CORNERSTONE BANCORP
1670 East Main Street
Easley, South Carolina 29642
(864) 306-1444
July 29, 2005
Mr. John P. Nolan
Accounting Branch Chief
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Cornerstone Bancorp, Easley, South Carolina
Form 10-KSB filed March 24, 2005
Form 10-QSB filed May 12, 2005
File No. 333-79543
Dear Mr. Nolan:
Thank you for your letter dated July 22, 2005 commenting on the filings listed
above. Set forth below are the Company's responses.
Form 10-KSB filed March 24, 2005
Business
Lending Activities, page 3
Comment 1
We note your disclosure in which you state that in most cases, you sell
residential mortgage loans upon origination. Please revise your filing
throughout (including balance sheet, cash flows, and footnotes) to separately
identify mortgage loans held for sale. Please revise your financial statement
footnotes to describe your accounting policies for mortgage loans held for sale.
Refer to paragraphs 28 and 29 of SFAS 65.
Response
The sentence to which you refer was, perhaps, inartfully worded. The
Bank does not currently hold, and has not to date held, any mortgage
loans for sale. The reference to mortgage loans being sold upon
origination relates to loans that are table-funded by other lenders,
not to loans booked in the name of the Bank and then sold. These loans
are also referred to as "brokered" loans in the last sentence of the
third paragraph under "General" on page 3 of the Form 10-KSB. The Bank
does not currently sell any loans that have been originated in its
name, and has no present intention to do so in the near future. The
Company will clarify this point in future filings.
2004 Annual Report
Management's Discussion and Analysis of Financial Condition and Results of
Operations, page 2
Other Expenses, page 8
Comment 2
We note from your Consolidated Statements of Income on page 19 that during the
year ended December 31, 2004, deposit charge-offs increased approximately
Mr. John P. Nolan
July 29, 2005
Page 2
$55,000 over the prior year and was the second largest component of your total
increase in noninterest expense during 2004. Please revise your MD&A to describe
what caused this increase and if this represents a trend that is likely to
continue in future periods.
Response
The increase in total non interest expense from 2003 to 2004 was not
material, and since the increase in deposit charge-offs was only
approximately one-fourth of the increase in total non interest expense,
it was not deemed material either. Furthermore, we do not believe the
increase represents a trend that is likely to continue in future
periods. Accordingly, the Company did not discuss this increase in the
Form 10-KSB.
The Company did, however, discuss these deposit charge-offs in its Form
10-QSB for the quarter ended September 30, 2004, on page 9 under the
heading "Results of Operations." As disclosed there, we noted that the
deposit charge-offs included a loss of $25,190 on two customer accounts
arising from fraudulent activity, and we further disclosed that ATM
processing and deposit charge-offs had increased due to an increase in
the number of demand deposit accounts and the automated overdraft
protection product.
Because the increase in deposit charge-offs was not material year over
year, because we do not believe the increase represents a trend, and
because the reasons for the increase were discussed in the Form 10-QSB
relating to the quarter in which it occurred, we do not believe further
disclosure is necessary.
Maturity Distribution of Loans, page 10
Comment 3
We note that approximately $57 million of your $75 million loan portfolio is
scheduled to mature in one year or less from December 31, 2004. Please tell us
how you considered the guidance in Item III.B, including the related
instructions in the preparation of your table. Please fully explain how you
determined that the majority of your loans are properly classified in the one
year or less table. For example, we are unclear whether these are demand loans,
loans with rollover features or have other terms and conditions which lead you
to this classification. Please also revise your presentation if your maturity
classifications are not correct.
Response
The amounts listed under the first column of this table include both
amounts maturing and repricing within one year. Amounts maturing within
one year, strictly by maturity date, and ignoring repricing, totaled
approximately $34.3 million at December 31, 2004. The remaining $22.9
million of the total $57.2 million disclosed is tied to the Prime rate
and can reprice within the 12 month time period.
We included loans repricing or maturing within one year in the column
"1 Year or Less" to reflect that variable rate loans in the portfolio
would reprice within the one-year time frame. Variable rate loans with
actual maturity dates after one year are further detailed below the
table to show the maturity distribution of these loans. We believe the
combination of these two items reflects, as closely as possible, the
interest rate risk inherent in the loan portfolio. Interest rate risk
is one of the most significant risks for all depository institutions
that have fixed rate interest earning assets funded with fixed rate
interest bearing liabilities. In management's opinion this disclosure
enables the user of the financial statements to discern the amount of
interest rate risk that might be inherent in the portfolio, with the
possible exception of optionality in the balance sheet where the
options are not controlled by the Company. Placing variable rate loans
in categories of this table which reflect their maturity, rather than
their repricing time frames, would be redundant with the information
below the table and would not disclose the repricing time frame, and
Mr. John P. Nolan
July 29, 2005
Page 3
would not enable the user of the financial statements to make any
evaluation of interest rate risk inherent in the portfolio.
We do not plan to change the manner of presenting the information in
this table in the future unless you require us to do so.
Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies and Activities, page 22
Comment 4
Please revise Note 1 to describe your accounting policies regarding loan and
commitment fees for both loans held for investment and loans held for sale.
Refer to paragraphs 20-25 of SFAS 65. Your revised footnotes should also
specifically address how you comply with paragraphs 5 and 18-22 of SFAS 91.
Response
We do not hold loans for sale. Please refer to the response to Comment
1.
With respect to SFAS 91, we do not defer loan fees under SFAS 91 on the
basis that the effect on our financial statements of the net fees or
costs associated with our loans is immaterial to the loans on our books
with maturities greater than one year. The Company performs a detailed
annual analysis comparing the fees from newly originated loans with the
cost of making these loans in order to determine the net deferrable
amount. In each of the years for which the analysis has been done,
including 2004 and 2003, the net deferrable amount was less than
$20,000, of which only 50% would be deferred because the average
remaining maturity of the loan portfolio as of December 31, 2004 was
2.02 years. Accordingly, the net deferrable amount is immaterial to the
Company's financial statements. The Company will continue to perform
this annual analysis, and in the event that we determine the effect
would be material to the financial statements, we will fully adopt SFAS
91.
Comment 5
Please revise Note 1 to clarify whether you retain the servicing rights on
residential mortgage loans you sell to others. If so, please also revise to
include the disclosures specified in paragraph 17e of SFAS 140.
Response
We do not hold loans for sale. Please refer to the response to Comment
1.
Comment 6
Describe whether loans are sold with or without recourse. If sold with recourse,
please describe the nature of the recourse provisions and tell us how you
considered paragraphs 9-12 of SFAS 140 in determining these transactions should
be recorded as loan sales instead of as secured borrowings.
Response
We do not hold loans for sale. Please refer to the response to Comment
1.
Mr. John P. Nolan
July 29, 2005
Page 4
Note 4 - Investment securities, page 28
Comment 7
We note from the Consolidated Statements of Cash Flows on page 21 that you sold
securities during 2004 for a net gain of $5,230. Please quantify for us the
types of investment securities sold, amortized amount, fair value, and gain
recognized for each type of security.
Response
The Company sold one security in 2004. The security was an
available-for-sale security with an amortized book value of $703,192, a
fair value of $708,422, and was sold for a gain of $5,230. The security
was an SLMA Floater with an original coupon of 4.48%. During December
2003, it yielded only 1.65%. Proceeds in the amount of $708,422 were
reported in the Consolidated Statement of Cash Flows for the year ended
December 31, 2004 and in our quarterly report on form 10-QSB for the
quarter ended March 31, 2004.
Form 10-Q filed May 12, 2005
Consolidated Financial Statements
Consolidated Statements of Shareholders' Equity and Comprehensive Income, page 4
Comment 8
We note that during the first quarter of 2005, $57,327 of unrealized losses were
recorded to accumulated other comprehensive income (loss). Please tell us and
revise future filings to state whether you still have the ability and intent to
hold securities with gross unrealized losses until such time as the value
recovers or the securities mature. Please also confirm and revise future filings
to disclose that you do not consider these losses to be other-than-temporary.
Response
Unrealized losses of $57,327 as of March 31, 2005 are considered to be
temporary losses as the Company does have the ability and intent to
hold these securities until maturity. All of these securities are
issued by agencies of the U.S. Government and municipal governments and
all have AAA or Aaa ratings. As of June 30, 2005, Available-for-Sale
securities have an average life of 2.02 years. Of the total amount of
Available-for-Sale securities ($7.9 million) at June 30, 2005, 72% are
pledged for public or other large deposits and sweep accounts, and
would not be sold for that reason.
The Company will disclose in future filings whether it has the ability
and intent to hold securities with gross unrealized losses until such
time as the value recovers or the securities mature, and that the
Company does not consider these losses to be other than temporary.
* * * * * * *
We plan to make the revisions discussed above only with respect to future
filings. We do not believe revising previously filed documents to include the
additional information would be material to an investor's decision to purchase,
sell or continue to hold our stock. Accordingly, we do no plan to revise
previously filed documents unless you require us to do so.
In connection with your comments, we acknowledge that:
. The Company is responsible for the adequacy and accuracy of the
disclosure in filings required under the Securities Exchange Act of
1934;
Mr. John P. Nolan
July 29, 2005
Page 5
. Staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
. The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
We appreciate the staff's assistance and suggestions to help improve the
Company's disclosures, and hope the above responses clarify the issues you have
raised with respect to our Form 10-KSB dated December 31, 2004 and Form 10-QSB
dated March 31, 2005. Please do not hesitate to call me at 864-306-7009 or fax
me at 864-306-1473 if additional clarification or information is necessary.
Sincerely,
s/Jennifer M. Champagne
Jennifer M. Champagne
Chief Financial Officer