<PAGE> 1
United States
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 SEPTEMBER 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.)
6401 SUITE B
LEE CORNERS
CHATTANOOGA, TENNESSEE 37421
(Address of principal executive offices)
(423) 385-3000
(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: 1,166,329 SHARES OF COMMON
STOCK AS OF SEPTEMBER 30, 1999.
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
Unaudited Unaudited
September 30, December 31, September 30,
1999 1998 1998
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS
Cash and due from banks 4,171,067 4,268,967 6,851,654
Federal funds sold 2,000,000 8,425,000 580,000
Investment securities available for sale 13,722,139 9,280,116 10,172,059
Investment securities held to maturity 6,128,973 9,077,465 10,818,912
Loans, less allowance for loan loss 69,287,556 72,492,549 74,139,182
Premises and equipment, net 2,057,900 1,967,329 1,988,039
Accrued interest receivable 653,862 638,441 674,697
Excess cost over fair value of assets acquired 2,750,747 2,834,124 2,861,917
Other assets 1,893,773 1,522,143 1,601,869
------------ ------------ -----------
Total assets 102,666,018 110,506,134 109,688,328
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non interest bearing 10,886,803 14,151,526 9,496,581
NOW accounts 15,282,557 12,998,223 13,287,953
Savings deposits and money market accounts 10,488,031 10,283,103 12,000,219
Time deposits of $100,000 or more 15,860,872 17,489,618 19,120,251
Time deposits of less than $100,000 36,726,204 43,089,138 43,035,159
------------ ------------ -----------
Total deposits 89,244,467 98,011,608 96,940,164
Other Borrowings 1,044,188 -- --
Accrued interest payable 175,469 270,634 270,773
Other liabilities 331,655 470,861 616,471
Note Payable -- 1,250,000 1,250,000
------------ ------------ -----------
Total Liabilities 90,795,779 100,003,103 99,077,408
------------ ------------ -----------
Redeemable common stock 237,504 478,744 478,744
Stockholders' Equity
Common stock 1,166,329 1,009,461 1,009,461
Additional paid-in capital 11,124,634 9,017,430 9,017,430
Undivided profits (deficit) (559,890) (41,695) 68,076
Net unrealized gain in securities available for sale (98,338) 39,091 37,209
------------ ------------ -----------
Total Stockholders' Equity 11,870,239 10,503,031 10,610,920
------------ ------------ -----------
Total liabilities and stockholders equity 102,666,018 110,506,134 109,688,328
============ ============ ===========
</TABLE>
2
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Unaudited Unaudited
Three months ended Nine months ended
September 30, September 30,
------------------------ -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans 1,626,935 1,750,144 4,689,687 4,825,427
Interest on investment securities 305,513 341,449 833,699 1,007,399
Interest on federal funds sold 36,293 17,485 161,394 154,565
Interest on other earning assets -- -- -- --
---------- ---------- ---------- ---------
Total interest income 1,968,741 2,109,078 5,684,780 5,987,391
---------- ---------- ---------- ---------
INTEREST EXPENSE
Interest bearing demand accounts 55,565 61,759 172,369 195,353
Money market accounts 56,988 85,416 156,095 216,519
Savings accounts 27,466 25,827 81,352 77,350
Time deposits of less than $100,000 515,312 628,126 1,592,998 1,892,671
Time deposits of $100,000 or more 202,828 272,926 659,737 730,292
Federal funds purchased 300 6,336 1,032 6,906
Securities sold under agreements to repurchase 6,551 -- 10,269 --
Other borrowings 14,648 20,742 67,122 56,207
---------- ---------- ---------- ---------
Total interest expense 879,658 1,101,132 2,740,974 3,175,298
---------- ---------- ---------- ---------
Net interest income 1,089,084 1,007,946 2,943,807 2,812,093
Provision for loan losses 105,000 183,478 760,000 306,670
---------- ---------- ---------- ---------
Net interest income after the provision for loan losses 984,084 824,468 2,183,807 2,505,423
---------- ---------- ---------- ---------
NONINTEREST INCOME
Service charges on deposit accounts 120,063 165,955 373,727 626,242
Net securities gains (losses) -- -- -- --
Other income 31,518 (4,721) 64,629 138,217
---------- ---------- ---------- ---------
Total noninterest income 151,581 161,234 438,356 764,459
---------- ---------- ---------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits 568,057 430,399 1,605,235 1,254,911
Occupancy and equipment expense 135,221 100,006 397,742 325,442
Other operating expense 387,143 375,079 1,287,946 1,011,288
---------- ---------- ---------- ---------
Total noninterest expense 1,090,420 905,484 3,290,922 2,591,641
---------- ---------- ---------- ---------
Income before provision for income taxes 45,245 80,218 (668,760) 678,241
Provision for income taxes (58,957) (47,683) (150,564) 114,075
---------- ---------- ---------- ---------
NET INCOME 104,202 127,901 (518,196) 564,166
========== ========== ========== =========
Basic net income per common share 0.09 0.13 (0.44) 0.56
Diluted net income per common share 0.08 0.11 (0.40) 0.49
Dividends declared per common share -- -- -- --
</TABLE>
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (518,196) 564,166
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Provision for possible loan losses 760,000 306,670
Net Charge-offs (1,174,766) (271,604)
Provision for depreciation and amortization 265,846 242,101
Accrued interest receivable (15,421) (90,251)
Accrued interest payable (95,165) 54,778
Changes in other assets and liabilities: (443,016) (691,860)
----------- -----------
Net cash used in operating activities (1,220,717) 114,000
----------- -----------
Cash flows from investing activities:
Purchase of investment securities: AFS (9,295,372) (6,365,349)
Purchase of investment securities: HTM -- (8,856,080)
Proceeds from security transactions: AFS 5,039,365 5,602,129
Proceeds from security transactions: HTM 2,557,272 6,920,641
Net increase in loans 3,619,759 (13,762,936)
Purchase of bank premises and equipment (273,085) (181,752)
----------- -----------
Net cash used in investing activities 1,647,939 (16,643,347)
----------- -----------
Cash flows from financing activities:
Net increase in deposits (8,767,141) 15,108,726
Net increase in repurchase agreements 1,044,188 --
Net increase of notes payable (1,250,000) --
Issuance of common stock 2,022,832 1,548,382
----------- -----------
Net cash provided by financing activities (6,950,121) 16,657,108
----------- -----------
Net increase in cash and cash equivalents (6,522,899) 127,761
Cash and cash equivalents beginning of period 12,693,967 7,303,892
----------- -----------
Cash and cash equivalents end of period 6,171,067 7,431,654
=========== ===========
</TABLE>
4
<PAGE> 5
Cornerstone Bancshares, Inc and Subsidiary
Changes in Stockholders' Equity
September 30, 1999
<TABLE>
<CAPTION>
Accumulated
Additional Retained Other Total
Comprehensive Common Paid-in Earnings Comprehensive Stockholders'
Income Stock Capital (Deficit) Income Equity
------------- ------ ------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 1,009,461 9,017,430 (41,695) 39,091 10,024,287
Purchase of Treasury stock (19,352) (251,576) (270,928)
Sale of Treasury Stock 19,352 251,576 270,928
Issuance of Common Stock 156,868 1,865,964 2,022,832
Prior Year Redeemable Common Stock 478,744 478,744
Current Year Redeemable Common Stock (237,504) (237,504)
Comprehensive Income:
Net Income (518,195) (518,195) (518,195)
Other comprehensive income, net of tax:
Unrealized holding gains (losses)
on securities available for sale,
net of reclassification adjustment (137,429) (137,429) (137,429)
-------- --------- ---------- -------- ------- ----------
Total comprehensive income (655,624)
========
BALANCE, October 31, 1999 1,166,329 11,124,634 (559,890) (98,338) 11,632,735
========= ========== ======== ======= ==========
</TABLE>
5
<PAGE> 6
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, Cornerstone Bancshares 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 number of common shares outstanding
(denominator). Diluted EPS is computed by dividing income available to common
shareholders (numerator) by the number of shares outstanding (denominator). The
adjusted 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
6
<PAGE> 7
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.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
The company ended the first nine months of 1999 with total assets
of $103 million, a 7.1% decrease from December 31, 1998, and a 6.8% decrease
from September 30, 1998. The company reported net income for the third quarter
ending September 30, 1999 of $104,202, or $0.09 basic earnings per share,
compared to $127,901 or $0.13 basic earnings per share, for the same period in
1998. The decline in earnings represents an 18.5% decrease from the third
quarter 1998 compared to the third quarter of 1999. The company reported net
income for the first nine months ending September 30, 1999 of $(518,196), or
$(0.44) basic earnings per share, compared to $564,166 or $0.56 basic earnings
per share, for the same period in 1998. The decline in earnings represents a
191.9% decrease from the first nine months in 1998 compared to the same period
in 1999.
The decrease in net income from September 1998 to September 1999
is primarily due to a two-phase plan to move Cornerstone Bancshares back to a
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 year of
$760,000. Earnings should improve in the short-term as the Bank loan quality
improves and in the long-term as the Bank grows in size to optimize the new
expertise acquired to improve the Bank's financial status.
FINANCIAL CONDITION
Earning Assets. Average earning assets for three months ending
September 30, 1999 decreased $7.6 million or 6.9% below September 1998, while
actual earning assets decreased $7.0 million or 7.2% during the same time
period. The average balance decrease was due to a general pull back from
aggressive deposit pricing in order to maintain the Bank's mix of earning assets
while the Bank's lenders concentrated on technical exceptions and created action
plans for their substandard loans.
Management expects average earning assets to increase less than
5.0% for the remainder of the year and anticipates faster growth in the first
and second quarter of 2000.
Loan Portfolio. Cornerstone's average loans for the third three
months of 1999 were $68.5 million, a decrease of $5.0 million or 6.9% from the
third quarter in 1998, while actual balances decreased to $70.2 million, an
decrease of 7.1% below $75.5 million in loans in September 1998.
Management is anticipating increased loan growth (more than 8%)
for the remainder of the year in actual balances, with a larger increase in
average balances. However, the amount of such growth, if any, will depend upon
general economic conditions.
8
<PAGE> 9
Investment Portfolio. Cornerstone's investment securities
portfolio decreased by 8.1% or $2.0 million from September 1998 to September
1999. 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
September 30, 1999, unrealized losses in the "Available for Sale" portfolio
amounted to $142,790 or 1.0% decrease in value of the Available For Sale
securities.
Deposits. Cornerstone's average deposits decreased $8.0 million or
8.2% from September 1998 to September 1999, while actual deposit balances
decreased $6.7 million or 6.9%. The 1999 deposit numbers used in the above
calculation include commercial repurchase agreements, arranged with
Cornerstone's larger deposit customers. The largest portion of decrease was a
$9.6 million, or 15.3% 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.
Capital Resources. Stockholders' average equity increased $0.3
million or 2.6% to $11.1 million for the three months ending September 30, 1999,
compared with $10.8 during the same three months ending September 30, 1998.
Actual equity increased $1.3 million or 11.9% from September 1998 to September
1999. This increase was primarily due to a capital program to encourage warrant
holders to exercise their warrants with net proceeds of approximately $2
million. The balance represents current year losses sustained from operations
and proceeds not collected as of the end of the reporting period.
9
<PAGE> 10
CONSOLIDATED AVERAGE BALANCE SHEET
INTEREST INCOME / EXPENSE AND YIELD / RATES
Taxable equivalent basis
(in thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------------------------------------------------------
1999 1998
-------------------------------- -------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets
Earning Assets:
Loans, net of unearned income 68,514 1,627 9.42% 73,542 1,758 9.48%
Investment securities 22,604 335 5.88% 24,601 369 5.96%
Other earning assets -- --
------- ----- ------- -----
Total earning assets 91,117 1,962 8.64% 98,143 2,127 8.69%
Allowance for loan losses (998) (1,077)
Cash and other assets 11,541 12,162
------- -------
TOTAL ASSETS 101,661 109,228
======= =======
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits 13,781 55 1.60% 12,249 65 2.10%
Savings deposits 10,005 85 3.35% 11,666 113 3.83%
Time deposits 38,288 505 5.24% 44,638 635 5.64%
Time deposits of $100,000 or more 15,397 213 5.48% 17,109 274 6.36%
Federal funds and securities sold under
Agreement to repurchase 652 7 4.17% 428 6 5.85%
Other borrowings 408 15 8.25% 988 21 8.42%
----- -----
Total interest bearing liabilities 78,529 880 4.49% 87,079 1,114 5.13%
----- -----
Net interest spread 1,082 1,013
===== =====
Noninterest bearing demand deposits 11,372 10,484
Accrued expenses and other liabilities 669 849
Stockholders' equity 11,092 10,816
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 101,661 109,228
======= =======
Net interest margin on earning assets 4.76% 4.14%
==== ====
Net interest spread on earning assets 4.14% 3.56%
==== ====
</TABLE>
10
<PAGE> 11
RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER
ENDED SEPTEMBER 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 third three months of 1999 increased
$81,138 or 8.0% above net interest income earned as of September 1998. The
increase in net interest income as of September 30, 1999 is primarily due to a
increase in the Bank's net interest margin on earning assets, which rose from
4.14% to 4.76% in 1999, and a smaller provision to loan loss. The increased
margin was a result of management's efforts to change the deposit mix from
certificate of deposit based to a transaction account deposit base. The
strategic direction has produced material improvements in the net interest
margin and should continue to assist the Bank's earnings in the future. The
lower provision represents an improvement in the loan portfolio's quality, but
reflects no future direction.
Interest income decreased $140,337 or 6.7% as of September 1999
compared to September 1998. Interest income produced by the loan portfolio
decreased $123,209 or 7.0% from September 1998 to September 1999 due to the
decrease in average loans outstanding for the period. Management estimates the
average balances will increase, but will restrain origination of these loans to
insure quality standards and documentation are maintained. Interest income on
investment securities and federal funds decreased $17,128 or 4.8% from September
1998 to September 1999, due primarily to reduced deposit balances and the
purchase of lower yielding securities which reduced the Bank's interest rate
risk and gave the Bank a more predictable cash-flow.
Total interest expense decreased $221,474 or 20.11% from September
30, 1998 to September 30, 1999. The interest expense decrease from the third
quarter of 1998 to the third quarter of 1999 is primarily due to the active
management of the 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 September 30, 1999 was 4.76%. The yield on
earning assets decreased 5 basis points to 8.64% at September 30, 1999 from
8.69% at September 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 third quarter 1999, the interest rate spread was 4.14%, an
increase of 58 basis points from September 1998 to September 1999.
11
<PAGE> 12
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
$985,234 for September 1999 in the allowance for loan loss account reflects the
full known extent of credit exposure. This amount includes a provision of
$105,000 made in the third quarter of 1999. The Bank anticipates similar
provisions in the future as the loan portfolio grows and unanticipated loan
losses occur. 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 September 30, 1999
Cornerstone had $919,270 in non-accrual loans and $1,258,493 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. Total non-interest income
decreased by $45,892 or 28.5% from September 1998 to September 1999.
Non-interest Expense. Non-interest expense for the third three
months of 1999 increased by $184,936 or 20.4% as compared to the third three
months in 1998. Salaries and employee benefits increased by $137,718 or 32.0% in
September 1999 over September 1998. Occupancy expense as of September 30, 1999
increased by $35,215 or 35.2% over the same period in 1998. All other
non-interest expenses at June 30, 1999 increased $12,064 or 3.2% over the
non-interest expenses as of September 30, 1998.
12
<PAGE> 13
CONSOLIDATED AVERAGE BALANCE SHEET
INTEREST INCOME / EXPENSE AND YIELD / RATES
Taxable equivalent basis
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------------------------------------------------
1999 1998
-------------------------------- -------------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets
Earning Assets:
Loans, net of unearned income 68,922 4,690 9.10% 66,842 4,825 9.65%
Investment securities 22,662 995 5.87% 24,319 1,162 6.39%
Other earning assets -- --
------- ----- ------- -----
Total earning assets 91,585 5,685 8.30% 91,161 5,987 8.78%
Allowance for loan losses (1,076) (861)
Cash and other assets 11,951 14,077
------- -------
TOTAL ASSETS 102,459 104,377
======= =======
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits 13,530 172 1.70% 12,123 195 2.15%
Savings deposits 9,760 237 3.25% 10,439 294 3.76%
Time deposits 39,805 1,593 5.35% 45,272 1,893 5.59%
Time deposits of $100,000 or more 15,846 660 5.57% 14,520 730 6.72%
Federal funds and securities sold under
Agreement to repurchase 338 11 4.47% 148 7 6.23%
Other borrowings 999 67 8.98% 898 56 8.37%
----- ------- -----
Total interest bearing liabilities 80,278 2,741 4.56% 83,400 3,175 5.09%
----- -----
Net interest spread 2,944 2,812
===== =====
Noninterest bearing demand deposits 10,858 9,710
Accrued expenses and other liabilities 852 1,337
Stockholders' equity 10,589 10,518
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 102,577 104,965
======= =======
Net interest margin on earning assets 4.30% 4.12%
==== ====
Net interest spread on earning assets 3.73% 3.69%
==== ====
</TABLE>
13
<PAGE> 14
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
QUARTER ENDED SEPTEMBER 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 nine months of 1999 increased
$131,714 or 4.7% above net interest income earned as of September 1998. The
increase in net interest income as of September 30, 1999 is primarily due to an
increase in the Bank's net interest margin on earning assets, which rose from
4.12% to 4.3% in 1999. Reduced deposit costs caused by a change in the deposit
mix from certificates of deposits to transaction accounts contributed the
majority of the net interest margin increase.
Interest income decreased $302,611 or 5.1% as of September 1999
compared to September 1998. Interest income produced by the loan portfolio
decreased $135,740 or 2.8% from September 1998 to September 1999 due to the
decrease in average yields for the period. Two factors contributed to the
reduction of loan yields. In the first half of the year a review of all loans
placed many loans on non-accrual and previously booked interest income was
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 $166,871 or 14.4% from
September 1998 to September 1999, due primarily to reduced deposit balances.
Total interest expense decreased $434,324 or 13.7% from September
30, 1998 to September 30, 1999. The interest expense decrease is primarily due
to the active management of the 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 September 30, 1999 was 4.30%. The yield on
earning assets decreased 48 basis points to 8.30% at September 30, 1999 from
8.78% at September 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 non-interest
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 1999, the interest rate spread was 3.73%, a increase of 4 basis
points from September 1998 to September 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
14
<PAGE> 15
considered adequate to absorb anticipated loan losses. Management believes that
the $985,234 for September 1999 in the allowance for loan loss account reflects
the full known extent of credit exposure. 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 September 30, 1999
Cornerstone had $919,270 in non-accrual loans and $1,258,493 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. Total non-interest income
decreased by $326,103 or 46.6% from September 1998 to September 1999.
Non-interest Expense. Non-interest expense for the first nine
months of 1999 increased by $699,281 or 27.0% as compared to the first nine
months in 1998. Salaries and employee benefits increased by $350,324 or 27.9% in
September 1999 over September 1998. Occupancy expense as of September 30, 1999
increased by $72,300 or 18.2% over the same period in 1998. All other
non-interest expenses at September 30, 1999 increased $276,658 or 27.4% over the
non-interest expenses as of September 30, 1998, primarily due to an increase in
professional fees, and miscellaneous charge-offs.
15
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
16
<PAGE> 17
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1999
-----------------------------------------------
Quarter Ending September 30 June 30 March 31
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of period 1,030,243 1,208,311 1,400,000
Loans charged-off (225,363) (858,844) (304,209)
Loans recovered 75,354 75,777 62,520
----------- ----------- -----------
Net Charge-offs (recoveries) (150,009) (783,068) (241,689)
Provision for loan losses charged
to expense 105,000 605,000 50,000
----------- ----------- -----------
Balance at end of period 985,234 1,030,243 1,208,311
=========== =========== ===========
Allowance for loan losses as a
percentage of average loans
outstanding for the period 1.438% 1.545% 1.679%
Allowance for loan losses as a
percentage of nonperforming assets
and loans 90 days past due
outstanding for the period 78.287% 76.738% 125.368%
Annualized QTD net charge-offs as
a percentage of average loans
outstanding for the period -0.876% -4.698% -1.344%
Annualized YTD net charge-offs as
a percentage of average loans
outstanding for the period -2.686% -3.352% -1.687%
YTD Average Outstanding Loans 68,922,000 69,396,000 72,150,000
QTD Average Outstanding Loans 68,513,772 66,670,912 71,950,537
Nonperforming assets and
loans 90 days past due 1,258,493 1,342,538 963,808
</TABLE>
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Bank is currently involved in two lawsuits. Both of which are related to a
relationship with Island Cove Marina. Management believes the suits have a low
probability of having any material effect on the Bank's future earnings.
Item 2. Changes in Securities
None
Item 3. Defaults on 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 during the quarter ended
September 30, 1999.
18
<PAGE> 19
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.
Date: September 15, 1999
/s/ Gregory B. Jones, President & CEO
Date: September 15, 1999
/s/ Nathaniel F. Hughes, CFO
19
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,171
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,722
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 70,272
<ALLOWANCE> 985
<TOTAL-ASSETS> 102,666
<DEPOSITS> 89,244
<SHORT-TERM> 1,044
<LIABILITIES-OTHER> 507
<LONG-TERM> 0
0
0
<COMMON> 11,870
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 102,666
<INTEREST-LOAN> 4,690
<INTEREST-INVEST> 995
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,685
<INTEREST-DEPOSIT> 2,581
<INTEREST-EXPENSE> 2,741
<INTEREST-INCOME-NET> 2,944
<LOAN-LOSSES> 760
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,291
<INCOME-PRETAX> (669)
<INCOME-PRE-EXTRAORDINARY> (518)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (518)
<EPS-BASIC> (0.44)
<EPS-DILUTED> (0.40)
<YIELD-ACTUAL> 4.30
<LOANS-NON> 919
<LOANS-PAST> 15
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,400
<CHARGE-OFFS> 1,388
<RECOVERIES> 214
<ALLOWANCE-CLOSE> 985
<ALLOWANCE-DOMESTIC> 985
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
