due to an increase in advertising costs
and professional fees.
6
<PAGE> 8
OPERATING RESULTS
The Company had net income of $35,685 or $0.07 per weighted
average common share for the first quarter of 1997 compared to a net loss for
the first quarter of 1996 of ($38,464) or ($0.09) per weighted average common
share outstanding. Our returns on average assets and average common equity for
the first quarter of 1997 were 0.06% and 1.07%, respectively compared to (0.05%)
and (1.48%), respectively for the first quarter of 1996.
Net interest income for the first quarter of 1997 increased
$146,219 to $513,586 versus the first quarter of 1996 of $367,367. The increase
is attributable to loan growth and a higher investment portfolio yield. Loans
grew 52.86% over the first quarter of 1996 from $24,772,966 at March 31, 1996 to
$37,867,007 at the end of the first quarter of 1997. Total Company assets were
$64,822,699 at March 31, 1997 compared to $48,513,294 as of March 31, 1996.
The net interest margin was 3.57% for the first quarter of 1997
compared to 2.95% for the first quarter of 1996. The yield on the investment
portfolio was 6.47% for the first quarter of 1997 compared to 6.29% for the same
quarter of 1996. The higher level of interest income from loans and securities
was offset by an increase in the cost of interest-bearing deposits. Net interest
income was helped by a decrease in the Company's long-term debt and a decrease
in average rate on the Company's long-term debt which was utilized to increase
the capital of the Company's subsidiary Bank.
Non-interest income for the first quarter of 1997 increased
$13,584 over the first quarter of 1996 to $52,331 compared to $38,747 for the
first quarter of 1996. The growth is attributable to service charges on deposit
accounts and other fees. Non-interest expenses for the first quarter of 1997
increased $12,043 to $463,599 compared to the first quarter of 1996 of $451,556.
The Company's net income was significantly benefitted by a decrease in the
expense ratio (annualized non-interest expense divided by total assets) to 2.91%
at March 31, 1997 compared to 4.04% at March 31, 1996. The decrease in the
expense ratio is primarily attributable to the Company being able to service
increased business volume without corresponding increases in costs.
ASSET QUALITY
Asset quality measures continue to improve. Non-performing assets
at March 31, 1997 were $122,000 or 0.32% of loans and foreclosed properties,
which is a decrease from $263,000 or 1.07% of loans and foreclosed properties at
March 31, 1996. The provision for losses on loans was $45,000 for the first
quarter of 1997 which is an increase of $30,000 over the provision of $15,000
for the first quarter of 1996. The increase in the provision is primarily
attributable to the increase in loan growth. At March 31, 1997, the allowance
for losses on loans was 1.32% of loans and approximately 410% of non-performing
assets.
7
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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
Exhibits:
27 -- Financial Data Schedule (For SEC Use Only)
Current Reports:
There have been no Current Reports on Form 8-K filed during the quarter ended
December 31, 1997.
8
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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: May 14, 1998 /s/Timothy L. Hobbs
Timothy L. Hobbs, President
(principal executive officer)
Date: May 14, 1998 /s/Teresa Patten
Teresa Patten
(principal financial and
accounting officer)
9
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CORNERSTONE BANCSHARES, INC. FOR THE THREE MONTH PERIOD
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,166,368
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 14,310,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,375,520
<INVESTMENTS-CARRYING> 8,687,672
<INVESTMENTS-MARKET> 8,719,486
<LOANS> 63,759,536
<ALLOWANCE> 871,452
<TOTAL-ASSETS> 108,990,536
<DEPOSITS> 97,126,213
<SHORT-TERM> 855,000
<LIABILITIES-OTHER> 674,178
<LONG-TERM> 0
0
0
<COMMON> 1,009,061
<OTHER-SE> 9,326,084
<TOTAL-LIABILITIES-AND-EQUITY> 108,990,536
<INTEREST-LOAN> 1,530,852
<INTEREST-INVEST> 363,427
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,894,279
<INTEREST-DEPOSIT> 984,271
<INTEREST-EXPENSE> 984,841
<INTEREST-INCOME-NET> 909,438
<LOAN-LOSSES> 47,018
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 829,830
<INCOME-PRETAX> 216,074
<INCOME-PRE-EXTRAORDINARY> 216,074
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87,926
<EPS-PRIMARY> 0.09
<EPS-DILUTED> .09
<YIELD-ACTUAL> 4.38
<LOANS-NON> 0
<LOANS-PAST> 303,990
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 915,005
<CHARGE-OFFS> 94,000
<RECOVERIES> 5,000
<ALLOWANCE-CLOSE> 871,452
<ALLOWANCE-DOMESTIC> 871,452
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
