<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 JUNE 30, 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 BANCHSHARES, 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 SHARES OF COMMON
STOCK AS OF AUGUST 1, 1998.
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,455,469 $ 6,173,892
Federal fund sold 2,855,000 1,130,000
Investment securities available for sale 7,544,579
Investment securities held to maturity 12,122,160 10,779,662
Loans, less allowances for loan losses 12,983,804 60,589,987
Premises and equipment, net 2,459,888 2,444,219
Accrued interest receivable 720,138 584,446
Excess cost over fair value of assets acquired 2,322,101 2,362,580
Other assets 1,157,309 1,093,520
------------- ------------
Total assets $ 109,803,623 $ 92,702,885
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 11,048,289 $ 9,272,695
NOW accounts 13,306,067 13,009,450
Savings deposits and money market accounts 11,045,520 9,879,431
Time deposits 62,396,793 49,688,229
------------- ------------
Total deposits 97,796,669 81,849,805
Accrued interest payable 315,659 325,551
Other liabilities 329,460 600,647
Note payable 855,000 855,000
------------- ------------
Total liabilities 99,296,788 83,631,003
Stockholders' equity:
Common stock 1,009,461 874,954
Additional paid-in capital 9,496,174 8,444,238
Undivided profits (deficit) (27,719) (290,027)
Net unrealized gain on securities available for sale, net of tax 28,920 42,717
------------- ------------
Total stockholders' equity 10,506,835 9,071,882
------------- ------------
Total liabilities and stockholders' equity $ 109,803,623 $ 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 and Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30
--------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $1,640,668 $1,387,000 $3,171,520 $2,432,000
Interest on investment securities: 388,166 298,000 665,950 606,000
Other interest income 51,437 40,000 137,080 167,000
---------- ---------- ---------- ----------
Total interest income 2,080,271 1,725,000 3,974,550 3,205,000
---------- ---------- ---------- ----------
Interest expense 1,090,400 830,000 2,075,241 1,578,000
---------- ---------- ---------- ----------
Provision for possible loan losses 76,714 92,000 123,192 184,000
---------- ---------- ---------- ----------
Net interest income after provision for possible
loan losses 913,698 803,000 1,776,117 1,443,000
Non-interest income:
Loan fees 31,110 25,000 55,399 44,000
Service charges on deposits 108,576 98,000 206,333 156,000
Other operating income 71,664 51,000 133,102 99,000
---------- ---------- ---------- ----------
Total other income 211,350 174,000 394,834 299,000
Other expense:
Salaries and employee benefits 408,875 392,000 821,598 784,000
Net occupancy and equipment expense 100,708 57,000 203,121 88,000
Other operating expense 329,754 322,000 644,449 608,000
---------- ---------- ----------
Total other expense 839,336 771,000 1,669,167 1,480,000
---------- ---------- ---------- ----------
Income before income taxes 295,711 501,784
Income tax expense 111,329 39,000 239,476 38,000
---------- ---------- ---------- ----------
Net income $ 174,382 $ 167,000 $ 262,308 $ 224,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
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CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statement of Cash Flows
For The Six Months Ended June 30, 1998 (1)
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 262,308
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Deferred income taxes
Provision for possible loan losses 123,192
Provision for depreciation and amortization 148,535
changes in other assets and liabilities:
Accrued interest receivable (135,692)
Accrued interest payable (9,892)
Other (323,593)
----------
Net cash used in operating activities 64,858
----------
Cash Flows from Investing Activities:
Purchase of investment securities available for sale (5,957,397)
Purchase of securities held to maturity (7,101,586)
Proceeds from security transactions:
Securities available for sale 1,366,020
Securities held to maturity 4,897,444
Net increase in loans (9,260,960)
Purchase of bank premises and equipment (123,725)
Net cash used in investing activities (16,180,204)
----------
Cash Flows from Financing Activities:
Net increase in deposits 15,946,864
Issuance of common stock 1,186,443
----------
Net cash provided by financing activities 17,133,307
----------
Net Increase in cash and cash equivalents 1,017,961
Cash and cash equivalents beginning of period 7,303,892
----------
Cash and cash equivalents end of period 8,321,853
==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest 2,085,133
Income taxes 0
</TABLE>
- ----------
(1) Information for June 30, 1997 is not presented due to the fact that pro
forma cash flow is not meaningful.
The accompanying notes are an integral part of these consolidated financial
statements.
3
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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
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
Cornerstone's Management Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the
information and tables which follow.
The 1997 statistical disclosure of Cornerstone Bancshares, Inc.
under Guide 3 represent 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, 1996. Guide 3 financial information 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 net income as of June 30, 1998 was $174,000, a 4.0% increase
from Cornerstone's net income of $167,000 earned during the same period in 1997.
Net income per common share in June 1998 was $.17 compared with $.15 for June
1997.
The first six months of 1998 reflect year to date net income of
$262,000, a 17% increase from Cornerstone's net income of $224,000 earned for
the first half of 1997. Year to date net income per common share for June 1998
was $.26, compared with $.22 per share as of June 30, 1997. Pretax income for
June 1998 increased $24,000 from June 1997 pretax income of $262,000.
The increase in net income from June 1997 to June 1998 is
primarily due to a 25% increase in interest-earning assets. The increase was
also due in part to a 21% increase in non-interest income offset by only a 9%
increase in non-interest expenses.
FINANCIAL CONDITION
Earning Assets. Average earning assets for the first half of 1998
increased by $18 million, or 24% over average earning assets for the first half
of 1997. This growth was due to an increase in average loans and average
investment securities funded by the continued growth of deposit accounts.
Loan Portfolio. Cornerstone's average loans as of June 30, 1998
were $67 million, an increase of 34% over $50 million in average loans reported
for the first half of 1997. Loan growth for 1998 has been primarily funded
through increased deposit growth. The increase in ending balances from June 1997
to June 1998 was consistent with the increase in average balances.
Investment Portfolio. Cornerstone's investment securities
portfolio increased by 9% or $2 million from June 1997 to June 1998, funded
primarily by an increase in deposits. 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 June 30, 1998, unrealized gains in
the "Available for Sale" portfolio amounted to $47,000.
Deposits. Cornerstone's average deposits increased $20 million or
26% from June 1997 to June 1998. Total deposits increased $22 million or 29% for
the same period. Time deposits accounted for the largest portion of this growth
with a 37% or $17 million increase. This increase was due to Cornerstone's
strategy of increasing time deposits by offering competitive rates to consumers.
From June 1997 to June 1998 interest-bearing transaction deposits decreased $2
million or 14%, and savings deposits increased $1 million or 12%.
Capital Resources. Stockholders' equity increased $4.2 or 67% to
$10.5 million as of June 30, 1998, compared with $6.2 million at June 30, 1997.
This increase was primarily due to warrants being exercised by shareholders.
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BALANCE SHEET MANAGEMENT
Liquidity Management. Liquidity is the ability of a company to
convert assets into cash without significant loss and to raise funds by
increasing liabilities. Liquidity management involves having the ability to meet
the day-to-day flow requirements of its customers, whether they are depositors
wishing to withdraw funds or borrowers requiring funds to meet their credit
needs.
The primary function of asset/liability management is not only to
assure adequate liquidity in order for Cornerstone to meet the needs of its
customer base, but to maintain an appropriate balance between interest-sensitive
assets and interest-sensitive liabilities so that Cornerstone can profitably
deploy its assets. Both assets and liabilities are considered sources of
liquidity funding and both are, therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity
primarily through loan repayments and maturities of investment securities.
Additional sources of liquidity are the investments in federal funds sold and
prepayments from the mortgage-backed securities from the investment portfolio.
The liability portion of the balance sheet provides liquidity
through various interest bearing and noninterest bearing deposit accounts. As of
June 1998 Cornerstone had approximately $2.0 million of federal funds lines
available.
RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 1998 COMPARED TO QUARTER ENDED
JUNE 30, 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
expenses paid on deposits. The following discussion is on a fully taxable
equivalent basis.
Net interest income as of June 30, 1998 increased by $187,000 or
21% over net interest income as of June 30, 1997. The increase in net interest
income is primarily due to an increase in interest-earning assets.
Interest income increased $355,000 or 21% as of June 1998 compared
to June 1997. Interest income produced by the loan portfolio increased $254,000
or 18% from June 1997 to June 1998 due to the increase in average loans for the
period. Interest income on investment securities increased $90,000 or 30% from
June 1997 to June 1998.
Total interest expense increased $260,000 or 31% from June 30,
1997 to June 30, 1998. The interest expense increased from the second quarter of
1997 to the second 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
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, 1998 was 4.28%. The net cost of
funds, defined as interest expense divided by average-earning assets, increased
22 basis points from 4.02% on June 30, 1997 to 4.24% in 1998. The yield on
earning assets increased 45 basis points to 8.68% at June 30, 1998 from 8.23% at
June 30, 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 16 basis points from 3.67% to 3.51%
from June 1997 to June 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 approximate provisions required to maintain a level considered
adequate to absorb anticipated loan losses. Management believes that the
$994,000 for June 1998 in the allowance for loan losses account was sufficient
to absorb known risks in the portfolio. No assurance can be
6
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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 which it is contractually past the 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 June 30, 1998 Cornerstone had
$29,000 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 increased by $37,000 or 21% from June
1997 to June 1998.
Noninterest Expense. Noninterest Expense for the second quarter of
1998 increased by $68,000 or 9% as compared to the second quarter 1997. Salaries
and employee benefits increased $17,000 or 4% from the second quarter of 1997 to
the second quarter of 1998. Occupancy expense as of June 30, 1998 increased by
$44,000 or 130% from June 30, 1997 due to the expense of upgrading computer
equipment. All other noninterest expenses for the quarter ending June 30, 1998
increased $7,000 or 2% over the noninterest expenses for quarter ending June 30,
1997.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1997
Net Interest Income. Year to date net interest income for the six
months ended June 1998 increased $272,000 or 17% over net interest income for
the six months ended June 1997. This increase is primarily due to an increase in
interest-earning assets.
Total interest income earned year to date increased $770,000 or
24% from June 30, 1997 to June 30, 1998. The interest income produced by the
loan portfolio for the six month period increased $740,000 or 30% due to the
increase in average loans. Interest income on investment securities increased
$60,000 or 10% from June 1997 to June 1998.
Year to date total interest expense as of June 30, 1998 increased
$497,000 or 30% from the year to date total interest expense of $1.6 million at
June 30, 1997. This increase is primarily due to the increase in total interest
bearing deposits.
Noninterest Income and Expense. Year to date total noninterest
income as of June 30, 1998 increased $96,000 or 32% from year to date
noninterest income as of June 30, 1997. This increase is due in part to an
increase in fees assessed on nonsufficient funds.
Year to date noninterest expense as of June 30, 1998 increased by
$352,000 or 27% over the year to date noninterest expense as of June 1997.
Salaries and employee benefits increased by $38,000 or 5% in 1998 over 1997.
Occupancy expense as of June 30, 1998 increased by $115,000 or 131% over the
same period primarily due to the additional expense of upgrading computer
equipment. All other noninterest expenses at June 30, 1998 increased $199,000 or
45% over the noninterest expenses as of June 30, 1997. This increase was
primarily due to an increase in advertising costs and professional fees.
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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
(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, 1998.
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: August 14, 1998
/s/Timothy L. Hobbs, President
(principal executive officer)
Date: August 14, 1998
/s/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 SIX MONTHS ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,455,469
<INT-BEARING-DEPOSITS> 11,384
<FED-FUNDS-SOLD> 2,855,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,122,160
<INVESTMENTS-CARRYING> 12,983,804
<INVESTMENTS-MARKET> 12,963,080
<LOANS> 69,727,755
<ALLOWANCE> 0
<TOTAL-ASSETS> 109,803,623
<DEPOSITS> 97,796,669
<SHORT-TERM> 0
<LIABILITIES-OTHER> 329,460
<LONG-TERM> 855,000
0
0
<COMMON> 1,009,461
<OTHER-SE> 9,497,374
<TOTAL-LIABILITIES-AND-EQUITY> 109,803,623
<INTEREST-LOAN> 3,171,520
<INTEREST-INVEST> 665,950
<INTEREST-OTHER> 137,080
<INTEREST-TOTAL> 3,974,550
<INTEREST-DEPOSIT> 2,038,131
<INTEREST-EXPENSE> 2,075,241
<INTEREST-INCOME-NET> 1,776,117
<LOAN-LOSSES> 123,192
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,669,167
<INCOME-PRETAX> 501,784
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 262,308
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
<YIELD-ACTUAL> 8.68
<LOANS-NON> 29,000
<LOANS-PAST> 498,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 915,000
<CHARGE-OFFS> 106,000
<RECOVERIES> 62,000
<ALLOWANCE-CLOSE> 994,000
<ALLOWANCE-DOMESTIC> 994,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
