SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-25465
CORNERSTONE BANCORP, INC./CT
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
CONNECTICUT 06-1524044
--------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
550 Summer St., Stamford, Connecticut 06901
---------------------------------------------
(Address of principal executive offices)
(203) 356-0111
--------------
(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___
The number of shares outstanding of the issuer's common stock as of April 30,
2000 was 1,083,358.
Transitional Small Business Disclosure Format (check one): Yes___ No X
---
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements (Unaudited)
- -----------------------------
PAGE
----
Consolidated Statements of Condition
March 31, 2000 and December 31, 1999...................................... 1
Consolidated Statements of Income
Three Months Ended March 31, 2000 and March 31, 1999...................... 2
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended March 31, 2000 and March 31, 1999...................... 3
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and March 31, 1999...................... 4
Notes to Consolidated Financial Statements................................ 5
Item 2. Management's Discussion and Analysis
- ---------------------------------------------
of Financial Condition and Results of Operations.......................... 6 - 12
------------------------------------------------
PART II - Other Information
Item 1. Legal Proceedings...................................................... None
- -------------------------
Item 2. Changes in Securities and Use of Proceeds.............................. None
- -------------------------------------------------
Item 3. Defaults upon 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....................................... 13
- ----------------------------------------
Signatures..................................................................... 14
PART I - Financial Information
Item 1. Financial Statements
- ----------------------------
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share and per share data)
(unaudited)
March 31, December 31,
Assets 2000 1999
-------- -----------
Cash and due from banks $ 6,577 $ 11,928
Federal funds sold 5,912 --
-------- --------
Cash and cash equivalents 12,489 11,928
Available for sale securities, at fair value 25,238 25,357
Held to maturity securities (fair value of $16,322 at March 31, 2000
and $17,385 at December 31, 1999) 16,780 17,812
Loans, net of allowance for loan losses of $1,674 at March 31, 2000
and $1,626 at December 31, 1999 83,365 78,038
Accrued interest receivable 1,129 1,097
Federal Home Loan Bank stock, at cost 419 419
Bank premises and equipment, net 2,892 2,961
Other assets 1,921 1,795
-------- --------
Total assets $144,233 $139,407
======== ========
Liabilities And Stockholders' Equity
Liabilities:
Deposits:
Demand (non-interest bearing) $ 28,913 $ 25,177
Money market demand and NOW 21,680 21,058
Regular, club and money market savings 26,614 28,187
Time 43,003 44,860
-------- --------
Total deposits 120,210 119,282
Securities sold under repurchase agreements 4,751 3,768
Federal Home Loan Bank borrowings 3,000 --
Accrued interest payable 122 135
Other liabilities 900 646
-------- --------
Total liabilities 128,983 123,831
-------- --------
Stockholders' equity:
Common stock, par value $0.01 per share; authorized
5,000,000 shares; issued 1,133,183 shares at March 31, 2000
and 1,129,599 shares at December 31, 1999 11 11
Additional paid-in capital 11,550 11,510
Retained earnings 4,750 4,452
Treasury stock, at cost (51,991 shares at March 31, 2000) (589) --
Accumulated other comprehensive loss, net of taxes of $312
at March 31, 2000 and $270 at December 31, 1999 (472) (397)
-------- --------
Total stockholders' equity 15,250 15,576
-------- --------
Total liabilities and stockholders' equity $144,233 $139,407
======== ========
See accompanying notes to consolidated financial statements.
-1-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(In thousands, except share and per share data)
(unaudited)
Three Months Ended
March 31,
-----------------
2000 1999
---- ----
Interest income:
Loans $ 1,872 $ 1,538
Securities 642 616
Federal funds sold 77 215
---------- ----------
Total interest income 2,591 2,369
---------- ----------
Interest expense:
Deposits 782 879
Other 51 18
---------- ----------
Total interest expense 833 897
---------- ----------
Net interest income 1,758 1,472
Provision for loan losses 41 (17)
---------- ----------
Net interest income after provision
for loan losses 1,717 1,489
---------- ----------
Non-interest income:
Deposit service charges 119 117
Other 54 55
---------- ----------
Total non-interest income 173 172
---------- ----------
Non-interest expense:
Salaries and employee benefits 632 565
Occupancy 146 121
Furniture and equipment 103 108
Data processing 82 87
Professional fees 66 68
Other 197 166
---------- ----------
Total non-interest expense 1,226 1,115
---------- ----------
Income before income tax expense 664 546
Income tax expense 269 224
---------- ----------
Net income $ 395 $ 322
========== ==========
Earnings per common share:
Basic $ 0.35 $ 0.29
Diluted 0.35 0.28
Weighted average common shares:
Basic 1,118,706 1,122,848
Diluted 1,129,932 1,163,661
See accompanying notes to consolidated financial statements.
-2-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(In thousands)
(unaudited)
Accumulated
Additional Other Total
Common Paid-in Retained Treasury Comprehensive Stockholders'
Stock Capital Earnings Stock Income (Loss) Equity
------- ----------- --------- --------- -------------- --------------
BALANCE, JANUARY 1, 1999 $ 11 $11,351 $3,497 $ -- $ 131 $14,990
Net income 322 322
Change in net unrealized gain (loss)
on available for sale securities,
net of taxes (128) (128)
-------
Total comprehensive income 194
Cash dividends ($0.24 per share) (269) (269)
Shares issued in connection with:
Directors Compensation Plan 1 1
Dividend Reinvestment Plan 65 65
----- ------- ------ ----- ----- -------
BALANCE, MARCH 31, 1999 $ 11 $11,417 $3,550 $ -- $ 3 $14,981
===== ======= ====== ===== ===== =======
BALANCE, JANUARY 1, 2000 $ 11 $11,510 $4,452 $ -- $(397) $15,576
Net income 395 395
Change in net unrealized gain (loss)
on available for sale securities,
net of taxes (75) (75)
-------
Total comprehensive income 320
Cash dividends ($0.09 per share) (97) (97)
Purchases of treasury stock (51,991 shares) (589) (589)
Shares issued in connection with:
Directors Compensation Plan 3 3
Dividend Reinvestment Plan 37 37
----- ------- ------ ----- ----- -------
BALANCE, MARCH 31, 2000 $ 11 $11,550 $4,750 $(589) $(472) $15,250
===== ======= ====== ===== ===== =======
See accompanying notes to consolidated financial statements.
-3-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(In thousands)
(unaudited)
Three Months Ended
March 31,
-------------------------
Operating activities: 2000 1999
---- ----
Net income $ 395 $ 322
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 41 (17)
Depreciation and amortization 99 89
Common stock issued under compensation agreements 3 1
Increase in accrued interest receivable (32) (104)
Increase in deferred loan costs (6) (19)
Increase in other assets (84) (186)
Decrease in accrued interest payable (13) (11)
Increase in other liabilities 259 120
------- -------
Net cash provided by operating activities 662 195
------- -------
Investing activities:
Proceeds from maturities of available for sale securities -- 2,740
Proceeds from maturities of held to maturity securities 1,024 1,000
Purchases of available for sale securities -- (3,500)
Purchases of held to maturity securities -- (3,505)
Disbursements for loan originations less principal repayments (5,362) (1,603)
Purchases of bank premises and equipment (20) (54)
------- -------
Net cash used in investing activities (4,358) (4,922)
------- -------
Financing activities:
Net increase in demand, money market and savings deposits 2,785 6,051
Net decrease in time deposits (1,857) (2,344)
Net increase in securities sold under repurchase agreements 983 1,880
Proceeds from Federal Home Loan Bank borrowings 3,000 -
Proceeds from issuance of common stock 37 65
Purchases of treasury stock (589) --
Dividends paid on common stock (102) (269)
------- -------
Net cash provided by financing activities 4,257 5,383
------- -------
Net increase in cash and cash equivalents 561 656
Cash and cash equivalents at beginning of period 11,928 27,312
------- -------
Cash and cash equivalents at end of period $12,489 $27,968
======= =======
Supplemental information:
Interest paid $ 846 $ 908
Income taxes paid 70 100
======= =======
See accompanying notes to consolidated financial statements.
-4-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
- ----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
- --------------------------------------------------------
(dollars in thousands)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
include the accounts of Cornerstone Bancorp, Inc. and Cornerstone Bank (the
"Bank"), collectively the "Company". The interim consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles for interim financial statements and the instructions to Form 10-QSB,
and, accordingly, do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited consolidated financial
statements reflect all adjustments necessary, consisting only of normal
recurring accruals, to present fairly the financial position, results of
operations, changes in stockholders' equity and cash flows at the dates and for
the periods presented. In preparing the interim consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the statement
of condition and revenues and expenses for the period. Actual results could
differ significantly from those estimates. A material estimate that is
particularly susceptible to near-term change is the allowance for loan losses.
The interim results of operations for the first three months of 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000.
While management believes that the disclosures presented are adequate so as
not to make the information misleading, it is suggested that these interim
consolidated financial statements be read in conjunction with the annual
consolidated financial statements and notes included in the Form 10-KSB for the
year ended December 31, 1999.
NOTE B - EARNINGS PER SHARE
Basic EPS is computed by dividing net income by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. For the three
month periods ended March 31, 2000 and 1999, the number of shares for diluted
EPS exceeded the number of shares for basic EPS due to the dilutive effect of
outstanding stock options computed using the treasury stock method. For
purposes of computing basic EPS, net income applicable to common stock equaled
net income for these periods.
NOTE C - SEGMENT INFORMATION
Public companies are required to report certain financial information about
significant revenue-producing segments of the business for which sufficient
information is available and utilized by the chief operating decision maker.
Specific information to be reported for individual operating segments includes a
measure of profit and loss, certain revenue and expense items, and total assets.
As a community-oriented financial institution, substantially all of the Bank's
operations involve the delivery of loan and deposit products to customers.
Management makes operating decisions and assesses performance based on an
ongoing review of these banking operations, which constitute the Company's only
operating segment for financial reporting purposes.
-5-
Item 2. Management's Discussion and Analysis of
- -----------------------------------------------
Financial Condition and Results of Operations
- ---------------------------------------------
(dollars in thousands)
FORWARD-LOOKING STATEMENTS
The statements contained in this report which are not historical are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Examples of such forward-looking statements include, without
limitation, statements by the Company regarding expectations for earnings,
credit quality and other financial and business matters. In addition, when used
in this report, the words "anticipate," "plan," "believe," "estimate," "expect"
and similar expressions as they relate to the Company or its management are
intended to identify forward-looking statements. All forward-looking statements
involve risks and uncertainties. Actual results may differ materially from those
discussed in, or implied by, the forward-looking statements as a result of
certain factors, including but not limited to, competitive pressures on loan and
deposit product pricing, other actions of competitors, changes in economic
conditions, the extent and timing of actions of the Federal Reserve Board,
customer deposit disintermediation, changes in customers' acceptance of the
Company's products and services, and the extent and timing of legislative and
regulatory actions and reforms.
The forward-looking statements contained in this report speak only as of
the date on which such statements are made. By making any forward-looking
statements, the Company assumes no duty to update them to reflect new, changing
or unanticipated events or circumstances.
FINANCIAL CONDITION
General
Total assets increased from $139,407 at December 31, 1999 to $144,233 at
March 31, 2000, an increase of $4,826 (or 4%). The increase reflects loan
growth of $5,327 and an increase of $561 in cash and cash equivalents, partially
offset by a decrease of $1,032 in securities held to maturity. The asset growth
was funded principally from Federal Home Loan Bank ("FHLB") borrowings of
$3,000, repurchase agreement borrowings of $983 and an increase of $928 in
deposits. A portion of this funding ($589) was also used to purchase 51,991
treasury shares under the Company's program, announced in December 1999, to
repurchase up to 100,000 common shares.
Loans
The net loan portfolio increased from $78,038 at December 31, 1999 to
$83,365 at March 31, 2000, an increase of $5,327 (or 7%). (For purposes of this
discussion, loan amounts are referenced net of unearned income/deferred costs
and allowance for loan losses.) The increase in the loan portfolio in the first
quarter of 2000 reflects increases in non-residential and commercial loans,
partially offset by decreases in residential mortgage loans and other
categories. Non-residential loans increased from $25,470 at December 31, 1999 to
$29,523 at March 31, 2000, an increase of $4,053 (or 16%). Commercial loans
increased from $9,604 at December 31, 1999 to $11,844 at March 31, 2000, an
increase of $2,240 (or 23%). Over 50% of the increase in non-residential and
commercial loans was due to the origination of one large loan in each category.
Residential mortgage loans decreased from $35,501 at December 31, 1999 to
$34,837 at March 31, 2000, a decrease of $664 (or 2%). Construction loans
decreased from $6,022 at December 31, 1999 to $5,800 at March 31, 2000, a
decrease of $222 (or 4%).
-6-
Major classifications of loans at March 31, 2000 and December 31, 1999 were as
follows:
March 31, 2000 December 31, 1999
--------------- ------------------
Loans secured by real estate:
Residential $34,837 $35,501
Non-residential 29,523 25,470
Construction 5,800 6,022
Commercial loans 11,844 9,604
Consumer and other loans 2,988 3,026
------- -------
Total loans 84,992 79,623
Allowance for loan losses (1,674) (1,626)
Deferred loan costs, net 47 41
------- -------
Total loans, net $83,365 $78,038
======= =======
Non-performing Loans and the Allowance for Loan Losses
It is the Bank's policy to manage its loan portfolio to facilitate
recognition of problem loans at an early point. The Bank commences internal
collection efforts once a loan payment is more than 15 days past due. The Bank's
data processing system generates delinquency reports on all of the Bank's loans
weekly and management reviews the loan portfolio on a weekly basis to determine
if past due loans should be placed on non-accrual status. Unless the customer is
working with the Bank toward repayment, once a loan payment is 90 days past due,
the Bank generally initiates appropriate collection action.
The following table sets forth information with respect to non-performing loans
at the dates indicated.
March 31, 2000 December 31, 1999
-------------- -----------------
Loans on nonaccrual status:
Loans secured by real estate $ 480 $ 388
------ ------
Loans on accrual status:
Loans secured by real estate 4 50
Commercial loans 105 9
Consumer and other loans - 13
------ ------
109 72
------ ------
Total loans past due 90 days or more 589 460
Real estate secured loans current or past due
less than 90 days, for which interest payments
are being applied to reduce principal balances 716 846
------ ------
Total non-performing loans $1,305 $1,306
====== ======
-7-
The following table sets forth changes in the allowance for loan losses for
the periods indicated.
Three Months Ended
March 31,
------------------
2000 1999
---- ----
Balance at beginning of period $1,626 $1,733
Provision for loan losses 41 (17)
Charge-offs -- --
Recoveries 7 9
------ ------
Balance at end of period $1,674 $1,725
====== ======
Securities
Total securities decreased from $43,169 at December 31, 1999 to $42,018 at
March 31, 2000, a decrease of $1,151 (or 3%). The decrease in the securities
portfolio was primarily due to maturities of securities held to maturity which
were used to fund a portion of the loan growth in the first quarter.
The following table sets forth the amortized cost and estimated fair value
of the securities portfolio at the dates indicated.
March 31, 2000 December 31, 1999
------------------------- ----------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
Available for sale
- ------------------
U.S. Agency securities $26,023 $25,238 $26,024 $25,357
======= ======= ======= =======
Held to maturity
- ----------------
U.S. Agency securities $14,704 $14,250 $14,735 $14,313
U.S. Treasury securities 2,001 1,997 3,002 2,997
Other 75 75 75 75
------- ------- ------- -------
Total $16,780 $16,322 $17,812 $17,385
======= ======= ======= =======
Pledged securities amounted to $10,051 and $10,766 at December 31, 1999 and
March 31, 2000, respectively.
Deposits
Deposits are the primary source of funds for the Company. Deposits consist
of checking accounts, preferred savings accounts, regular savings deposits, NOW
accounts, money market accounts, and certificates of deposit (time deposits).
Deposits are obtained from individuals, partnerships, small and medium size
businesses and professionals in the Company's market area. The Company does not
accept brokered deposits.
-8-
The following table indicates the composition of deposits at the dates
indicated.
March 31, 2000 December 31, 1999
-------------- -----------------
Demand deposits (non-interest bearing) $ 28,913 $ 25,177
Money market demand and NOW accounts 21,680 21,058
Regular, club and money market savings 26,614 28,187
Time deposits 43,003 44,860
-------- --------
Total $120,210 $119,282
======== ========
Total deposits increased from $119,282 at December 31, 1999 to $120,210 at
March 31, 2000, an increase of $928 (or 1%). Demand deposits increased from
$25,177 at December 31, 1999 to $28,913 at March 31, 2000, an increase of
$3,736 (or 15%). Money market demand and NOW accounts increased from $21,058 at
December 31, 1999 to $21,680 at March 31, 2000, an increase of $622 (or 3%).
These increases were partially offset by a decrease in time deposits from
$44,860 at December 31, 1999 to $43,003 at March 31, 2000, a decrease of $1,857
(or 4%). Approximately $1.5 million of the decrease in time deposits was
attributable to maturities and withdrawals of accounts opened during the last
three quarters of 1995 in connection with a promotion. Certificates of deposit
in denominations of $100 or more were $9,820 at December 31, 1999 compared to
$9,791 at March 31, 2000, a decrease of $29. Regular, club and money market
savings decreased from $28,187 at December 31, 1999 to $26,614 at March 31,
2000, a decrease of $1,573 (or 6%).
Liquidity and Capital Resources
At March 31, 2000, total short term investments, which are made up of
federal funds sold, available for sale securities and held to maturity
securities maturing in three months or less, totaled $32,176. The liquidity of
the Company is measured by the ratio of net cash, short term, and marketable
assets to net deposits and short term liabilities. The liquidity ratio at March
31, 2000 was 36.05%, primarily due to the large available for sale portfolio.
The Company's guideline is to maintain a liquidity ratio of 20% or more.
Net cash provided by operating activities was $662 for the three months
ended March 31, 2000 as compared to $195 for the three months ended March 31,
1999. Compared to the first quarter of 1999, cash used in investing activities
decreased primarily due to 1999 purchases of held to maturity securities,
partially offset by increased net disbursements for loan originations in the
current quarter. The decrease in net cash provided by financing activities
primarily resulted from lower net deposit inflows in the current quarter,
partially offset by higher borrowings. Cash and cash equivalents increased $561
for the three months ended March 31, 2000.
At March 31, 2000, the Company had outstanding loan commitments under
unused lines of credit approximating $12,544 and outstanding letters of credit
approximating $170.
At December 31, 1999 and March 31, 2000, the Company's consolidated
leverage capital ratio was equal to 11.1%. At December 31, 1999 and March 31,
2000, the Company's consolidated Tier 1 risk-based capital ratio was 18.4% and
16.7%, respectively. The Company's consolidated total risk-based capital ratio
at December 31, 1999 and March 31, 2000 was 19.6% and 18.0%, respectively. These
ratios exceeded the stated minimum regulatory requirements. The Bank's
regulatory capital ratios at March 31, 2000 were substantially the same as these
consolidated ratios, and the Bank was classified as a well-capitalized
institution for regulatory purposes.
-9-
RESULTS OF OPERATIONS
Comparative Analysis of Operating Results for the Three Months Ended March 31,
2000 versus March 31, 1999
Net Income. Net income was $322 for the three months ended March 31, 1999
compared to $395 for the three months ended March 31, 2000, an increase of $73
(or 23%). Diluted earnings per share were $0.28 for the three months ended March
31, 1999 and $0.35 for the three months ended March 31, 2000 based on weighted
average shares of 1,163,661 and 1,129,932, respectively. The annualized return
on average common stockholders' equity (R.O.E) was 8.57% and 10.22% for the
three months ended March 31, 1999 and March 31, 2000, respectively. The
annualized return on average assets was 0.94% for the three months ended March
31, 1999 and 1.12% for the three months ended March 31, 2000.
Higher net income for the three months ended March 31, 2000 was principally
due to increased net interest income (reflecting an increase in interest income
and a reduction in interest expense) which was partially offset by increases in
the provision for loan losses, non-interest expense and income tax expense.
Net Interest Income. Net interest income is the difference between the interest
income the Company earns on its loans, securities, and other earning assets,
and the interest cost of deposits and other interest-bearing liabilities
necessary to fund these earning assets. It is the primary component of the
Company's earnings.
Net interest income was $1,472 for the three months ended March 31, 1999
compared to $1,758 for the three months ended March 31, 2000, an increase of
$286 (or 19%). Higher loan and securities volume as well as higher interest
rates on federal funds resulted in increased interest income. The rolloff of
higher priced certificates of deposit resulted in decreased interest expense.
The average yield on interest-earning assets increased 51 basis points for the
three months ended March 31, 2000 compared to March 31, 1999, while the average
rate paid on interest-bearing liabilities decreased 28 basis points. These
changes resulted in a 79 basis point increase in the net interest margin for the
three months ended March 31, 2000 compared to March 31, 1999. The higher asset
yields reflect a shift in asset mix to higher yielding loans, as well as recent
increases in market interest rates. The lower funding costs reflect the
maturity or withdrawal of higher priced deposit accounts.
Interest Income. Average earning assets for the three months ended March 31,
1999 were $129,460 compared to $131,519 for the three months ended March 31,
2000, an increase of $2,059(or 2%). Total interest income, which is a function
of the volume of interest-earning assets and their related rates, was $2,369 for
the three months ended March 31, 1999 and $2,591 for the three months ended
March 31, 2000, representing an increase of $222 (or 9%).
Loans represent the largest component of interest-earning assets. Average
loans outstanding in the three months ended March 31, 1999 were $70,405 compared
to $82,914 during the three months ended March 31, 2000, an increase of $12,509
(or 18%). Interest on loans was $1,538 for the three months ended March 31, 1999
compared to $1,872 for the three months ended March 31, 2000, an increase of
$334 (or 22%). The increase in loan income primarily reflects the increase in
loan volume for the three months ended March 31, 2000 compared to March 31,
1999.
Average investments in securities and federal funds sold were $59,055 for
the three months ended March 31, 1999 compared to $48,605 for the three months
ended March 31, 2000, a decrease of $10,450
-10-
(or 18%). Related income decreased from $829 for the three months ended March
31, 1999 to $719 for the three months ended March 31, 2000, a decrease of $110
(or 13%). Average investments in securities, not including federal funds,
increased by $3,000 (or 8%) during the three months ended March 31, 2000 while
average federal funds sold decreased by $13,450 (or 71%). The decrease in income
from securities and federal funds was primarily due to the reduced volume of
federal funds sold and a reduction in yields on securities which was partially
offset by increasing rates of interest earned on federal funds and increased
securities volume.
Interest Expense. Interest expense was $897 for the three months ended March 31,
1999 compared to $833 for the three months ended March 31, 2000, a 7% decrease.
Interest expense is a function of the volume of interest-bearing liabilities and
their related rates. Average interest-bearing liabilities during the three
months ended March 31, 1999 were $98,451 compared to $97,847 during the three
months ended March 31, 2000, a decrease of $604 (or 1%). The decline in average
interest-bearing liabilities was primarily due to the decline in average time
deposits. The lower volume resulted in an overall decline in interest expense
for the three months ended March 31, 2000 compared to March 31, 1999.
Provision for Loan Losses. The periodic provision for loan losses represents the
amount necessary to adjust the allowance for loan losses to management's
estimate of probable credit losses inherent in the existing loan portfolio at
the reporting date. Management's determination of the allowance for loan losses
is based on the results of continuing reviews of individual loans and borrower
relationships, particularly in the commercial and commercial real estate loan
portfolios. A review of the quality of the loan portfolio is conducted
internally by management on a quarterly basis, using a consistently-applied
methodology, and the results are presented to the Board of Directors for
approval. The evaluation covers individual borrowers whose aggregate loans are
greater than $100, as well as all adversely-classified loans. Management also
considers factors such as the borrower's financial condition, historical and
expected ability to make loan payments, and underlying collateral values. The
determination of the allowance for loan losses also considers the level of past
due loans, the Bank's historical loan loss experience, changes in loan portfolio
mix, geographic and borrower concentrations, and current economic conditions.
The provision for loan losses was ($17) for the three months ended March 31,
1999 and $41 for the three months ended March 31, 2000. As of March 31, 2000,
the allowance for loan losses was $1,674 or 1.97% of gross loans, compared to
$1,626 or 2.04% of gross loans at December 31, 1999.
At March 31, 2000, the Company had $1,305 of nonperforming loans, including
$480 of nonaccrual loans and $109 of accruing loans greater than 90 days past
due. Loans less than 90 days past due for which interest payments are being
applied to reduce principal balances, were $716 at March 31, 2000. At December
31, 1999, the Company had $1,306 of nonperforming loans, including $388 of
nonaccrual loans and $72 of accruing loans greater than 90 days past due. Loans
less than 90 days past due for which interest payments are being applied to
reduce principal balances, were $846 at December 31, 1999.
Non-interest Income. Non-interest income was $172 for the three months ended
March 31, 1999 compared to $173 for the three months ended March 31, 2000.
Non-interest Expense. Total non-interest expenses were $1,115 for the three
months ended March 31, 1999 and $1,226 for the three months ended March 31,
2000, an increase of $111 (or 10%).
-11-
A table summarizing the dollar amounts for each category, and the dollar
and percent changes, is as follows:
Three Months Ended
March 31, 2000 vs 1999
------------------ -------------------
Category 2000 1999 $ Change % Change
---- ---- -------- --------
Salaries and employee benefits $ 632 $ 565 $ 67 12%
Occupancy 146 121 25 21
Furniture and equipment 103 108 (5) (5)
Other categories 345 321 24 8
------ ------ ----
Total non-interest expense $1,226 $1,115 $111 10%
====== ====== ==== ==
The increase in salaries and employee benefits resulted from the addition
of seven employees, salary increases and increased cost of benefits. On May 17,
1999, the Bank opened its fifth branch which is located in Norwalk, Connecticut.
The increase in occupancy expense primarily resulted from additional rent and
depreciation associated with the Norwalk branch. The increase in other non-
interest expense categories was also primarily related to the Norwalk branch.
The following table summarizes dollar amounts for each category as a
percentage of total operating income (interest income plus non-interest income):
Three Months Ended
March 31,
------------------
Category 2000 1999
----- -----
Salaries and employee benefits 22.87% 22.24%
Occupancy 5.28 4.76
Furniture and equipment 3.73 4.25
Other categories 12.48 12.63
----- -----
Total non-interest expense 44.36% 43.88%
===== =====
Income Taxes. The provision for income taxes increased from $224 for the three
months ended March 31, 1999 to $269 for the three months ended March 31, 2000,
an increase of $45 (or 20%). The increase in income taxes was principally due to
the increase in pre-tax income.
YEAR 2000
The operating systems of the Company have been performing properly since
December 31, 1999 and there have been no interruptions in the Company's business
operations. The Company has had dialogue with its loan customers concerning
their Year 2000 preparedness and has incorporated the consideration of Year 2000
readiness into its loan review and credit underwriting processes. The Company is
not currently aware of any Year 2000 issues that have adversely affected its
loan customers or the third parties relied upon by the Company for its daily
transaction processing and other technology needs. Management recognizes,
however, that the possibility exists that adverse effects of the Year 2000 issue
may come to light in the future and will continue to monitor this issue
accordingly.
-12-
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months ended
March 31, 2000.
-13-
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
CORNERSTONE BANCORP, INC.
-------------------------
(Registrant)
DATE: May 4, 2000 /s/ Norman H. Reader
- -------------------------- ------------------------------------------
Norman H. Reader
President and Chief Executive Officer
DATE: May 4, 2000 /s/ Leigh A. Hardisty
- -------------------------- ------------------------------------------
Leigh A. Hardisty
Vice President and Chief Financial Officer
-14-
EXHIBIT INDEX
Exhibit No. Description
27.1 Financial Data Schedule (1)
(1) Filed herewith