-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KvMArsVf4nYmiXMxchHAF3QZgpbP+XdB4Qra4TN+3yKqWfgduOHjppAApRDUKeJP s00ATj4TfQ7FK7VMuQq9iw== 0000912057-01-516021.txt : 20010516 0000912057-01-516021.hdr.sgml : 20010516 ACCESSION NUMBER: 0000912057-01-516021 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNERSTONE BANCSHARES INC CENTRAL INDEX KEY: 0001038773 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 621175427 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-30497 FILM NUMBER: 1638471 BUSINESS ADDRESS: STREET 1: 4154 RINGGOLD RD CITY: CHATTANOOGA STATE: TN ZIP: 37412-416 BUSINESS PHONE: 4236982454 MAIL ADDRESS: STREET 1: 4154 RINGGOLD RD CITY: CHATTANOOGA STATE: TN ZIP: 37412-0416 FORMER COMPANY: FORMER CONFORMED NAME: EAST RIDGE BANCSHARES INC DATE OF NAME CHANGE: 19970507 10QSB 1 a2049440z10qsb.txt FORM 10-QSB 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, 2001 / / TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------- ------------------- Commission file number 000-30497 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.)
5319 HIGHWAY 153 CHATTANOOGA, TENNESSEE 37343 (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 The aggregate market value of the Registrant's outstanding Common Stock held by nonaffiliates of the Registrant on March 31, 2001 was approximately $15,966,171. There were 1,228,167 shares of Common Stock outstanding as of March 31, 2001. Transitional Small Business Disclosure Format (check one) : Yes No X --- --- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CORNERSTONE BANCSHARES PRESENTATION OF FINANCIAL INFORMATION The 2001 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 2000 Annual Report to Shareholders which was furnished to each shareholder of the Company in March 2001. 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-KSB for the year ended December 31, 2000, as filed with the Securities and Exchange Commission. Since December 31, 2000, 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 Cornerstone 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 results to differ materially from Cornerstone'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. PART I -- FINANCIAL INFORMATION Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET Unaudited Unaudited March 31, December 31, March 31, --------------- ---------------- ---------------- ASSETS 2001 2000 2000 --------------- ---------------- ---------------- Cash and due from banks 5,043,997 4,633,514 5,997,383 Due from banks time deposits 1,827,798 - - Federal funds sold 6,500,000 2,400,000 500,000 Investment securities available for sale 15,159,718 16,397,715 15,106,432 Investment securities held to maturity 3,462,998 4,012,414 5,286,376 Loans, less allowance for loan loss 85,739,411 83,431,776 78,006,363 Premises and equipment, net 3,816,055 3,391,138 2,215,250 Accrued interest receivable 766,014 849,142 727,002 Excess cost over fair value of assets acquired 2,632,243 2,662,499 2,693,963 Other assets 2,238,840 1,600,557 2,372,991 --------------- ---------------- ---------------- Total assets 127,187,073 119,378,755 112,905,761 =============== ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing 13,728,232 11,924,140 11,342,594 NOW accounts 16,792,291 13,687,959 18,495,979 Savings deposits and money market accounts 10,601,907 10,459,568 10,985,321 Time deposits of $100,000 or more 20,426,463 16,911,729 13,844,691 Time deposits of less than $100,000 47,307,566 48,266,503 43,752,236 --------------- ---------------- ---------------- Total deposits 108,856,459 101,249,899 98,420,822 Federal funds purchased and securites sold under agreement to repurchase 2,317,015 3,144,291 2,184,893 Federal Home Loan Bank Advance 2,000,000 2,000,000 - Accrued interest payable 189,276 183,834 180,043 Other liabilities 392,402 282,570 160,035 --------------- ---------------- ---------------- Total Liabilities 113,755,152 106,860,594 100,945,793 --------------- ---------------- ---------------- Redeemable common stock - - - Stockholders' Equity Common stock 1,228,167 1,166,129 1,166,629 Additional paid-in capital 12,033,867 11,322,276 11,321,776 Retained Earnings (deficit) (59,310) (92,694) (353,851) Accumulated other comprehensive income 229,197 122,450 (174,586) --------------- ---------------- ---------------- Total Stockholders' Equity 13,431,921 12,518,161 11,959,968 --------------- ---------------- ---------------- Total liabilities and stockholders equity 127,187,073 119,378,755 112,905,761 =============== ================ ================
CONSOLIDATED STATEMENTS OF INCOME Unaudited Three months ended March 31, ----------------------------------- 2001 2000 ---------------- ---------------- INTEREST INCOME Interest and fees on loans 2,017,467 1,844,549 Interest on investment securities 297,881 329,145 Interest on federal funds sold 55,171 2,517 Interest on other earning aseets 34,238 253 ---------------- ---------------- Total interest income 2,404,757 2,176,465 ---------------- ---------------- INTEREST EXPENSE Interest-bearing demand accounts 60,442 62,587 Money market accounts 64,953 60,097 Savings accounts 29,391 29,949 Time deposits of less than $100,000 742,169 548,856 Time deposits of $100,000 or more 303,114 205,302 Federal funds purchased - 21,586 Securities sold under agreements to repurchase 27,546 21,091 Federal Home Loan Bank Advance 24,658 - ---------------- ---------------- Total interest expense 1,252,274 949,467 ---------------- ---------------- Net interest income before the provision for loan losses 1,152,483 1,226,998 Provision for loan losses 165,500 158,500 ---------------- ---------------- Net interest income after the provision for loan losses 986,983 1,068,498 ---------------- ---------------- NONINTEREST INCOME Service charges on deposit accounts 106,398 93,016 Net securities gains (losses) 83,705 - Other income 75,232 66,574 ---------------- ---------------- Total noninterest income 265,336 159,591 ---------------- ---------------- NONINTEREST EXPENSE Salaries and employee benefits 553,518 559,637 Occupancy and equipment expense 132,237 125,468 Other operating expense 494,930 417,785 ---------------- ---------------- Total noninterest expense 1,180,685 1,102,890 ---------------- ---------------- Income before provision for income taxes 71,633 125,198 Provision for income taxes 38,250 24,224 ---------------- ---------------- NET INCOME 33,383 100,974 ================ ================ Basic net income per common share 0.03 0.09 Diluted net income per common share 0.03 0.08 Dividends declared per common share - -
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31
2001 2000 ---------------- ---------------- Cash flows from operating activities: Net income 33,383 100,974 Adjustments to reconcile net income (loss) to net cash provided by operating actvities: Provision for possible loan losses 165,500 158,500 Net Charge-offs (102,878) (131,471) Provision for depreciation and amortization 103,845 87,282 Accrued interest receivable 83,128 (70,843) Accrued interest payable 5,442 (9,827) Changes in other assets and liabilities: (528,451) (322,032) ---------------- ---------------- Net cash used in operating activities (240,030) (187,417) ================ ================ Cash flows from investing activities: Purchase of investment securities: AFS (1,998,438) (1,963,125) Purchase of investment securities: HTM - - Proceeds from security transactions: AFS 3,250,533 192,297 Proceeds from security transactions: HTM 606,812 440,643 Purchase of due from bank time deposits (1,827,798) - Net increase in loans (1) (2,370,257) (6,709,521) Purchase of bank premises and equipment (1) (203,253) (34,539) ---------------- ---------------- Net cash used in investing activities (2,542,400) (8,074,244) ================ ================ Cash flows from financing activities: Net increase in deposits 7,606,560 7,075,195 Net increase in repurchase agreements (827,276) 5,530 Net increase of FHLB Advance - - Issuance of common stock 513,629 (43,962) ---------------- ---------------- Net cash provided by finanacing activities 7,292,912 7,036,763 ================ ================ Net increase in cash and cash equivalents 4,510,483 (1,224,898) Cash and cash equivalents beginning of period 7,033,514 7,722,281 ---------------- ---------------- Cash and cash equivalents end of period 11,543,997 6,497,383 ================ ================
Cornerstone Bancshares, Inc and Subsidiary Consolidated Statement of Changes in Stockholders' Equity March 31, 2001
Accumulated Additional Retained Other Total Comprehensive Common Paid-in Earning Comprehensive Stockholders' Income Stock Capital (Deficit) Income Equity ------------- ---------- ----------- ----------- ------------ -------------- BALANCE, December 31, 2000 1,166,129 11,322,276 (92,694) 122,450 12,518,162 Redemption of Common Stock - - - Issuance of Common Stock 62,038 711,591 773,629 Comprehensive Income: Net Income 33,383 33,383 33,383 Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities available for sale, net of reclassification adjustment 106,747 106,747 106,747 ----------- ----------- ----------- ----------- ----------- ----------- Total comprehensive income 140,130 ----------- BALANCE, March 31, 2001 1,228,167 12,033,867 (59,310) 229,197 13,431,921 =========== =========== ========== ========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. OVERVIEW Cornerstone Bancshares, Inc. ("Cornerstone") ended the first three months of 2001 with total assets of $127 million, a 6.5% increase from December 31, 2000, and a 12.6% increase from March 31, 2000. Cornerstone reported net income for the first quarter ending March 31, 2001 of $33,383, or $0.03 basic earnings per share, compared to $100,974 or $0.09 basic earnings per share, for the same period in 2000. The decrease in earnings represents a 66.9% decrease from the first quarter 2000 compared to the first quarter of 2001. The decrease in net income from first quarter 2000 to first quarter 2001 is primarily due to the dramatic 150 basis points decrease in interest rates implemented by the Federal Reserve during the first quarter of 2001. Cornerstone was and still is positioned to reprice assets quicker than liabilities during the three months following an interest rate move. During the six months following the three-month period, Cornerstone's liabilities typically reprice quicker than assets. This means Cornerstone's net interest margin will shrink during the first three months of an interest rate decrease and expand during the following six months. Cornerstone fully expects the net interest margin to return to its target percentage of 4.75% over the next two quarters. Cornerstone continues to improve loan quality with strict underwriting procedures and aggressive handling of substandard loans. The management of the Bank believes strongly that, at the end of 2001, it will have the amount of its substandard loans returned to, or below, peer bank standards and as a result, expects a lower provision to the loan loss allowance. Core customer relationships, which bring low cost deposits and quality loans to the balance sheet, remain a top priority and Cornerstone will also focus the majority of its efforts on small business relationships in the future. To further assist in this effort, Cornerstone will continue to expand its branch system to accommodate these small businesses. Cornerstone has purchased property in Ooltewah, Tennessee for its next branch expansion. The Strategic plan of Cornerstone entails providing a competitive footprint (convenient branches) to the Chattanooga Metropolitan Statistical Area allowing Cornerstone to compete with the three major regional banks located in the area. Cornerstone 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 eight percent (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 March 31, 2001, Cornerstone Community Bank reported to the FDIC that it was in compliance with all but three provisions of the Memorandum. The management of the Bank believes that it is in substantial compliance with the remaining three provisions. Because of the increased regulatory scrutiny required by the Memorandum, Cornerstone's activities are more restricted, and these restrictions may effect Cornerstone Community Bank's flexibility in conducting its business operations. FINANCIAL CONDITION EARNING ASSETS. Average earning assets for the three months ending March 31, 2001, increased $13.9 million, or 14.4%, above the three months ending March 31, 2000, while actual earning assets increased $13.8 million or 13.9% 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 2001 and expects a 13.0% growth for the year and anticipates similar growth in 2002. LOAN PORTFOLIO. Cornerstone's average loans for the first three months of 2001 were $85.4 million, an increase of $9.7 million or 12.8% from the first quarter in 2000, while actual balances increased to $86.9 million, an increase of 15.6% above $79.0 million in loans in the first quarter of 2000. Management is anticipating increased loan growth for the remainder of the year in both average and actual balances. INVESTMENT PORTFOLIO. Cornerstone's average investment securities portfolio and Federal Funds sold increased by 19.6% or $4.1 million from March 31, 2000 to March 31, 2001, while actual balances increased $4.2 million, an increase of 20.2%. The growth is the direct result of deposit growth. The majority of the proceeds from this deposit growth were placed in Federal Funds ($6.5 million) as management allowed expensive deposits to terminate while waiting for an appropriate investment environment to grow the investment portfolio. 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, in order of priority, Gap Management, Liquidity, Pledging, Return, and Local Community Support. 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 "Held to Maturity" securities are carried at book value. As of March 31, 2001, net unrealized gains in the "Available for Sale" portfolio amounted to $343,234, a 2.04% increase in value. DEPOSITS. Cornerstone's average deposits increased $11.3 million or 12.2% from March 31, 2000 to March 31, 2001, while actual deposit balances increased $10.4 million or 10.6%. The actual deposit growth was concentrated in certificates of deposit, which increased 17.5% during the same time period. Management will continue to focus its efforts on attracting core deposits and expects certificates of deposit to decrease over the remainder of 2001 while deposits in general increase in the 10% level for the next several quarters. Transaction accounts will be continuously solicited from new customers and existing customers, and represent one of Cornerstone's highest priorities and should provide Cornerstone with an increased net interest margin. OTHER LIABILITIES. During the last quarter of 2000, Cornerstone acquired an advance from the Federal Home Loan Bank of Cincinnati (FHLB). The advance was in the amount of $2,000,000 and had a maturity of 10 years with call and put options after two years. Management of the Cornerstone believes the FHLB provides an inexpensive method to reduce interest rate risk by obtaining longer term liabilities to match off the typically longer termed assets the Bank has on its Balance sheet and usually below the cost of certificates of deposit. CAPITAL RESOURCES. Stockholders' average equity increased $1.0 million or 8.4% to $12.9 million for the three months ending March 31, 2001, compared with $11.9 million during the same three months ending March 31, 2000. Actual equity increased $1.5 million or 12.6% from March 31, 2000 to March 31, 2001. This increase was primarily due to a registered stock offering with net proceeds of approximately $.8 million. The balance represents current year earnings from operations and net unrealized gains in available for sale investment securities. CONSOLIDATED AVERAGE BALANCE SHEET INTEREST INCOME / EXPENSE AND YIELD / RATES Taxable equivalent basis (in thousands)
Three months ended March 31, -------------------------------------------------------------------------------- 2001 2000 -------------------------------------------------------------------------------- Assets Average Income / Yield / Average Income / Yield / Balance Expense Rate Balance Expense Rate -------------------------------------------------------------------------------- Earning Assets: Loans, net of unearned income 85,414 2,024 9.61% 75,701 1,845 9.80% Investment securities 20,335 326 6.50% 20,236 329 6.55% Other earning assets 4,216 55 5.31% 168 3 6.03% ---------------------------- --------------------------- Total earning assets 109,965 2,405 8.87% 96,105 2,176 9.11% Allowance for loan losses (1,159) (984) Cash and other assets 13,055 12,954 ------------ ----------- TOTAL ASSETS 121,861 108,075 ============ =========== Liabilities and Stockholders' Equity Interest bearing liabilities: Interest bearing demand deposits 14,183 60 1.73% 15,066 63 1.67% Savings deposits 10,421 94 3.67% 10,694 90 3.39% Time deposits 48,021 742 6.27% 39,847 549 5.54% Time deposits of $100,000 or more 19,481 303 6.31% 15,242 205 5.42% Federal funds and securities sold under Agreement to repurchase 2,505 28 4.46% 3,235 43 5.31% Other borrowings 2,000 25 5.00% - - ---------------------------- --------------------------- Total interest bearing liabilities 96,611 1,252 5.26% 84,083 949 4.54% ------------- ----------- Net interest spread 1,152 1,227 ============= =========== Noninterest bearing demand deposits 11,521 11,525 Accrued expenses and other liabilities 817 556 Stockholders' equity 12,912 11,911 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 121,861 108,075 ============ =========== Net interest margin on earning assets 4.25% 5.13% ========= ======== Net interest spread on earning assets 3.61% 4.57% ========= ========
RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 2001 COMPARED TO QUARTER ENDED MARCH 31, 2000 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 provision for loan loss for the first three months of 2001 decreased $81,515 or 7.6% below net interest income after provision for loan loss for first three months of 2000. The decrease in net interest income as of March 31, 2001 is primarily due to the 150 basis point drop in the Fed Funds rate during the first quarter of 2001. This fact, coupled with a sharp increase in Cornerstone's certificates of deposit as a percentage of total deposits, drove up the cost of funds to 5.26% from 4.54% during the same period of 2000. These two facts contributed to a sharp decrease in Cornerstone's net interest margin from 5.13% to 4.25% in the first three months of 2000 as compared to the first three months of 2001. The decrease was anticipated by Cornerstone's management due to its interest rate sensitivity modeling and economic forecasting, and was properly budgeted. Management foresees the margin to return to the budgeted 4.75% by the end of the third quarter. Three factors contribute to this net interest margin forecast: First, Cornerstone's certificates of deposit will reprice rapidly during the second and third quarter from an average 6.50% to average 4.75%; Second, Cornerstone will continue to solicit transaction accounts from small businesses and reduce Cornerstone's percentage of certificates of deposit to total deposits; and Third, Cornerstone plans to continue to grow the Cornerstone's earning assets as a percentage of total assets. Interest income increased $228,292 or 10.5% as of March 31, 2001 compared to March 31, 2000. Interest income produced by the loan portfolio increased $172,918 or 9.37% from March 31, 2000 to March 31, 2001, due to the increase in average loans, outstanding for the period and loan fees for loan origination. Management estimates the average balances will increase, but will closely monitor origination of these loans to insure quality standards and documentation are maintained. Interest income on investment securities and Federal Funds increased $55,375 or 16.7% from March 31, 2000 to March 31, 2001, due primarily to call protection structured into the portfolio and higher than normal amount of Federal Funds. Total interest expense increased $302,807 or 31.9% from March 31, 2000 to March 31, 2001. From the first quarter of 2000 to the first quarter of 2001, the interest expense increase is primarily due to growth of average deposits, which were mostly concentrated in certificates of deposit. Management is actively pursuing customer relationships with small business and municipalities to obtain lower cost deposits and reduce Cornerstone's exposure to certificates of deposit. Management anticipates total interest expense to drop during the second and third quarter of 2001. 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 the fully taxable equivalent net interest income by the 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 on March 31, 2001 was 4.25%. The yield on earning assets decreased 24 basis points to 8.87% on March 31, 2001 from 9.11% at March 31, 2000. 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 2000 and reduced loan rates during the current period, the interest rate spread was 3.61%, a decrease of 96 basis points from March 31, 2000 to March 31, 2001. 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 $1.2 million for March 31, 2001 in the allowance for loan loss account reflects the full known extent of credit exposure. Cornerstone made a $165,500 provision during the first quarter of 2001 and 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 payment of principal or interest is contractually 90 or more days past due. 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, 2001 Cornerstone had $128,976 in non-accrual loans and $1,193,044 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, 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 $105,745 or 66.2% from March 31, 2000 to March 31, 2001. A gain on investment securities of $83,705 taken during January 2001 contributed to the increase. The sale was made to reduce Cornerstone's interest rate sensitivity by shorting the portfolio's average duration after treasury rates had dropped 150 basis points. NON-INTEREST EXPENSE. Non-interest expense for the first three months of 2001 increased by $77,795 or 7.1% as compared to the first three months in 2000. Salaries and employee benefits decreased by $6,119 or 1.1% in March 31, 2001 over March 31, 2000. Occupancy expense as of March 31, 2001 increased by $6,769 or 5.4% over the same period in 2000. All other non-interest expenses at March 31, 2001 increased $77,145 or 18.5% over the non-interest expenses as of March 31, 2000.
ALLOWANCE FOR LOAN LOSSES ----------------------------------------------------------------------------------- 2001 2000 ---------------- ----------------------------------------------------------------- Quarter Ending March 31 December 31, September 30 June 30 March 31 ----------------------------------------------------------------------------------- Balance at beginning of period 1,141,869 1,155,233 1,086,054 1,028,838 1,001,809 Loans charged-off (115,132) (159,494) (72,003) (259,543) (170,891) Loans recovered 12,254 90,929 51,183 60,758 39,420 ------------------------------------------------------------------------------------ Net charge-offs (recoveries) (102,878) (68,564) (20,820) (198,784) (131,471) Provision for loan losses charged to expense 165,500 55,200 90,000 256,000 158,500 ------------------------------------------------------------------------------------- Balance at end of period 1,204,491 1,141,869 1,155,233 1,086,054 1,028,838 ===================================================================================== Allowance for loan losses as a percentage of average loans outstanding for the period 1.409% 1.360% 1.402% 1.358% 1.358% Allowance for loan losses as a percentage of nonperforming assets and loans 90 days past due outstanding for the period 100.959% 142.709% 164.388% 136.980% 83.251% Annualized QTD net charge-offs as a percentage of average loans outstanding for the period -0.481% -0.327% -0.101% -0.994% -0.694% Annualized YTD net charge-offs as a percentage of average loans outstanding for the period -0.481% -0.822% -0.590% -0.849% -0.694% YTD Average Outstanding Loans 85,465,574 80,525,815 79,399,688 77,837,484 75,760,000 QTD Average Outstanding Loans 85,465,574 83,980,913 82,375,120 79,974,088 75,760,000 Nonperforming assets and loans 90 days past due 1,193,044 800,137 702,746 792,858 1,235,826
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 On February 4, 2000 the Company filed a registration statement on Form S-1 (SEC File Number 333-96185) to issue 150,000 shares of common stock at $13.00 a share. The Company terminated the offering on December 31, 2000 and has received commitments for approximately 70,000 shares. The Company is in the process of collecting the proceeds and will ultimately purchase Bank stock with the majority of the funds. The Company will retain the balance for working capital. 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: (b) There have been no Current Reports on Form 8-K during the quarter ended March 31, 2001. 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: May 15, 2001 /s/ Gregory B. Jones, President & CEO Date: May 15, 2001 /s/ Nathaniel F. Hughes, EVP & CFO -----END PRIVACY-ENHANCED MESSAGE-----