<PAGE> 1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ________________
Commission file number 0-30497
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 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: 1,166,129 SHARES OF COMMON
STOCK AS OF JUNE 30, 2000.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE> 2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CORNERSTONE BANCSHARES
PRESENTATION OF FINANCIAL INFORMATION
The 2000 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 1999 Annual Report to
Shareholders which was furnished to each shareholder of the Company in March
2000. 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. ("Company") and its sole subsidiary Cornerstone
Community Bank ("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 Form 10-K for the year ended December 31, 1999, as filed with
the Securities and Exchange Commission. Since December 1999, 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, and 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 adjusted 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
<PAGE> 3
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.
<PAGE> 4
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Unaudited Unaudited
June 30, December 31, June 30,
ASSETS 2000 1999 1999
------------- ------------- -------------
<S> <C> <C> <C>
Cash and due from banks $ 9,857,546 $ 7,721,701 $ 6,654,167
Federal funds sold -- -- 5,355,000
Investment securities available for sale 17,008,300 13,339,306 11,955,433
Investment securities held to maturity 4,938,914 5,723,320 6,989,300
Loans, less allowance for loan loss 81,247,022 71,323,878 65,220,182
Premises and equipment, net 2,247,022 2,231,179 1,921,513
Accrued interest receivable 717,828 656,159 534,078
Excess cost over fair value of assets acquired 2,665,275 2,722,651 2,778,539
Other assets 2,040,660 2,084,033 1,853,347
------------- ------------- -------------
Total assets $ 120,722,567 $ 105,802,227 $ 103,261,559
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non interest bearing $ 13,593,950 $ 12,411,939 $ 12,259,447
NOW accounts 21,932,543 12,626,200 14,985,198
Savings deposits and money market accounts 11,132,449 10,254,825 9,616,620
Time deposits of $100,000 or more 16,973,270 16,129,350 15,138,652
Time deposits of less than $100,000 42,241,131 39,923,313 39,404,797
------------- ------------- -------------
Total deposits 105,873,344 91,345,627 91,404,714
Other Borrowings 2,506,094 2,179,363 282,191
Accrued interest payable 190,035 189,870 183,682
Other liabilities 211,509 193,108 351,544
Note Payable -- -- 1,250,000
------------- ------------- -------------
Total Liabilities 108,780,982 93,907,968 93,472,131
------------- ------------- -------------
Redeemable common stock -- 237,504 237,504
Stockholders' Equity
Common stock 1,166,129 1,166,629 1,011,561
Additional paid-in capital 11,322,276 11,128,234 9,284,418
Undivided profits (deficit) (357,700) (454,818) (664,092)
Accumulated other comprehensive income (189,120) (183,290) (79,963)
------------- ------------- -------------
Total Stockholders' Equity 11,941,585 11,894,259 9,789,428
------------- ------------- -------------
Total liabilities and stockholders equity $ 120,722,567 $ 105,802,227 $ 103,261,559
============= ============= =============
</TABLE>
<PAGE> 5
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Unaudited Unaudited
Three months ended Six months ended
June 30, June 30,
-------------------------- ------------------------
2000 1999 2000 1999
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 1,978,042 $ 1,485,614 $3,822,591 $ 3,062,752
Interest on investment securities 359,024 252,250 688,169 528,186
Interest on federal funds sold 17,364 86,568 19,882 125,101
Interest on other earning aseets 10 -- 263 --
----------- ----------- ---------- -----------
Total interest income 2,354,441 1,824,432 4,530,905 3,716,039
----------- ----------- ---------- -----------
INTEREST EXPENSE
Interest bearing demand accounts 75,010 56,023 137,597 116,804
Money market accounts 68,693 47,037 128,791 99,107
Savings accounts 28,981 27,257 58,930 53,886
Time deposits of less than $100,000 595,892 521,915 1,144,747 1,077,686
Time deposits of $100,000 or more 235,379 218,842 440,681 456,909
Federal funds purchased 7,673 -- 29,259 732
Securities sold under agreements to repurchase 36,557 2,040 57,648 3,718
Other borrowings -- 28,255 -- 52,474
----------- ----------- ---------- -----------
Total interest expense 1,048,185 901,369 1,997,653 1,861,316
----------- ----------- ---------- -----------
Net interest income 1,306,255 923,063 2,533,253 1,854,723
Provision for loan losses 256,000 605,000 414,500 655,000
----------- ----------- ---------- -----------
Net interest income after the provision for loan losses 1,050,255 318,063 2,118,752 1,199,723
----------- ----------- ---------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 94,087 82,375 187,104 173,553
Net securities gains (losses) -- -- -- --
Other income 43,600 76,191 110,174 113,222
----------- ----------- ---------- -----------
Total noninterest income 137,687 158,566 297,278 286,775
----------- ----------- ---------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits 570,077 556,833 1,129,714 1,037,178
Occupancy and equipment expense 138,768 134,338 264,237 262,521
Other operating expense 464,799 518,048 882,584 900,803
----------- ----------- ---------- -----------
Total noninterest expense 1,173,644 1,209,219 2,276,535 2,200,502
----------- ----------- ---------- -----------
Income before provision for income taxes 14,298 (732,590) 139,496 (714,004)
Provision for income taxes 18,154 (113,475) 42,378 (91,607)
----------- ----------- ---------- -----------
NET INCOME $ (3,856) $ (619,115) $ 97,118 $ (622,397)
=========== =========== ========== ===========
Basic net income per common share (0.00) (0.61) 0.08 (0.62)
Diluted net income per common share (0.00) (0.59) 0.08 (0.60)
Dividends declared per common share -- -- -- --
</TABLE>
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30
<TABLE>
<CAPTION>
Unaudited Unaudited
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income 97,118 (622,397)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Provision for possible loan losses 414,500 655,000
Net Charge-offs (330,255) (1,024,757)
Provision for depreciation and amortization 174,097 176,334
Accrued interest receivable (61,669) 104,363
Accrued interest payable 165 (86,952)
Changes in other assets and liabilities: 61,774 (734,809)
------------ ------------
Net cash provided by (used in) operating activities 355,729 (1,533,218)
------------ ------------
Cash flows from investing activities:
Purchase of investment securities: AFS (4,053,044) (6,865,216)
Purchase of investment securities: HTM -- --
Proceeds from security transactions: AFS 368,362 4,418,020
Net increase in loans (10,007,388) 7,642,124
Purchase of bank premises and equipment (132,563) (81,272)
------------ ------------
Net cash provided by (used in) investing activities (13,030,871) 6,904,034
------------ ------------
Cash flows from financing activities:
Net increase in deposits 14,527,717 (6,606,894)
Net increase in repurchase agreements 326,731 282,191
Net increase of notes payable -- --
Issuance of common stock (43,462) 269,088
------------ ------------
Net cash provided by (used in) financing activities 14,810,986 (6,055,615)
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,135,845 (684,800)
Cash and cash equivalents beginning of period 7,721,701 12,693,967
------------ ------------
Cash and cash equivalents end of period $ 9,857,546 $ 12,009,167
============ ============
</TABLE>
<PAGE> 7
Cornerstone Bancshares, Inc and Subsidiary
Changes in Stockholders' Equity
June 30, 2000
<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, 1999 $ 1,166,629 $ 11,128,234 $ (454,818) $ (183,290) $ 11,656,755
Redemption of Common Stock (15,344) (222,660) (238,004)
Issuance of Common Stock 14,844 179,198 194,042
Decrease in Redeemable Common Stock 237,504 237,504
Comprehensive Income:
Net Income $ 97,118 97,118 97,118
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
securities available for sale, net of
reclassification adjustment (5,830) (5,830) (5,830)
-------- ----------- ------------ ---------- ---------- ------------
Total comprehensive income $ 91,288
========
BALANCE, June 30, 2000 (Unaudited) $ 1,166,129 $ 11,322,276 $ (357,700) $ (189,120) $ 11,941,585
=========== ============ ========== ========== ============
</TABLE>
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
The Company ended the first six months of 2000 with total assets
of $121 million, a 14.1% increase from December 31, 1999, and a 17.0% increase
from June 30, 1999. The Company reported a net loss for the second quarter
ending June 30, 2000 of $(3,855) or $(0.004) basic earnings per share, compared
to net loss $(619,115) or $(0.61) basic earnings per share, for the same period
in 1999. The increase in earnings represents a 99.4% increase from the second
quarter 1999 compared to the second quarter of 2000. The Company reported net
income for the first six months ending June 30, 2000 of $97,118, or $0.08 basic
earnings per share, compared to $(622,397), or $(0.62) basic earnings per share,
for the same period in 1999. The increase in earnings represents a 115.6%
increase from the first six months in 1999 compared to the same period in 2000.
The increase in net income from first six months 1999 to first six
months 2000 is due primarily to the improvement in the Bank's net interest
margin. The Bank has seen an increase in the net interest margin to 5.13% in
first six months of 2000 from 4.08% in the first six months of 1999. This
represents an increase of 105 basis points. Several factors have contributed to
the improvement in net interest margin. First, the loan portfolio quality has
improved. The non-performing assets and 90 days past due loan category decreased
from $1,362,582 at year end 1999 to $792,582 as of June 30, 2000. The 30-day or
greater past due ratio dropped from 1.20% as of the end of 1999 to .70% as of
the end of June 30, 2000. These two facts allowed the Bank to recover some
previously charged off interest, which increased the interest and fees earned on
loans. The growth in average earning-assets out paced the growth in average
non-earning assets. Average earning assets increased 13.5% from June 30, 1999 to
June 30, 2000 (on a QTQ basis) while average non-earning assets increased 11.4%
over the same time period. We also have an improved asset and liability mix. The
Bank's average loan to asset ratio improved from 65.9% as of June 30, 1999 to
69.9% as of June 30, 2000 (on a QTQ basis) on the asset side of the balance
sheet. On the liability side, average transaction and saving accounts increased
28.3% while average certificates of deposits increased only 4.3% to fund the
asset growth (on a QTQ basis). Going forward the Bank expects the net interest
margin to be in line with its peer group and will focus on improving the Bank's
efficiency ratio and asset and liability mix to create further earnings
increases to net income of the Company. The Company expects net income to
materially increase over the next several quarters as the loan portfolio quality
continues to improve and the Bank efficiency ratios become more comparable with
other peer banks.
The strategic plan of the Company is to provide a competitive
footprint (convenient branches) to the Chattanooga MSA (Metropolitan Statistical
Area) which would allow Cornerstone Bancshares to compete with the three major
regional banks located in the area. The Bank will focus its efforts in the
suburb branch network and not on a central hub bank located in downtown
Chattanooga. The customer base will consist of small businesses and individual
consumers.
The most recent action the Bank has taken to implement the
strategic plan is the acquisition of a new branch location. The Bank has entered
into an agreement with AmSouth Bank to purchase its closed Gunbarrel Road Branch
building (located 50 yards in front of our present Gunbarrel supermarket
branch). The move is consistent with the strategic plan and will facilitate the
Bank's movement away from grocery store branches to full service branches that
can provide the full service expected of a community bank.
<PAGE> 9
Cornerstone Community Bank is operating under a Memorandum of
Understanding (Memorandum) with the Tennessee Department of Financial
Institutions and the Federal Deposit Insurance Corporation. Among other things,
the Memorandum provides the following:
- The Board of Directors must develop a written management plan that
addresses Cornerstone Community Bank's plans for size, structure,
growth, earnings, services, information systems, personnel,
accounting, financial reporting and operating matters;
- Cornerstone Community Bank must maintain a Tier I leverage capital
ratio of equal to or greater than 8%;
- Cornerstone Community Bank may not pay dividends without the prior
approval of the FDIC; and
- Cornerstone Community Bank must report its progress on the actions
required by the Memorandum to the FDIC on specific dates.
At the June 2000, examination the FDIC reported that Cornerstone
Community Bank was materially in compliance with the provisions of the
Memorandum. However, because of the increased regulatory scrutiny required by
the Memorandum, the activities of Cornerstone Community Bank and Cornerstone are
more restricted, and these restrictions may affect the flexibility of
Cornerstone in conducting its business operations.
FINANCIAL CONDITION
Earning Assets. Average earning assets for three months ending
June 30, 2000 increased $13.4 million or 13.3% above the three months ending
June 30, 1999. The average balance increase was due to strong loan demand and a
steady growth in core deposits during the period. Management expects average
earning assets to steadily increase during the rest of 2000 and anticipates
similar growth in 2001.
Loan Portfolio. Average loans for the first six months of 2000
were $77.8 million, an increase of $8.7 million or 12.7% from the first six
months in 1999, while actual balances increased to $82.3 million, an increase of
24.1% above $66.3 million in loans at the end of June 1999. Management is
anticipating increased loan growth for the remainder of the year in average
balances, with a smaller increase in actual balances. This is due primarily to
the Bank's loan to asset ratio reaching industry norm. As a result, loan growth
will be restricted to the percentage of asset growth going forward. The amount
of such growth, if any, will depend upon general economic conditions.
Investment Portfolio. Investment securities portfolio increased by
15.8% or $3.0 million from June 30, 1999 to June 30, 2000. The growth was a
timing issue as the Bank remained liquid (holding $5.4 million in Fed Funds) as
management made its transition and allowed expensive deposits to terminate. The
Bank 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" (HTM) and "Available for Sale" (AFS).
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,
2000, unrealized losses in the "Available for Sale" and "Held to Maturity"
amounted to $352,353 or a 1.6% decrease in value.
<PAGE> 10
Deposits. Bank's average deposits increased $9.1 million or 11.6%
from June 30, 1999 to June 30, 2000, while actual deposit balances increased
$14.5 million or 15.8%. The actual deposit growth has been broad based with the
exception of certificates of deposit over $100,000, which decreased 3.6% during
the same time period. Management will continue to focus its efforts on
attracting core deposits and expects average deposit growth in the 10% level for
the next several quarters. Transaction accounts will be continuously solicited
from new customers and existing customers. Attracting transaction accounts is
the Bank's highest liability management priority and will provide the Bank with
an increased net interest margin.
Capital Resources. Stockholders' average equity increased $1.7
million or 16.9% to $11.9 million for the three months ending June 30, 2000,
compared with $10.2 million during the same three months ending June 30, 1999.
Actual equity increased $2.2 million or 22.0% from June 30, 1999 to June 30,
2000. 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 earnings sustained from operations
and unrealized losses in the bond portfolio. The Company has approved a stock
offering of 150,000 shares of common stock at $13 per share ($1.9 million). The
Company plans to initiate the offering during the third quarter of 2000.
<PAGE> 11
CONSOLIDATED AVERAGE BALANCE SHEET
INTEREST INCOME / EXPENSE AND YIELD / RATES
Taxable equivalent basis
(in thousands)
<TABLE>
<CAPTION>
Three months ended
June 30,
----------------------------------------------------------------
2000 1999
------------------------------- -----------------------------
Assets Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------- ------- -------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans, net of unearned income 79,974 1,978 9.95% 66,610 1,486 8.95%
Investment securities 22,699 376 6.67% 23,840 339 5.70%
Other earning assets -- --
-------- ------ -------- -----
Total earning assets 102,673 2,354 9.22% 90,450 1,824 8.09%
Allowance for loan losses (1,021) (874)
Cash and other assets 12,761 11,454
-------- --------
TOTAL ASSETS 114,413 101,030
======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits 17,272 75 1.75% 13,646 56 1.65%
Savings deposits 11,453 98 3.43% 9,378 74 3.18%
Time deposits 42,827 596 5.60% 39,507 522 5.30%
Time deposits of $100,000 or more 15,731 235 6.02% 15,657 219 5.61%
Federal funds and securities sold under
Agreement to repurchase 3,353 44 5.31% 222 2 3.69%
Other borrowings -- -- 0.00% 1,250 28 9.07%
-------- ------ -------- -----
Total interest bearing liabilities 90,635 1,048 4.65% 79,660 901 4.54%
------ -----
Net interest spread 1,306 923
===== =====
Noninterest bearing demand deposits 11,191 10,478
Accrued expenses and other liabilities 668 692
Stockholders' equity 11,919 10,201
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 114,413 101,030
======== ========
Net interest margin on earning aseets 5.12% 4.09%
==== ====
Net interest spread on earning assets 4.57% 3.55%
==== ====
Taxable equivalent adjustment:
Loans -- --
Investment Securities -- --
------ -----
Total adjustment -- --
====== =====
</TABLE>
<PAGE> 12
RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED
JUNE 30, 1999
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 after loan loss provision for the three month
period ending June 30 2000 increased $732,192 or 230.2% above net interest
income after loan loss provision as of the same period 1999. The increase in net
interest income as of June 30, 2000 is primarily due to an increase in the
Bank's net interest margin on earning assets, which rose from 4.09% to 5.12% in
three months ending June 30, 2000 as compared to the three months ended June 30,
1999. A larger loan loss provision offset would result in even larger growth.
The increased margin was a result of management's efforts to change the deposit
mix from certificate of deposit base to a transaction account deposit base and
the collection of interest from non-accrual loans written-off in the previous
year. The increase in prime rate loans helped the Bank maintain its margin in an
increasing interest rate environment. The strategic direction has produced
material improvements in the net interest margin and should continue to increase
the Bank's earnings in the future. The larger loan loss provision represents a
continued purging of substandard loans and should continue throughout the year
2000.
Interest income increased $530,009 or 29.1% as of June 30, 2000
compared to June 30, 1999. Interest income produced by the loan portfolio
increased $492,428 or 33.2% from June 30, 1999 to June 30, 2000 due to the
increase in average loans outstanding for the period and the collection of
interest from non-accrual loans and loan fees for loan origination. 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 increased $37,570 or
11.1% from June 30, 1999 to June 30, 2000, due primarily to reduced prepayments
of mortgage backed securities that were purchased at a premium and a fully
invested cash position.
Total interest expense increased $146,816 or 16.3% from June 30,
1999 to June 30, 2000. The interest expense increase from the second quarter of
1999 to the second quarter of 2000 is primarily due to increased market rates
caused by the Federal Reserve's 125 basis point rate increases of Fed Funds over
the last 12 months. Offsetting this increase in rates is the Bank's active
management of the deposit mix and the solicitation of lower costing transaction
accounts at the branch locations.
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, 2000 was 5.12%. The yield on earning
assets increased 113 basis points to 9.22% at June 30, 2000 from 8.09% at June
30, 1999.
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
<PAGE> 13
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 1999 and recaptured interest
during the current period, the interest rate spread was 4.57% on June 30, 2000,
compared to 3.55% on June 30, 1999, an increase of 102 basis points.
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
$1,086,054 for June 30, 2000 in the allowance for loan loss account reflects the
full known extent of credit exposure. The provision for the second quarter
ending June 30, 2000 was $256,000, well above the budgeted amount for that time
period. The Bank does not anticipate similar provisions for the remainder of
2000. In the future and as the loan portfolio grows and unanticipated loan
losses occur, the Bank may have loan loss provisions slightly above peer to
cover the above average loan growth the Bank will realize. 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, 2000
Cornerstone had $128,041 in non-accrual loans and $792,858 in non-performing
assets.
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 $20,879 or 13.3% from June 30, 1999 to June 30, 2000. Due primarily
to slow down of home mortgage origination caused by a sharp increase in interest
rates.
Non-interest Expense. Non-interest expense for the three months
ending June 30, of 2000, decreased by $35,575 or 2.95% as compared to the three
months ending June 30, 1999. Salaries and employee benefits increased by $13,244
or 2.4% in June 30, 2000 over June 30, 1999. Occupancy expense as of June 30,
2000 increased by $4,430 or 3.3% over the same period in 1999. All other
non-interest expenses at June 30, 2000 decreased $53,249 or 10.3% over the
non-interest expenses as of June 30, 1999.
<PAGE> 14
CONSOLIDATED AVERAGE BALANCE SHEET
INTEREST INCOME / EXPENSE AND YIELD / RATES
Taxable equivalent basis
(in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------------------------------------------------
2000 1999
------------------------------- -----------------------------
Assets Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------- ------- -------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans, net of unearned income 77,838 3,823 9.88% 69,097 3,063 8.94%
Investment securities 21,551 708 6.61% 22,683 653 5.81%
Other earning assets -- --
-------- ------ -------- -----
Total earning assets 99,389 4,531 9.17% 91,780 3,716 8.16%
Allowance for loan losses (1,003) (1,116)
Cash and other assets 12,857 12,129
-------- --------
TOTAL ASSETS 111,243 102,793
======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits 16,169 138 1.71% 13,402 117 1.76%
Savings deposits 11,073 188 3.41% 9,641 153 3.20%
Time deposits 41,337 1,145 5.57% 40,568 1,078 5.36%
Time deposits of $100,000 or more 15,486 441 5.72% 16,073 457 5.73%
Federal funds and securities sold under
Agreement to repurchase 3,294 87 5.31% 182 4 4.93%
Other borrowings -- -- 1,255 52 8.43%
-------- ------ -------- -----
Total interest bearing liabilities 87,359 1,998 4.60% 81,121 1,861 4.63%
------ -----
Net interest spread 2,533 1,855
====== =====
Noninterest bearing demand deposits 11,358 10,604
Accrued expenses and other liabilities 610 779
Stockholders' equity 11,916 10,290
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 111,243 102,793
======== ========
Net interest margin on earning assets 5.13% 4.08%
==== ====
Net interest spread on earning assets 4.57% 3.54%
==== ====
Taxable equivalent adjustment:
Loans -- --
Investment Securities -- --
------ -----
Total adjustment -- --
====== =====
</TABLE>
<PAGE> 15
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1999
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 after loan loss provision for the first six
months of 2000 increased $919,030 or 76.6% above net interest income after loan
loss provision as of first six months of 1999. The increase in net interest
income as of June 30, 2000 is primarily due to an increase in the Bank's net
interest margin on earning assets, which rose from 4.08% to 5.13% in first six
months of 2000 as compared to the first six months of 1999. 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 collection of
interest from non-accrual loans written off in the previous year, and a smaller
loan loss provision. The strategic direction has produced improvements in the
net interest margin and should continue to assist the Bank's earnings in the
future. The current year provision represents a continued purging of substandard
loans and should continue throughout the year 2000.
Interest income increased $814,866 or 21.9% as of June 30, 2000
compared to June 30, 1999. Interest income produced by the loan portfolio
increased $759,839 or 24.8% from June 30, 1999 to June 30, 2000 due to the
increase in average loans outstanding for the period and the collection of
interest from non-accrual loans and loan fees for loan origination. 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 increased $54,764 or
8.4% from June 30, 1999 to June 30, 2000, due primarily to reduced prepayments
of mortgage backed securities that were purchased at a premium and a fully
invested cash position.
Total interest expense increased $136,337 or 7.3% from June 30,
1999 to June 30, 2000. The interest expense increase from the first six months
of 1999 to the first six months of 2000 is primarily due to increased market
rates caused by the Federal Reserve's five 25 basis point rate increases of Fed
Funds over the last 12 months.
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, 2000 was 5.13%. The yield on earning
assets increased 101 basis points to 9.17% at June 30, 2000 from 8.16% at June
30, 1999.
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 1999 and recaptured interest during the current period, the interest rate
spread was 4.57% on June 30, compared to 3.53% on June 30, 1999, an increase of
104 basis points.
<PAGE> 16
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
$414,500 provision for loan loss as of June 30, 2000 adequately provides funds
to the Bank's loan loss allowance to cover the full known extent of credit
exposure. The Bank anticipates a smaller provision for the rest of 2000 that
will cover the Bank's credit risk 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 June 30, 2000
Cornerstone had $128,041 in non-accrual loans and $792,858 in non-performing
assets.
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
increased by $10,503 or 3.7% from June 30, 1999 to June 30, 2000.
Non-interest Expense. Non-interest expense for the first six
months of 2000 increased by $76,032 or 3.53% as compared to the first six months
in 1999. Salaries and employee benefits increased by $92,536 or 8.9% in June 30,
2000 over June 30, 1999. Occupancy expense as of June 30, 2000 increased by
$1,716 or 0.7% over the same period in 1999. All other non-interest expenses at
June 30, 2000 decreased $18,219 or 2.0% over the non-interest expenses as of
June 30, 1999.
<PAGE> 17
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
2000 1999
-------------------------- ------------------------------------------
Quarter Ending June 30 March 31 December 31, September 30 June 30
--------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period 1,028,838 1,001,809 985,234 1,030,243 1,208,311
Loans charged-off (259,543) (170,891) (123,631) (225,363) (858,844)
Loans recovered 60,758 39,420 45,206 75,354 75,777
-----------------------------------------------------------------------------------------------------------------
Net Charge-offs (recoveries) (198,784) (131,471) (78,425) (150,009) (783,068)
Provision for loan losses charged
to expense 256,000 158,500 95,000 105,000 605,000
-----------------------------------------------------------------------------------------------------------------
Balance at end of period 1,086,054 1,028,838 1,001,809 985,234 1,030,243
=================================================================================================================
Allowance for loan losses as a
percentage of average loans
outstanding for the period 1.358% 1.358% 1.390% 1.438% 1.547%
Allowance for loan losses as a
percentage of nonperforming assets
and loans 90 days past due
outstanding for the period 136.980% 83.251% 73.523% 78.287% 76.738%
Annualized QTD net charge-offs as
a percentage of average loans
outstanding for the period -0.994% -0.694% -0.435% -0.876% -4.702%
Annualized YTD net charge-offs as
a percentage of average loans
outstanding for the period -1.106% -0.694% -1.797% -2.273% -2.966
YTD Average Outstanding Loans 77,837,484 75,760,000 69,731,000 68,922,000 69,097,000
QTD Average Outstanding Loans 79,974,088 75,760,000 72,065,598 68,513,772 66,610,187
Nonperforming assets and
loans 90 days past due 792,858 1,235,826 1,362,582 1,258,493 1,342,538
</TABLE>
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are various claims and lawsuits in which the Bank is periodically
involved incidental to the Bank's business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
Item 2. Changes in Securities
None
Item 3. Defaults on Senior Securities
N/A
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:
Financial Data Schedule (For SEC Use Only)
(b) There have been no Current Reports on Form 8-K during the quarter ended
June 30, 2000.
<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: August 14, 2000
/s/Gregory B. Jones, President & CEO
Date: August 14, 2000
/s/Nathaniel F. Hughes, EVP & CFO
