<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 MARCH 31, 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 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 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: 1,166,629 SHARES OF COMMON
STOCK AS OF MARCH 31, 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. (The "Company") 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, 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
<PAGE> 3
statements. These statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from the Company's
historical experience and its present expectations or projections. These risks
and uncertainties include, but are not limited to, unanticipated economic
changes, interest rate movements and the impact of competition. Caution should
be taken not to place undue reliance on any such forward-looking statements
since such statements speak only as of the date of making such statements.
<PAGE> 4
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION Unaudited Unaudited
March 31, December 31, March 31,
------------ ------------ ------------
ASSETS 2000 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash and due from banks 5,997,383 7,721,701 5,454,637
Federal funds sold 500,000 0 6,445,000
Investment securities available for sale 15,106,432 13,339,306 8,524,813
Investment securities held to maturity 5,286,376 5,723,320 8,024,303
Loans, less allowance for loan loss 78,006,363 71,323,878 67,174,147
Premises and equipment, net 2,215,250 2,231,179 1,940,085
Accrued interest receivable 727,002 656,159 570,966
Excess cost over fair value of assets acquired 2,693,963 2,722,651 2,806,331
Other assets 2,372,991 2,084,033 1,568,554
------------ ------------ ------------
Total assets 112,905,761 105,802,227 102,508,835
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non interest bearing 11,342,594 12,411,939 10,396,679
NOW accounts 18,495,979 12,626,200 13,749,522
Savings deposits and money market accounts 10,985,321 10,254,825 9,315,445
Time deposits of $100,000 or more 13,844,691 16,129,350 15,677,132
Time deposits of less than $100,000 43,752,236 39,923,313 40,517,135
------------ ------------ ------------
Total deposits 98,420,822 91,345,627 89,655,913
Other Borrowings 2,184,893 2,179,363 210,626
Accrued interest payable 180,043 189,870 913,699
Other liabilities 160,035 193,108 1,250,000
Note Payable -- -- --
------------ ------------ ------------
Total Liabilities 100,945,793 93,907,968 92,030,238
------------ ------------ ------------
Redeemable common stock -- 237,504 237,504
Stockholders' Equity
Common stock 1,166,629 1,166,629 1,009,561
Additional paid-in capital 11,321,776 11,128,234 9,260,418
Undivided profits (deficit) (353,851) (454,818) (44,978)
Net unrealized gain in securities available for sale (174,586) (183,290) 16,092
------------ ------------ ------------
Total Stockholders' Equity 11,959,968 11,894,259 10,478,597
------------ ------------ ------------
Total liabilities and stockholders equity 112,905,761 105,802,227 102,508,835
============ ============ ============
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME Unaudited
Three months ended
March 31,
------------------------------------
2000 1999
---------- ----------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans 1,844,549 1,577,138
Interest on investment securities 329,145 275,936
Interest on federal funds sold 2,517 38,533
Interest on other earning assets 253 --
---------- ----------
Total interest income 2,176,465 1,891,607
---------- ----------
INTEREST EXPENSE
Interest bearing demand accounts 62,587 60,781
Money market accounts 60,097 52,070
Savings accounts 29,949 26,629
Time deposits of less than $100,000 548,856 555,771
Time deposits of $100,000 or more 205,302 238,067
Federal funds purchased 21,586 732
Securities sold under agreements to repurchase 21,091 1,678
Other borrowings -- 24,219
---------- ----------
Total interest expense 949,467 959,947
---------- ----------
Net interest income 1,226,998 931,660
Provision for loan losses 158,500 50,000
---------- ----------
Net interest income after the provision for loan losses 1,068,498 881,660
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 93,016 91,178
Net securities gains (losses) -- --
Other income 66,574 37,031
---------- ----------
Total noninterest income 159,591 128,209
---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 559,637 480,345
Occupancy and equipment expense 125,468 128,183
Other operating expense 417,785 382,756
---------- ----------
Total noninterest expense 1,102,890 991,284
---------- ----------
Income before provision for income taxes 125,198 18,585
Provision for income taxes 24,224 21,868
---------- ----------
NET INCOME 100,974 (3,283)
========== ==========
Basic net income per common share 0.09 (0.00)
Diluted net income per common share 0.08 (0.00)
Dividends declared per common share -- --
</TABLE>
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31
<TABLE>
<CAPTION>
Unaudited
Three months ended
March 31,
------------------------------------
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income 100,974 (3,283)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Provision for possible loan losses 158,500 50,000
Net Charge-offs (131,471) --
Provision for depreciation and amortization 87,282 --
Accrued interest receivable (70,843) 67,475
Accrued interest payable (9,827) (60,008)
Changes in other assets and liabilities: (322,032) (225,449)
---------- ----------
Net cash used in operating activities (187,416) (171,265)
========== ==========
Cash flows from investing activities:
Purchase of investment securities: AFS (1,963,125) (2,316,702)
Purchase of investment securities: HTM -- --
Proceeds from security transactions: AFS 192,876 4,086,501
Proceeds from security transactions: HTM 440,643 --
Net increase in loans (6,709,521) 5,318,402
Purchase of bank premises and equipment (34,539) (32,312)
---------- ----------
Net cash used in investing activities (8,073,665) 7,055,889
========== ==========
Cash flows from financing activities:
Net increase in deposits 7,075,195 (8,343,937)
Net increase in repurchase agreements 5,530 663,135
Net increase of notes payable -- --
Issuance of common stock (43,962) 1,848
---------- ----------
Net cash provided by financing activities 7,036,763 (7,678,954)
========== ==========
Net increase in cash and cash equivalents (1,224,318) (794,330)
Cash and cash equivalents beginning of period 7,721,701 12,693,967
---------- ----------
Cash and cash equivalents end of period 6,497,383 11,899,637
========== ==========
</TABLE>
<PAGE> 7
CORNERSTONE BANCSHARES, INC. AND SUBSIDIARY
CHANGES IN STOCKHOLDERS' EQUITY
MARCH 31, 1999
<TABLE>
<CAPTION>
Unaudited
Three months ended
March 31,
------------------------------------
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 (14,844) (222,660) (237,504)
INSURANCE OF EXISTING COMMON STOCK 14,844 178,698 193,542
ISSUANCE OF NEWLY AUTHORIZED COMMON 0 0 0
STOCK
DECREASE IN REDEEMABLE COMMON STOCK 237,504 237,504
COMPREHENSIVE INCOME:
NET INCOME 100,967 100,967 100,967
OTHER COMPREHENSIVE, NET OF TAX:
UNREALIZED HOLDING GAINS (LOSSES) ON
SECURITIES AVAILABLE FOR SALE, NET OF
RECLASSIFICATION ADJUSTMENT 8,704 8,704 8,704
------- --------- ---------- -------- -------- ----------
TOTAL COMPREHENSIVE INCOME 109,671
=======
BALANCE, MARCH 31, 2000 1,166,629 11,321,776 (353,851) (174,586) 11,959,968
========= ========== ======== ======== ==========
</TABLE>
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
The company ended the first three months of 2000 with total assets of
$113 million, a 6.7% increase from December 31, 1999, and a 10.1% increase from
March 31, 1999. The company reported net income for the third quarter ending
March 31, 2000 of $100,974, or $0.09 basic earnings per share, compared to
$(3,283) or $0.00 basic earnings per share, for the same period in 1999. The
increase in earnings represents a 3100.5% increase from the first quarter 1999
compared to the first quarter of 2000.
The increase in net income from first quarter 1999 to first quarter
2000 is primarily due to improvement in the quality of the loan portfolio and
the steady growth in core customer relationships, which bring low cost deposits
and quality loans to the balance sheet. The Company has completed an extensive
reorganization and purged a net $1.3 million of bad loans from the balance
sheet during 1999. Concurrently the Company made the strategic decision to
place a priority on raising core deposits which caused a large number of large
depositors with only high yield certificates of deposit leave the Bank to other
financial institutions willing to pay higher rates. The result has been a
dramatic increase in the Bank's net interest margin to 5.13% in first quarter
of 2000 from 3.92% in the first quarter of 1999. This represents an increase of
120 basis points over the net interest margin during the first quarter of 1999.
Going forward the Bank expects the net interest margin to fall into line with
their peer group and will focus on improving the Bank's efficiency ratio to
create further 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 ratio's fall
inline 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.
Cornerstone Community Bank is operating under a Memorandum of Understanding
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 September 30, 1999, Cornerstone Community Bank reported to the
FDIC that it was
<PAGE> 9
in compliance with all 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 March
31, 2000 increased $3.0 million or 3.2% above the three months ending March 31,
1999, while actual earning assets increased $8.5 million or 9.4% during the
same time period. 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 expects
a 15.0% growth for the year and anticipates similar growth in 2001.
Loan Portfolio. Cornerstone's average loans for the first three months
of 2000 were $75.8 million, an increase of $4.0 million or 5.5% from the first
quarter in 1999, while actual balances increased to $79.0 million, an increase
of 15.6% above $68.4 million in loans in the first quarter of 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 loan to asset ratio's reaching industry norm and as a result loan
growth will be restricted to the percentage of asset growth going forward.
However, the amount of such growth, if any, will depend upon general economic
conditions.
Investment Portfolio. Cornerstone's investment securities
portfolio increased by 23.2% or $3.8 million from March 31, 1999 to March 31,
2000. The growth was a timing issue as the bank remained liquid (holding $6.4
million in Fed Funds) as management made its transition and allowed expensive
deposits to terminate. 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"
(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 March 31, 2000, unrealized losses in the
"Available for Sale" portfolio amounted to $264,523 or 1.7% decrease in value.
Deposits. Cornerstone's average deposits increased $0.4 million or
0.5% from March 31, 1999 to March 31, 2000, while actual deposit balances
increased $8.8 million or 9.8%. The actual deposit growth has been broad based
with the exception of certificates of deposit over $100,000, which decreased
11.7% 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. 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 $1.4 million
or 13.7% to $11.9 million for the three months ending March 31, 2000, compared
with $10.5 million during the same three months ending March 31, 1999. Actual
equity increased $1.5 million or 14.1% from March 31, 1999 to March 31, 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 losses 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 will initiate the offering during the 2nd quarter of 2000.
<PAGE> 10
CONSOLIDATED AVERAGE BALANCE SHEET
INTEREST INCOME/EXPENSE AND YIELD/RATES
TAXABLE EQUIVALENT BASIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------------------------------------------
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 75,760 1,845 9.79% 71,792 1,555 8.71%
INVESTMENT SECURITIES 20,404 332 6.55% 21,402 314 5.91%
OTHER EARNING ASSETS -- --
---------------------- ------------------
TOTAL EARNING ASSETS 96,164 2,177 9.10% 93,194 1,870 8.07%
ALLOWANCE FOR LOAN LOSSES (984) (1,361)
CASH AND OTHER ASSETS 12,897 12,832
------- -------
TOTAL ASSETS 108,077 104,665
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST BEARING LIABILITIES:
INTEREST BEARING DEMAND DEPOSITS 15,066 63 1.67% 13,154 61 1.86%
SAVINGS DEPOSITS 10,694 90 3.39% 9,907 79 3.19%
TIME DEPOSITS 39,847 549 5.54% 41,640 556 5.37%
TIME DEPOSITS OF $100,000 OR MORE 15,242 205 5.42% 16,494 238 5.81%
FEDERAL FUNDS AND SECURITIES SOLD UNDER
AGREEMENT TO REPURCHASE 3,235 43 5.31% 142 2 6.83%
OTHER BORROWINGS -- -- 1,250 24 7.79%
---------------------- ------------------
TOTAL INTEREST BEARING LIABILITIES 84,084 949 4.54% 82,587 960 4.67%
----- -----
NET INTEREST SPREAD 1,227 910
===== =====
NONINTEREST BEARING DEMAND DEPOSITS 11,525 10,744
ACCRUED EXPENSES AND OTHER LIABILITIES 556 860
STOCKHOLDERS' EQUITY 11,913 10,475
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 108,077 104,665
======= =======
NET INTEREST MARGIN ON EARNING ASSETS 5.13% 3.93%
==== ====
NET INTEREST SPREAD ON EARNING ASSETS 4.56% 3.39%
==== ====
</TABLE>
<PAGE> 11
RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED
MARCH 31, 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 three
months of 2000 increased $186,838 or 21.2% above net interest income after
provision earned as of first three months of 1999. The increase in net interest
income as of March 31, 2000 is primarily due to an increase in the Bank's net
interest margin on earning assets, which rose from 3.93% to 5.13% in first
three months of 2000 as compared to the first three months of 1999. A larger
loan loss provision offset what would result in an even larger growth. 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 and the
collection of interest from non-accrual loans written off in the previous year.
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
larger provision represents a continued purging of substandard loans and should
continue throughout the year 2000.
Interest income increased $284,858 or 15.1% as of March 31, 2000
compared to March 31, 1999. Interest income produced by the loan portfolio
increased $267,411 or 17.0% from March 31, 1999 to March 31, 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 $17,428 or
5.5% from March 31, 1999 to March 31, 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 decreased $10,480 or 1.1% from March 31, 1999
to March 31, 2000. The interest expense increase from the first quarter of 1999
to the first quarter of 2000 is primarily due to the active management of the
ALCO committee to reduce certificate of deposit exposure, but were mostly
offset by increased market rates caused by the Federal Reserve's five 25 basis
point rate increases of Fed Funds over the last 6 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 March 31, 2000 was 5.13%. The
yield on earning assets increased 103 basis points to 9.10% at March 31, 2000
from 8.07% at March 31, 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 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
28
<PAGE> 12
and recaptured interest during the current period, the interest rate spread was
4.56%, an increase of 117 basis points from March 31, 1999 to March 31, 2000.
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 $158,500 for March 31, 2000 in the allowance for loan loss
account reflects the full known extent of credit exposure 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 March 31, 2000 Cornerstone
had $581,986 in non-accrual loans and $1,235,826 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 $31,382 or 24.5% from March 31, 1999 to March 31, 2000.
Non-interest Expense. Non-interest expense for the first three months
of 2000 increased by $111,606 or 11.3% as compared to the first three months in
1999. Salaries and employee benefits increased by $79,292 or 16.5% in March 31,
2000 over March 31, 1999. Occupancy expense as of March 31, 2000 decreased by
$2,715 or 2.1% over the same period in 1999. All other non-interest expenses at
March 31, 2000 increased $35,029 or 9.2% over the non-interest expenses as of
March 31, 1999.
<PAGE> 13
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
2000 1999
---- ----
QUARTER ENDING MARCH 31 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
-------- ----------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD 1,001,809 985,234 1,030,243 1,208,311 1,400,000
LOANS CHARGED-OFF (170,891) (123,631) (225,363) (858,844) (304,209)
LOANS RECOVERED 39,240 45,206 75,354 75,777 62,520
--------------------------------------------------------------------------------------
NET CHARGE-OFFS (RECOVERIES) (131,471) (78,425) (150,009) (783,068) (241,689)
PROVISION FOR LOAN LOSSES
CHARGED TO EXPENSE 158,500 95,000 105,000 605,000 50,000
--------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD 1,028,838 1,001,809 985,234 1,030,243 1,208,311
======================================================================================
ALLOWANCE FOR LOAN LOSSES AS
A PERCENTAGE OF AVERAGE
LOANS OUTSTANDING FOR
THE PERIOD 1.358% 1.390% 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 83.251% 73.523% 78.287% 76.738% 125.368%
ANNUALIZED QTD NET CHARGE-
OFFS AS A PERCENTAGE OF
AVERAGE LOANS OUTSTANDING
FOR THE PERIOD -0.694% -0.435% -0.876% -4.698% -1.344%
ANNUALIZED YTD NET CHARGE-
OFFS AS A PERCENTAGE OF
AVERAGE LOANS OUTSTANDING
FOR THE PERIOD -0.915% -1.001% -2.686% -3.352% -1.687%
YTD AVERAGE OUTSTANDING LOANS 75,760,000 69,731,000 68,922,000 69,396,000 72,150,000
QTD AVERAGE OUTSTANDING LOANS 75,760,000 72,065,598 68,513,772 66,670,912 71,950,537
NONPERFORMING ASSETS AND
LOANS 90 DAYS PAST DUE 1,235,826 1,362,582 1,258,493 1,342,538 963,808
</TABLE>
<PAGE> 14
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 March 31, 2000.
<PAGE> 15
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: April 12, 2000
/s/Gregory B. Jones, President & CEO
Date: April 12, 2000
/s/Nathaniel F. Hughes, EVP & CFO
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CORNERSTONE BANCSHARES, INC. FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 5,997
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,106
<INVESTMENTS-CARRYING> 5,286
<INVESTMENTS-MARKET> 5,225
<LOANS> 79,035
<ALLOWANCE> 1,029
<TOTAL-ASSETS> 112,906
<DEPOSITS> 98,421
<SHORT-TERM> 2,185
<LIABILITIES-OTHER> 340
<LONG-TERM> 0
0
0
<COMMON> 11,960
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 112,906
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<INTEREST-TOTAL> 2,176
<INTEREST-DEPOSIT> 907
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<INTEREST-INCOME-NET> 1,227
<LOAN-LOSSES> 159
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,103
<INCOME-PRETAX> 125
<INCOME-PRE-EXTRAORDINARY> 101
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<CHANGES> 0
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<EPS-BASIC> 0.09
<EPS-DILUTED> 0.08
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<LOANS-NON> 582
<LOANS-PAST> 4
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