-----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, HrdSsKAFxIXXdbJgiYi/OK5kvaCwnshnuYGASsVY17qT0r3VyPIsosHFJu3jQ7iE SiPjn0q3EpO+xHNiM2MmNA== 0000950144-99-013150.txt : 19991117 0000950144-99-013150.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950144-99-013150 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 10-Q SEC ACT: SEC FILE NUMBER: 333-26699 FILM NUMBER: 99753065 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 10-Q 1 CORNERSTONE BANCSHARES, INC. 1 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1999 [ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- ----------------- Commission file number 333-26699 CORNERSTONE BANCSHARES, INC. (Exact name of small business issuer as specified in its charter) TENNESSEE 62-1173944 (State of other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 6401 SUITE B LEE CORNERS CHATTANOOGA, TENNESSEE 37421 (Address of principal executive offices) (423) 385-3000 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 1,166,329 SHARES OF COMMON STOCK AS OF SEPTEMBER 30, 1999. 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CONDITION
Unaudited Unaudited September 30, December 31, September 30, 1999 1998 1998 ------------ ------------ ----------- ASSETS Cash and due from banks 4,171,067 4,268,967 6,851,654 Federal funds sold 2,000,000 8,425,000 580,000 Investment securities available for sale 13,722,139 9,280,116 10,172,059 Investment securities held to maturity 6,128,973 9,077,465 10,818,912 Loans, less allowance for loan loss 69,287,556 72,492,549 74,139,182 Premises and equipment, net 2,057,900 1,967,329 1,988,039 Accrued interest receivable 653,862 638,441 674,697 Excess cost over fair value of assets acquired 2,750,747 2,834,124 2,861,917 Other assets 1,893,773 1,522,143 1,601,869 ------------ ------------ ----------- Total assets 102,666,018 110,506,134 109,688,328 ============ ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non interest bearing 10,886,803 14,151,526 9,496,581 NOW accounts 15,282,557 12,998,223 13,287,953 Savings deposits and money market accounts 10,488,031 10,283,103 12,000,219 Time deposits of $100,000 or more 15,860,872 17,489,618 19,120,251 Time deposits of less than $100,000 36,726,204 43,089,138 43,035,159 ------------ ------------ ----------- Total deposits 89,244,467 98,011,608 96,940,164 Other Borrowings 1,044,188 -- -- Accrued interest payable 175,469 270,634 270,773 Other liabilities 331,655 470,861 616,471 Note Payable -- 1,250,000 1,250,000 ------------ ------------ ----------- Total Liabilities 90,795,779 100,003,103 99,077,408 ------------ ------------ ----------- Redeemable common stock 237,504 478,744 478,744 Stockholders' Equity Common stock 1,166,329 1,009,461 1,009,461 Additional paid-in capital 11,124,634 9,017,430 9,017,430 Undivided profits (deficit) (559,890) (41,695) 68,076 Net unrealized gain in securities available for sale (98,338) 39,091 37,209 ------------ ------------ ----------- Total Stockholders' Equity 11,870,239 10,503,031 10,610,920 ------------ ------------ ----------- Total liabilities and stockholders equity 102,666,018 110,506,134 109,688,328 ============ ============ ===========
2 3 CONSOLIDATED STATEMENTS OF INCOME
Unaudited Unaudited Three months ended Nine months ended September 30, September 30, ------------------------ ----------------------- 1999 1998 1999 1998 ---------- ---------- ---------- --------- INTEREST INCOME Interest and fees on loans 1,626,935 1,750,144 4,689,687 4,825,427 Interest on investment securities 305,513 341,449 833,699 1,007,399 Interest on federal funds sold 36,293 17,485 161,394 154,565 Interest on other earning assets -- -- -- -- ---------- ---------- ---------- --------- Total interest income 1,968,741 2,109,078 5,684,780 5,987,391 ---------- ---------- ---------- --------- INTEREST EXPENSE Interest bearing demand accounts 55,565 61,759 172,369 195,353 Money market accounts 56,988 85,416 156,095 216,519 Savings accounts 27,466 25,827 81,352 77,350 Time deposits of less than $100,000 515,312 628,126 1,592,998 1,892,671 Time deposits of $100,000 or more 202,828 272,926 659,737 730,292 Federal funds purchased 300 6,336 1,032 6,906 Securities sold under agreements to repurchase 6,551 -- 10,269 -- Other borrowings 14,648 20,742 67,122 56,207 ---------- ---------- ---------- --------- Total interest expense 879,658 1,101,132 2,740,974 3,175,298 ---------- ---------- ---------- --------- Net interest income 1,089,084 1,007,946 2,943,807 2,812,093 Provision for loan losses 105,000 183,478 760,000 306,670 ---------- ---------- ---------- --------- Net interest income after the provision for loan losses 984,084 824,468 2,183,807 2,505,423 ---------- ---------- ---------- --------- NONINTEREST INCOME Service charges on deposit accounts 120,063 165,955 373,727 626,242 Net securities gains (losses) -- -- -- -- Other income 31,518 (4,721) 64,629 138,217 ---------- ---------- ---------- --------- Total noninterest income 151,581 161,234 438,356 764,459 ---------- ---------- ---------- --------- NONINTEREST EXPENSE Salaries and employee benefits 568,057 430,399 1,605,235 1,254,911 Occupancy and equipment expense 135,221 100,006 397,742 325,442 Other operating expense 387,143 375,079 1,287,946 1,011,288 ---------- ---------- ---------- --------- Total noninterest expense 1,090,420 905,484 3,290,922 2,591,641 ---------- ---------- ---------- --------- Income before provision for income taxes 45,245 80,218 (668,760) 678,241 Provision for income taxes (58,957) (47,683) (150,564) 114,075 ---------- ---------- ---------- --------- NET INCOME 104,202 127,901 (518,196) 564,166 ========== ========== ========== ========= Basic net income per common share 0.09 0.13 (0.44) 0.56 Diluted net income per common share 0.08 0.11 (0.40) 0.49 Dividends declared per common share -- -- -- --
3 4 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30
1999 1998 ----------- ----------- Cash flows from operating activities: Net income (518,196) 564,166 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for possible loan losses 760,000 306,670 Net Charge-offs (1,174,766) (271,604) Provision for depreciation and amortization 265,846 242,101 Accrued interest receivable (15,421) (90,251) Accrued interest payable (95,165) 54,778 Changes in other assets and liabilities: (443,016) (691,860) ----------- ----------- Net cash used in operating activities (1,220,717) 114,000 ----------- ----------- Cash flows from investing activities: Purchase of investment securities: AFS (9,295,372) (6,365,349) Purchase of investment securities: HTM -- (8,856,080) Proceeds from security transactions: AFS 5,039,365 5,602,129 Proceeds from security transactions: HTM 2,557,272 6,920,641 Net increase in loans 3,619,759 (13,762,936) Purchase of bank premises and equipment (273,085) (181,752) ----------- ----------- Net cash used in investing activities 1,647,939 (16,643,347) ----------- ----------- Cash flows from financing activities: Net increase in deposits (8,767,141) 15,108,726 Net increase in repurchase agreements 1,044,188 -- Net increase of notes payable (1,250,000) -- Issuance of common stock 2,022,832 1,548,382 ----------- ----------- Net cash provided by financing activities (6,950,121) 16,657,108 ----------- ----------- Net increase in cash and cash equivalents (6,522,899) 127,761 Cash and cash equivalents beginning of period 12,693,967 7,303,892 ----------- ----------- Cash and cash equivalents end of period 6,171,067 7,431,654 =========== ===========
4 5 Cornerstone Bancshares, Inc and Subsidiary Changes in Stockholders' Equity September 30, 1999
Accumulated Additional Retained Other Total Comprehensive Common Paid-in Earnings Comprehensive Stockholders' Income Stock Capital (Deficit) Income Equity ------------- ------ ------- -------- ------------- ------------- BALANCE, December 31, 1998 1,009,461 9,017,430 (41,695) 39,091 10,024,287 Purchase of Treasury stock (19,352) (251,576) (270,928) Sale of Treasury Stock 19,352 251,576 270,928 Issuance of Common Stock 156,868 1,865,964 2,022,832 Prior Year Redeemable Common Stock 478,744 478,744 Current Year Redeemable Common Stock (237,504) (237,504) Comprehensive Income: Net Income (518,195) (518,195) (518,195) Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities available for sale, net of reclassification adjustment (137,429) (137,429) (137,429) -------- --------- ---------- -------- ------- ---------- Total comprehensive income (655,624) ======== BALANCE, October 31, 1999 1,166,329 11,124,634 (559,890) (98,338) 11,632,735 ========= ========== ======== ======= ==========
5 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CORNERSTONE BANCSHARES PRESENTATION OF FINANCIAL INFORMATION The 1999 financial information in this report has not been audited. The information included herein should be read in conjunction with the notes to consolidated financial statements included in the 1998 Annual Report to Shareholders which was furnished to each shareholder of the Company in March 1999. The consolidated financial statements presented herein conform to generally accepted accounting principles and to general industry practices. Consolidation The accompanying consolidated financial statements include the accounts of Cornerstone Bancshares Inc. and its sole subsidiary Cornerstone Community Bank. Substantially all intercompany transactions, profits and balances have been eliminated. Accounting Policies During interim periods, Cornerstone Bancshares follows the accounting policies set forth in its 10-K for the year ended December 31, 1998, as filed with the Securities and Exchange Commission. Since December 1998, there have been no changes in any accounting principles or practices, or in the method of applying any such principles or practices. Interim Financial Data (Unaudited) In the opinion of the Company management, the accompanying interim financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, the results of operations, cash flows for the interim period. Results for interim periods are not necessarily indicative of the results to be expected for a full year. Earnings Per Common Share Basic earnings per share ("EPS") is computed by dividing income available to common shareholders (numerator) by the number of common shares outstanding (denominator). Diluted EPS is computed by dividing income available to common shareholders (numerator) by the number of shares outstanding (denominator). The adjusted number of shares outstanding reflects the potential dilution occurring if securities or other contracts to issue common stock were exercised or converted into common stock resulting in the issuance of common stock that share in the earnings of the entity. Forward-Looking Statements Certain written and oral statements made by or with the approval of an authorized executive officer of the Company may constitute "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995. Words or phrases such as "should result, are expected to, we anticipate, we estimate, we project" or similar expressions are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual 6 7 results to differ materially from the Company's historical experience and its present expectations or projections. These risks and uncertainties include, but are not limited to, unanticipated economic changes, interest rate movements and the impact of competition. Caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date of making such statements. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. OVERVIEW The company ended the first nine months of 1999 with total assets of $103 million, a 7.1% decrease from December 31, 1998, and a 6.8% decrease from September 30, 1998. The company reported net income for the third quarter ending September 30, 1999 of $104,202, or $0.09 basic earnings per share, compared to $127,901 or $0.13 basic earnings per share, for the same period in 1998. The decline in earnings represents an 18.5% decrease from the third quarter 1998 compared to the third quarter of 1999. The company reported net income for the first nine months ending September 30, 1999 of $(518,196), or $(0.44) basic earnings per share, compared to $564,166 or $0.56 basic earnings per share, for the same period in 1998. The decline in earnings represents a 191.9% decrease from the first nine months in 1998 compared to the same period in 1999. The decrease in net income from September 1998 to September 1999 is primarily due to a two-phase plan to move Cornerstone Bancshares back to a high quality financial institution status. The first phase consisted of a complete reorganization of the executive staff and an extensive review of lending and accounting procedures. In the second phase, corrective actions were taken to improve the loan portfolio's credit quality and accounting charges to correct the general ledger. The result of the first phase created higher salaries as the Bank hired expertise needed to remain competitive and in compliance with all Federal laws. In addition, the Bank incurred higher than normal professional and legal expenses as management reviewed the loan portfolio. In the second phase management and the Board charged off all substandard loans and brought the loan quality back to an acceptable quality level. The result was an unusually large loan loss provision for the year of $760,000. Earnings should improve in the short-term as the Bank loan quality improves and in the long-term as the Bank grows in size to optimize the new expertise acquired to improve the Bank's financial status. FINANCIAL CONDITION Earning Assets. Average earning assets for three months ending September 30, 1999 decreased $7.6 million or 6.9% below September 1998, while actual earning assets decreased $7.0 million or 7.2% during the same time period. The average balance decrease was due to a general pull back from aggressive deposit pricing in order to maintain the Bank's mix of earning assets while the Bank's lenders concentrated on technical exceptions and created action plans for their substandard loans. Management expects average earning assets to increase less than 5.0% for the remainder of the year and anticipates faster growth in the first and second quarter of 2000. Loan Portfolio. Cornerstone's average loans for the third three months of 1999 were $68.5 million, a decrease of $5.0 million or 6.9% from the third quarter in 1998, while actual balances decreased to $70.2 million, an decrease of 7.1% below $75.5 million in loans in September 1998. Management is anticipating increased loan growth (more than 8%) for the remainder of the year in actual balances, with a larger increase in average balances. However, the amount of such growth, if any, will depend upon general economic conditions. 8 9 Investment Portfolio. Cornerstone's investment securities portfolio decreased by 8.1% or $2.0 million from September 1998 to September 1999. Cornerstone maintains an investment strategy of making prudent investment decisions with active management of the portfolio to optimize, within the constraints of established policies, an adequate return and value. Investment objectives include Gap Management, Liquidity, Pledging, Return, and Local Community Support in that order of priority. Cornerstone maintains two classifications of investment securities: "Held to Maturity" and "Available for Sale." The "Available for Sale" securities are carried at fair market value, whereas the "Held to Maturity" securities are carried at book value. As of September 30, 1999, unrealized losses in the "Available for Sale" portfolio amounted to $142,790 or 1.0% decrease in value of the Available For Sale securities. Deposits. Cornerstone's average deposits decreased $8.0 million or 8.2% from September 1998 to September 1999, while actual deposit balances decreased $6.7 million or 6.9%. The 1999 deposit numbers used in the above calculation include commercial repurchase agreements, arranged with Cornerstone's larger deposit customers. The largest portion of decrease was a $9.6 million, or 15.3% decrease in time deposits. This is due to Cornerstone's strategy to only pay premium rates for certificates of deposit when loan growth dictates additional funding. Transaction accounts are continuously solicited from new customers and existing customers. Transaction accounts are the Bank's highest priority and will provide the Bank with an increased net interest margin. Capital Resources. Stockholders' average equity increased $0.3 million or 2.6% to $11.1 million for the three months ending September 30, 1999, compared with $10.8 during the same three months ending September 30, 1998. Actual equity increased $1.3 million or 11.9% from September 1998 to September 1999. This increase was primarily due to a capital program to encourage warrant holders to exercise their warrants with net proceeds of approximately $2 million. The balance represents current year losses sustained from operations and proceeds not collected as of the end of the reporting period. 9 10 CONSOLIDATED AVERAGE BALANCE SHEET INTEREST INCOME / EXPENSE AND YIELD / RATES Taxable equivalent basis (in thousands)
Three months ended September 30, --------------------------------------------------------------------- 1999 1998 -------------------------------- ------------------------------- Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- Assets Earning Assets: Loans, net of unearned income 68,514 1,627 9.42% 73,542 1,758 9.48% Investment securities 22,604 335 5.88% 24,601 369 5.96% Other earning assets -- -- ------- ----- ------- ----- Total earning assets 91,117 1,962 8.64% 98,143 2,127 8.69% Allowance for loan losses (998) (1,077) Cash and other assets 11,541 12,162 ------- ------- TOTAL ASSETS 101,661 109,228 ======= ======= Liabilities and Stockholders' Equity Interest bearing liabilities: Interest bearing demand deposits 13,781 55 1.60% 12,249 65 2.10% Savings deposits 10,005 85 3.35% 11,666 113 3.83% Time deposits 38,288 505 5.24% 44,638 635 5.64% Time deposits of $100,000 or more 15,397 213 5.48% 17,109 274 6.36% Federal funds and securities sold under Agreement to repurchase 652 7 4.17% 428 6 5.85% Other borrowings 408 15 8.25% 988 21 8.42% ----- ----- Total interest bearing liabilities 78,529 880 4.49% 87,079 1,114 5.13% ----- ----- Net interest spread 1,082 1,013 ===== ===== Noninterest bearing demand deposits 11,372 10,484 Accrued expenses and other liabilities 669 849 Stockholders' equity 11,092 10,816 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 101,661 109,228 ======= ======= Net interest margin on earning assets 4.76% 4.14% ==== ==== Net interest spread on earning assets 4.14% 3.56% ==== ====
10 11 RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998 Net Interest Income. Net interest income is the principal component of a financial institution's income stream and represents the spread between interest and fee income generated from earning assets and the interest expense paid on deposits. The following discussion is on a fully taxable equivalent basis. Net interest income for the third three months of 1999 increased $81,138 or 8.0% above net interest income earned as of September 1998. The increase in net interest income as of September 30, 1999 is primarily due to a increase in the Bank's net interest margin on earning assets, which rose from 4.14% to 4.76% in 1999, and a smaller provision to loan loss. The increased margin was a result of management's efforts to change the deposit mix from certificate of deposit based to a transaction account deposit base. The strategic direction has produced material improvements in the net interest margin and should continue to assist the Bank's earnings in the future. The lower provision represents an improvement in the loan portfolio's quality, but reflects no future direction. Interest income decreased $140,337 or 6.7% as of September 1999 compared to September 1998. Interest income produced by the loan portfolio decreased $123,209 or 7.0% from September 1998 to September 1999 due to the decrease in average loans outstanding for the period. Management estimates the average balances will increase, but will restrain origination of these loans to insure quality standards and documentation are maintained. Interest income on investment securities and federal funds decreased $17,128 or 4.8% from September 1998 to September 1999, due primarily to reduced deposit balances and the purchase of lower yielding securities which reduced the Bank's interest rate risk and gave the Bank a more predictable cash-flow. Total interest expense decreased $221,474 or 20.11% from September 30, 1998 to September 30, 1999. The interest expense decrease from the third quarter of 1998 to the third quarter of 1999 is primarily due to the active management of the ALCO committee to reduce certificate of deposit exposure and lower general rates to the market norm while the loan portfolio review slowed funding needs. The trend in net interest income is commonly evaluated in terms of average rates using the net interest margin and the interest rate spread. The net interest margin, or the net yield on earning assets, is computed by dividing fully taxable equivalent net interest income by average earning assets. This ratio represents the difference between the average yield on average earning assets and the average rate paid for all funds used to support those earning assets. The net interest margin at September 30, 1999 was 4.76%. The yield on earning assets decreased 5 basis points to 8.64% at September 30, 1999 from 8.69% at September 30, 1998. The interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest bearing sources of funds. The interest rate spread eliminates the impact of noninterest bearing funds and gives a direct perspective on the effect of market interest rate movements. As a result of changes in the asset and liability mix during late 1998 and third quarter 1999, the interest rate spread was 4.14%, an increase of 58 basis points from September 1998 to September 1999. 11 12 Allowance for Loan Losses. The allowance for possible loan losses represents management's assessment of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. Management analyzes the loan portfolio to determine the adequacy of the allowance for possible loan losses and the appropriate provisions required to maintain a level considered adequate to absorb anticipated loan losses. Management believes that the $985,234 for September 1999 in the allowance for loan loss account reflects the full known extent of credit exposure. This amount includes a provision of $105,000 made in the third quarter of 1999. The Bank anticipates similar provisions in the future as the loan portfolio grows and unanticipated loan losses occur. No assurances can be given, however, that adverse economic circumstances will not result in increased losses in the loan portfolio, and require greater provisions for possible loan losses in the future. Non-performing Assets. Non-performing assets include non-performing loans and foreclosed real estate held for sale. Non-performing loans include loans classified as non-accrual or renegotiated. Cornerstone's policy is to place a loan on non-accrual status when it is contractually past due 90 days or more as to payment of principal or interest. At the time a loan is placed on non-accrual status, interest previously accrued but not collected may be reversed and charged against current earnings. As of September 30, 1999 Cornerstone had $919,270 in non-accrual loans and $1,258,493 in non-performing loans. Non-interest Income. Non-interest income consists of revenues generated from a broad range of financial services and activities including fee-based services and profits and commissions earned through credit life insurance sales and other activities. In addition, gains or losses realized from the sale of loans are included in non-interest income. Total non-interest income decreased by $45,892 or 28.5% from September 1998 to September 1999. Non-interest Expense. Non-interest expense for the third three months of 1999 increased by $184,936 or 20.4% as compared to the third three months in 1998. Salaries and employee benefits increased by $137,718 or 32.0% in September 1999 over September 1998. Occupancy expense as of September 30, 1999 increased by $35,215 or 35.2% over the same period in 1998. All other non-interest expenses at June 30, 1999 increased $12,064 or 3.2% over the non-interest expenses as of September 30, 1998. 12 13 CONSOLIDATED AVERAGE BALANCE SHEET INTEREST INCOME / EXPENSE AND YIELD / RATES Taxable equivalent basis (in thousands)
Nine months ended September 30, --------------------------------------------------------------------- 1999 1998 -------------------------------- ------------------------------- Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- Assets Earning Assets: Loans, net of unearned income 68,922 4,690 9.10% 66,842 4,825 9.65% Investment securities 22,662 995 5.87% 24,319 1,162 6.39% Other earning assets -- -- ------- ----- ------- ----- Total earning assets 91,585 5,685 8.30% 91,161 5,987 8.78% Allowance for loan losses (1,076) (861) Cash and other assets 11,951 14,077 ------- ------- TOTAL ASSETS 102,459 104,377 ======= ======= Liabilities and Stockholders' Equity Interest bearing liabilities: Interest bearing demand deposits 13,530 172 1.70% 12,123 195 2.15% Savings deposits 9,760 237 3.25% 10,439 294 3.76% Time deposits 39,805 1,593 5.35% 45,272 1,893 5.59% Time deposits of $100,000 or more 15,846 660 5.57% 14,520 730 6.72% Federal funds and securities sold under Agreement to repurchase 338 11 4.47% 148 7 6.23% Other borrowings 999 67 8.98% 898 56 8.37% ----- ------- ----- Total interest bearing liabilities 80,278 2,741 4.56% 83,400 3,175 5.09% ----- ----- Net interest spread 2,944 2,812 ===== ===== Noninterest bearing demand deposits 10,858 9,710 Accrued expenses and other liabilities 852 1,337 Stockholders' equity 10,589 10,518 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 102,577 104,965 ======= ======= Net interest margin on earning assets 4.30% 4.12% ==== ==== Net interest spread on earning assets 3.73% 3.69% ==== ====
13 14 RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998 Net Interest Income. Net interest income is the principal component of a financial institution's income stream and represents the spread between interest and fee income generated from earning assets and the interest expense paid on deposits. The following discussion is on a fully taxable equivalent basis. Net interest income for the first nine months of 1999 increased $131,714 or 4.7% above net interest income earned as of September 1998. The increase in net interest income as of September 30, 1999 is primarily due to an increase in the Bank's net interest margin on earning assets, which rose from 4.12% to 4.3% in 1999. Reduced deposit costs caused by a change in the deposit mix from certificates of deposits to transaction accounts contributed the majority of the net interest margin increase. Interest income decreased $302,611 or 5.1% as of September 1999 compared to September 1998. Interest income produced by the loan portfolio decreased $135,740 or 2.8% from September 1998 to September 1999 due to the decrease in average yields for the period. Two factors contributed to the reduction of loan yields. In the first half of the year a review of all loans placed many loans on non-accrual and previously booked interest income was reversed. In addition, during this period of corrective actions loan originations paused and loan fee income was greatly reduced. Interest income on investment securities and federal funds decreased $166,871 or 14.4% from September 1998 to September 1999, due primarily to reduced deposit balances. Total interest expense decreased $434,324 or 13.7% from September 30, 1998 to September 30, 1999. The interest expense decrease is primarily due to the active management of the ALCO committee to reduce certificate of deposit exposure and lower general rates to the market norm while the loan portfolio review slowed funding needs. The trend in net interest income is commonly evaluated in terms of average rates using the net interest margin and the interest rate spread. The net interest margin, or the net yield on earning assets, is computed by dividing fully taxable equivalent net interest income by average earning assets. This ratio represents the difference between the average yield on average earning assets and the average rate paid for all funds used to support those earning assets. The net interest margin at September 30, 1999 was 4.30%. The yield on earning assets decreased 48 basis points to 8.30% at September 30, 1999 from 8.78% at September 30, 1998. The interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest bearing sources of funds. The interest rate spread eliminates the impact of non-interest bearing funds and gives a direct perspective on the effect of market interest rate movements. As a result of changes in the asset and liability mix during late 1998 and 1999, the interest rate spread was 3.73%, a increase of 4 basis points from September 1998 to September 1999. Allowance for Loan Losses. The allowance for possible loan losses represents management's assessment of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. Management analyzes the loan portfolio to determine the adequacy of the allowance for possible loan losses and the appropriate provisions required to maintain a level 14 15 considered adequate to absorb anticipated loan losses. Management believes that the $985,234 for September 1999 in the allowance for loan loss account reflects the full known extent of credit exposure. No assurances can be given, however, that adverse economic circumstances will not result in increased losses in the loan portfolio, and require greater provisions for possible loan losses in the future. Non-performing Assets. Non-performing assets include non-performing loans and foreclosed real estate held for sale. Non-performing loans include loans classified as non-accrual or renegotiated. Cornerstone's policy is to place a loan on non-accrual status when it is contractually past due 90 days or more as to payment of principal or interest. At the time a loan is placed on non-accrual status, interest previously accrued but not collected may be reversed and charged against current earnings. As of September 30, 1999 Cornerstone had $919,270 in non-accrual loans and $1,258,493 in non-performing loans. Non-interest Income. Non-interest income consists of revenues generated from a broad range of financial services and activities including fee-based services and profits and commissions earned through credit life insurance sales and other activities. In addition, gains or losses realized from the sale of loans are included in non-interest income. Total non-interest income decreased by $326,103 or 46.6% from September 1998 to September 1999. Non-interest Expense. Non-interest expense for the first nine months of 1999 increased by $699,281 or 27.0% as compared to the first nine months in 1998. Salaries and employee benefits increased by $350,324 or 27.9% in September 1999 over September 1998. Occupancy expense as of September 30, 1999 increased by $72,300 or 18.2% over the same period in 1998. All other non-interest expenses at September 30, 1999 increased $276,658 or 27.4% over the non-interest expenses as of September 30, 1998, primarily due to an increase in professional fees, and miscellaneous charge-offs. 15 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16 17 ALLOWANCE FOR LOAN LOSSES
1999 ----------------------------------------------- Quarter Ending September 30 June 30 March 31 ----------- ----------- ----------- Balance at beginning of period 1,030,243 1,208,311 1,400,000 Loans charged-off (225,363) (858,844) (304,209) Loans recovered 75,354 75,777 62,520 ----------- ----------- ----------- Net Charge-offs (recoveries) (150,009) (783,068) (241,689) Provision for loan losses charged to expense 105,000 605,000 50,000 ----------- ----------- ----------- Balance at end of period 985,234 1,030,243 1,208,311 =========== =========== =========== Allowance for loan losses as a percentage of average loans outstanding for the period 1.438% 1.545% 1.679% Allowance for loan losses as a percentage of nonperforming assets and loans 90 days past due outstanding for the period 78.287% 76.738% 125.368% Annualized QTD net charge-offs as a percentage of average loans outstanding for the period -0.876% -4.698% -1.344% Annualized YTD net charge-offs as a percentage of average loans outstanding for the period -2.686% -3.352% -1.687% YTD Average Outstanding Loans 68,922,000 69,396,000 72,150,000 QTD Average Outstanding Loans 68,513,772 66,670,912 71,950,537 Nonperforming assets and loans 90 days past due 1,258,493 1,342,538 963,808
17 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings The Bank is currently involved in two lawsuits. Both of which are related to a relationship with Island Cove Marina. Management believes the suits have a low probability of having any material effect on the Bank's future earnings. Item 2. Changes in Securities None Item 3. Defaults on Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and reports on Form 8-K (a) Exhibits: 27 Financial Data Schedule (For SEC Use Only) (b) There have been no Current Reports on Form 8-K during the quarter ended September 30, 1999. 18 19 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 15, 1999 /s/ Gregory B. Jones, President & CEO Date: September 15, 1999 /s/ Nathaniel F. Hughes, CFO 19 EX-27 2 FINANCIAL DATA SCHEDULE 9/30/99
9 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 4,171 0 2,000 0 13,722 0 0 70,272 985 102,666 89,244 1,044 507 0 0 0 11,870 0 102,666 4,690 995 0 5,685 2,581 2,741 2,944 760 0 3,291 (669) (518) 0 0 (518) (0.44) (0.40) 4.30 919 15 0 0 1,400 1,388 214 985 985 0 0
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