Cornerstone Bancshares, Inc. Reports Positive Earnings for Second Quarter of 2013

Cornerstone Bancshares, Inc. and Subsidiary

Second Quarter Financial Highlights

June 30, 2013 and 2012

(Unaudited)

2013

2012

% Change

Balance Sheet Data at June 30

Total assets

$   435,334

$    420,874

3.4

Interest-earning assets

403,917

387,995

4.1

Loans

276,062

263,749

4.7

Foreclosed assets

18,867

22,144

(14.8)

Deposits

339,199

321,740

5.4

Other interest-bearing liabilities

54,647

60,909

(10.3)

Shareholders' equity

40,234

36,759

9.5

Loan to deposit ratio

81.39%

81.98%

(0.7)

Tier 1 leverage ratio (Bank, est)

8.36%

8.24%

1.5

Total risk-based capital ratio (Bank, est)

13.05%

13.11%

(0.5)

Outstanding common shares 

6,547

6,500

0.7

Book value per common share

$         3.88

$          3.96

(2.1)

Tangible book value per common share

$         3.88

$          3.96

(2.1)

Market value per common share as of June 30

$         2.01

$          1.75

14.9

Loan Quality Data

Nonaccruing loans

5,864

7,124

(17.7)

Loans past due 90 days – accruing

-

-

-

Net charge-offs YTD

1,346

1,371

(1.8)

Allowance for loan losses

5,095

6,029

(15.5)

Allowance for loan losses to total loans

1.85%

2.29%

Nonperforming assets to total assets

5.68%

6.95%

Performance Data for the Year

Net income 

$          848

$           667

27.1

Return on average assets

0.39%

0.32%

Return on average equity

4.22%

3.63%

Net interest margin

3.79%

3.73%

Per common share data:

Net income – basic

$         0.01

$          0.01

Net income – diluted

$         0.01

$          0.01

Common dividends

$              -

$               -

Preferred dividends & accretion

$          786

$           576

Average shares (000s):

Basic common stock

6,547

6,500

Diluted common stock

6,665

6,581

Preferred stock (actual)

600

448

Cornerstone Bancshares, Inc. and Subsidiary

Quarterly Earnings Summary

2013

2012

Q2-13 /

Second

First

Fourth

Third

Second

Q2-12

(Amounts in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

% Chg

Interest income

Loans, including fees

$     4,079

$     4,142

$      4,718

$   4,242

$         4,186

(2.5)

Securities and interest-bearing deposits at other financial institutions

482

440

440

478

618

(22.0)

Federal funds sold and other earning assets

15

21

16

15

13

9.3

    Total interest income

4,576

4,603

5,174

4,735

4,817

(5.0)

Interest expense

Deposits

587

603

673

756

768

(23.6)

Short-term borrowings

17

18

17

22

23

(27.4)

FHLB advances and other borrowing

316

341

391

394

426

(25.8)

    Total interest expense

920

962

1,081

1,172

1,217

(24.5)

Net interest income

3,656

3,641

4,093

3,563

3,600

1.6

Provision for loan losses

-

300

330

100

-

 N/A 

Net interest income after the

  provision for loan losses

3,656

3,341

3,763

3,463

3,600

1.6

Noninterest income

Customer service fees

201

188

201

198

207

(2.8)

Other noninterest income

19

18

13

12

19

0.2

Gain on sale of assets

477

149

27

48

26

1,718.8

    Total noninterest income

697

355

241

258

252

176.7

Noninterest expense

Salaries and employee benefits

1,623

1,597

1,600

1,566

1,570

3.4

Net occupancy and equipment

340

337

408

355

348

(2.4)

Depository insurance

161

160

121

237

207

(22.1)

Foreclosed asset expense (1)

798

129

156

314

481

66.1

Other operating expense

780

752

1,192

731

817

(4.5)

    Total noninterest expense

3,702

2,975

3,477

3,203

3,423

8.1

Income before income taxes

652

721

527

518

429

52.0

Income tax expense

256

269

156

154

118

116.9

Net income

$         396

$        452

$         371

$      364

$            311

27.3

Preferred stock dividends & accretion on
preferred stock discount

393

393

393

325

296

32.8

Net income / (loss) available to common 

3

59

(22)

39

15

(79.8)

Net income / (loss) per common share:

  Basic

$        0.00

$       0.01

$           -

$     0.01

$               -

-

  Diluted

$        0.00

$       0.01

$           -

$     0.01

$               -

-

Average basic shares 

6,547

6,547

6,500

6,500

6,500

0.7

Average common diluted shares 

6,671

6,671

6,503

6,503

6,581

1.4

Performance Ratios

Return on average equity

3.86%

4.40%

3.81%

3.88%

3.42%

12.9

Return on average assets

0.37%

0.42%

0.35%

0.35%

0.30%

22.0

Net interest margin

3.77%

3.79%

4.21%

3.70%

3.87%

(2.6)

Average equity

41,065

41,135

38,926

37,501

36,423

12.7

Average assets

430,196

426,827

420,608

418,443

412,305

4.3

Average interest-earning assets

395,517

395,921

391,197

389,458

380,631

3.9

(1) Includes OREO adjustments to fair value

Cornerstone Bancshares, Inc. and Subsidiary

Loan Loss Allowance and Asset Quality Review

2013

2012

Second

First 

Fourth 

Third

Second

(Amounts in thousands)

Quarter

Quarter

Quarter

Quarter

Quarter

Allowance for loan losses

Balance at beginning of period

$      5,669

$       6,141

$     5,280

$    6,029

$    6,024

Provision for loan losses

-

300

330

100

-

Net charge-offs

(574)

(772)

531

(849)

5

Balance at end of period

$      5,095

$       5,669

$     6,141

$    5,280

$    6,029

As a % of loans

1.85%

2.08%

2.22%

1.93%

2.29%

As a % of nonperforming loans

86.88%

89.38%

102.24%

66.26%

84.63%

As a % of nonperforming assets

20.60%

20.61%

23.32%

17.40%

20.60%

Net charge-offs as a % of  loans (a)

0.83%

1.13%

-0.77%

1.24%

-0.01%

Risk element assets

Accruing troubled debt restructured

$      3,465

$       5,442

$     5,316

$    5,328

$    2,775

Loans past due 30-89 days

$      4,867

$       4,732

$     6,534

$    3,685

$    2,495

Nonaccruing loans

$      5,864

$       6,342

$     6,006

$    7,968

$    7,124

Loans past due 90 days – accruing

-

-

-

-

-

Total nonperforming loans

$      5,864

$       6,342

$     6,006

$    7,968

$    7,124

Repossessed assets

-

-

32

39

83

Other real estate owned (b)(c)

$   18,867

$     21,159

$   20,300

$  22,337

$  22,061

Total nonperforming assets

$   24,731

$     27,501

$   26,338

$  30,344

$  29,268

Nonperforming loans as a % of loans

2.12%

2.33%

2.17%

2.91%

2.70%

Nonperforming assets as a % of loans

   and other real estate owned

8.39%

9.36%

8.86%

10.25%

10.24%

Total loans

276,062

272,550

276,992

273,820

263,749

(a) Annualized

(b) Properties sold during 2nd Q 2013

$       2,438

(c) Properties under contract to sell 

$       2,907

Cornerstone Bancshares, Inc. and Subsidiary
Net Interest Margin Analysis
Taxable Equivalent Basis

Three months ended

June 30

(Amounts in thousands)

Assets

2013

2012

Average

Income/

Yield/

Average

Income/

Yield/

Earning assets:

Balance

Expense

Rate

Balance

Expense

Rate

Loans, net of unearned income

$       272,718

$       4,079

6.00%

$     262,598

$       4,186

6.39%

Investment securities

102,164

482

2.13%

94,949

618

2.91%

Other earning assets

20,635

15

0.28%

23,084

13

0.23%

  Total earning assets

395,517

$       4,576

4.70%

380,631

$       4,817

5.15%

Allowance for loan losses

(5,315)

(6,028)

Cash and other assets

39,994

37,702

TOTAL ASSETS

$       430,196

$     412,305

Liabilities and Shareholders' Equity

Interest-bearing liabilities:

Interest-bearing demand deposits

$         25,640

$            16

0.24%

$       28,332

$            23

0.33%

Savings deposits

12,214

8

0.25%

10,387

9

0.36%

MMDA's

77,206

108

0.56%

46,639

101

0.87%

Time deposits 

167,078

455

1.09%

189,169

635

1.35%

Federal funds purchased and securities

  sold under agreements to repurchase

20,752

17

0.32%

21,198

23

0.44%

Federal Home Loan Bank and other borrowings

31,740

316

3.99%

40,028

426

4.27%

  Total interest-bearing liabilities

334,630

920

1.10%

335,751

1,217

1.45%

Net interest spread

$       3,657

3.60%

$       3,600

3.70%

Noninterest-bearing demand deposits

52,401

40,829

Accrued expenses and other liabilities

2,100

(698)

Shareholders' equity

41,065

36,423

TOTAL LIABILITIES AND

  SHAREHOLDERS' EQUITY

$       430,196

$     412,305

Net yield on earning assets

3.77%

3.87%

Taxable equivalent adjustment:

  Loans

0

0

  Investment securities

60

71

          Total adjustment

60

71

Cornerstone Bancshares, Inc. and Subsidiary
Net Interest Margin Analysis
Taxable Equivalent Basis

Six months ended

June 30

(Amounts in thousands)

Assets

2013

2012

Average

Income/

Yield/

Average

Income/

Yield/

Earning assets:

Balance

Expense

Rate

Balance

Expense

Rate

Loans, net of unearned income

$   274,199

$        8,221

6.05%

$     264,205

$         8,330

6.36%

Investment securities

94,495

922

2.27%

91,795

1,085

2.70%

Other earning assets

26,668

36

0.27%

24,913

28

0.23%

  Total earning assets

395,362

$        9,179

4.75%

380,913

$         9,443

5.07%

Allowance for loan losses

(5,622)

(6,574)

Cash and other assets

38,780

36,169

TOTAL ASSETS

$   428,521

$     410,508

Liabilities and Shareholders' Equity

Interest-bearing liabilities:

Interest-bearing demand deposits

$     27,031

$             35

0.26%

$       26,611

$              44

0.33%

Savings deposits

11,919

15

0.25%

10,123

19

0.38%

MMDA's

75,719

219

0.58%

43,006

192

0.90%

Time deposits 

167,919

921

1.11%

192,139

1,334

1.40%

Federal funds purchased and securities

  sold under agreements to repurchase

20,920

35

0.34%

23,744

55

0.47%

Federal Home Loan Bank and other borrowings

32,224

656

4.11%

41,331

887

4.33%

  Total interest-bearing liabilities

335,732

1,881

1.13%

336,954

2,532

1.52%

Net interest spread

$        7,298

3.62%

$         6,912

3.56%

Noninterest-bearing demand deposits

49,632

37,654

Accrued expenses and other liabilities

2,058

(105)

Shareholders' equity

41,099

36,005

TOTAL LIABILITIES AND

  SHAREHOLDERS' EQUITY

$   428,521

$     410,508

Net yield on earning assets

3.79%

3.73%

Taxable equivalent adjustment:

  Loans

0

0

  Investment securities

142

142

          Total adjustment

142

142

Cornerstone Bancshares, Inc. and Subsidiary

Loan Stratification

2013

2012

(Amounts in thousands)

Second

% of

Second

% of

% Dollar

Quarter

Total

Quarter

Total

Change

Non-residential real estate

    Owner occupied

$      61,292

22.2

$     60,068

22.8

2.0

    Non-owner occupied

67,240

24.4

61,671

23.4

9.0

    Multi-family real estate

7,451

2.7

10,279

3.9

(27.5)

    1-4 family construction

8,269

3.0

5,477

2.1

51.0

    Commercial land and lot development

21,332

7.7

17,210

6.5

24.0

Total non-residential real estate

165,584

60.0

154,705

58.7

Residential real estate

    First mortgage - 1-4 family

43,282

15.7

42,333

16.1

2.2

    Second mortgage - 1-4 family

2,129

0.8

3,252

1.2

(34.5)

    Home equity lines

14,483

5.2

16,180

6.1

(10.5)

Total residential real estate

59,894

21.7

61,765

23.4

(3.0)

Total real estate loans

225,478

81.7

216,470

82.1

4.2

Commercial

40,586

14.7

36,765

13.9

10.4

Agricultural & other

7,994

2.9

8,528

3.2

(6.3)

Consumer

2,004

0.7

1,986

0.8

0.9

Total loans, net of unearned fees

$   276,062

100.0

$   263,749

100.0

Cornerstone Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets

Unaudited

June 30,

December 31,

ASSETS

2013

2012

Cash and due from banks

$              1,600,127

$                3,222,139

Interest-bearing deposits at other financial institutions

27,100,735

56,173,099

Total cash and cash equivalents

28,700,862

59,395,238

Securities available for sale

99,777,449

76,096,646

Securities held to maturity (fair value approximates

$43,630 and $46,212 at June 30, 2013 and December 31, 2012, respectively)

40,014

45,086

Federal Home Loan Bank stock, at cost

2,322,900

2,322,900

Loans, net of allowance for loan losses of

$5,094,740 and $6,141,281 at June 30, 2013 and December 31, 2012 respectively

270,967,656

270,850,465

Bank premises and equipment, net

5,183,270

5,399,340

Accrued interest receivable

1,152,927

1,213,778

Foreclosed assets

18,866,526

20,332,313

Other assets

8,322,485

7,790,634

     Total assets

$          435,334,089

$            443,446,400

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:

Noninterest-bearing demand deposits

$            60,094,019

$              60,053,838

Interest-bearing demand deposits

24,613,914

30,178,624

Savings deposits and money market accounts

90,452,881

80,994,239

Time deposits

164,038,451

173,653,892

Total deposits

339,199,265

344,880,593

Accrued interest payable

93,464

120,558

Federal funds purchased and securities sold under

agreements to repurchase

22,907,064

19,587,387

Federal Home Loan Bank advances and other borrowings

31,740,000

37,175,000

Other liabilities

1,160,021

794,026

Total liabilities

395,099,814

402,557,564

Stockholders' equity:

Preferred stock - no par value; 2,000,000 shares authorized;

600,000 shares issued and outstanding 

in 2013 and 2012,

14,857,236

14,821,546

Common stock - $1.00 par value; 20,000,000 shares authorized and

6,709,199 shares issued in 2013 and 2012;

6,547,074 and 6,500,396 shares outstanding in 2013 and 2012, respectively

6,547,074

6,500,396

Additional paid-in capital

21,485,355

21,390,486

Retained deficit

(3,146,410)

(3,274,986)

Accumulated other comprehensive income

491,020

1,451,394

Total stockholders' equity

40,234,275

40,888,836

Total liabilities and stockholders' equity

$          435,334,089

$            443,446,400

The Notes to Consolidated Financial Statements are an integral part of these statements.

Cornerstone Bancshares, Inc. and Subsidiary

Consolidated Statements of Income

Unaudited

Unaudited

Three months ended

Six months ended

June 30,

June 30,

2013

2012

2013

2012

INTEREST INCOME

Loans, including fees

$    4,079,369

$    4,185,757

$  8,221,105

$  8,329,701

Investment securities

482,117

618,255

922,023

1,085,261

Federal funds sold & other earning assets

14,533

13,341

36,005

28,428

Total interest income

4,576,019

4,817,353

9,179,133

9,443,390

INTEREST EXPENSE

Time deposits

455,340

634,961

920,596

1,334,055

Other deposits

131,534

133,459

269,464

254,702

Federal funds purchased and securities

    sold under agreements to repurchase

16,743

23,074

34,823

55,304

FHLB advances and other borrowings

315,948

425,737

656,387

886,944

Total interest expense

919,565

1,217,231

1,881,270

2,531,005

Net interest income before provision for loan losses

3,656,454

3,600,122

7,297,863

6,912,385

Provision for loan losses

-

-

300,000

-

Net interest income after provision for loan losses

3,656,454

3,600,122

6,997,863

6,912,385

NONINTEREST INCOME

Customer service fee

201,302

207,164

389,783

404,598

Net gains from sale of securities

424,971

-

424,971

-

Net gains from sale of loans and other assets

52,382

26,246

201,582

75,910

Other noninterest income

18,650

18,612

36,468

38,900

Total noninterest income

697,305

252,022

1,052,804

519,408

NONINTEREST EXPENSE

Salaries and employee benefits

1,622,501

1,569,555

3,219,792

3,160,690

Net occupancy and equipment expense

339,606

347,928

677,485

683,741

Depository insurance

161,120

206,866

320,964

409,649

Foreclosed assets, net

798,456

480,755

927,148

631,075

Other operating expense

780,045

818,255

1,532,219

1,612,336

Total noninterest expense

3,701,728

3,423,359

6,677,608

6,497,491

Income before provision for income taxes

652,031

428,785

1,373,059

934,302

Provision for income taxes

256,000

118,200

524,900

267,200

Net income

396,031

310,585

848,159

667,102

Preferred stock dividend requirements

375,000

280,031

750,000

545,887

Accretion on preferred stock discount

17,845

15,241

35,690

29,709

Net income available to common shareholders

$           3,186

$         15,313

$       62,469

$       91,506

EARNINGS PER COMMON SHARE

Basic net income per common share