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 September 30, 2000
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[_] 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
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(Exact name of small business issuer as specified in its charter)
CONNECTICUT 06-1524044
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
550 Summer St. , Stamford, Connecticut 06901
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(Address of principal executive offices)
(203) 356-0111
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(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 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____
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The number of shares outstanding of the issuer's common stock as of October 31,
2000 was 1,066,722
Transitional Small Business Disclosure Format (check one): Yes___ No X
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TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements (Unaudited)
-----------------------------
PAGE
----
Consolidated Statements of Condition
September 30, 2000 and December 31, 1999......................................... 1
Consolidated Statements of Income
Three Months Ended September 30, 2000 and September 30, 1999..................... 2
Consolidated Statements of Income
Nine Months Ended September 30, 2000 and September 30, 1999...................... 3
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 2000 and September 30, 1999...................... 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and September 30, 1999...................... 5
Notes to Consolidated Financial Statements ...................................... 6
Item 2. Management's Discussion and Analysis
- ---------------------------------------------
of Financial Condition and Results of Operations................................... 7- 16
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PART II - Other Information
Item 1. Legal Proceedings................................................................... None
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Item 2. Changes in Securities and Use of Proceeds........................................... None
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Item 3. Defaults upon Senior Securities..................................................... None
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Item 4. Submission of Matters to a Vote of Security Holders................................. None
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Item 5. Other Information................................................................... None
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Item 6. Exhibits and Reports on Form 8-K.................................................... 16
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Signatures.................................................................................. 17
PART I - Financial Information
Item 1. Financial Statements
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CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share and per share data)
(unaudited)
September 30, December 31,
Assets 2000 1999
-------- --------
Cash and due from banks $ 5,792 $ 11,928
Federal funds sold 7,637 --
-------- --------
Cash and cash equivalents 13,429 11,928
Securities available for sale, at fair value 19,713 25,357
Securities held to maturity (fair value of $14,428
at September 30, 2000 and $17,385 at December 31, 1999) 14,678 17,812
Loans, net of allowance for loan losses of $1,905 at September 30, 2000
and $1,626 at December 31, 1999 97,018 78,038
Accrued interest receivable 1,148 1,097
Federal Home Loan Bank stock, at cost 419 419
Bank premises and equipment, net 2,759 2,961
Other assets 1,771 1,795
-------- --------
Total assets $150,935 $139,407
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand (non-interest bearing) $ 31,156 $ 25,177
Money market demand and NOW 22,101 21,058
Regular, club and money market savings 26,258 28,187
Time 42,969 44,860
-------- --------
Total deposits 122,484 119,282
Securities sold under repurchase agreements 7,059 3,768
Federal Home Loan Bank borrowings 4,500 --
Accrued interest payable 153 135
Other liabilities 752 646
-------- --------
Total liabilities 134,948 123,831
-------- --------
Stockholders' equity:
Common stock, par value $0.01 per share; authorized
5,000,000 shares; issued 1,138,999 shares at September 30, 2000
and 1,129,599 shares at December 31, 1999 11 11
Additional paid-in capital 11,617 11,510
Retained earnings 5,398 4,452
Treasury stock, at cost (74,699 shares at September 30, 2000) (858) --
Accumulated other comprehensive loss, net of taxes of $125
at September 30, 2000 and $270 at December 31, 1999 (181) (397)
-------- --------
Total stockholders' equity 15,987 15,576
-------- --------
Total liabilities and stockholders' equity $150,935 $139,407
======== ========
See accompanying notes to consolidated financial statements.
-1-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands, except share and per share data)
(unaudited)
Three Months Ended
September 30,
-----------------------
2000 1999
---------- ----------
Interest income:
Loans $ 2,287 $ 1,641
Securities 584 661
Federal funds sold 95 229
---------- ----------
Total interest income 2,966 2,531
---------- ----------
Interest expense:
Deposits 829 862
Federal Home Loan Bank borrowings 79 --
Other 40 19
---------- ----------
Total interest expense 948 881
---------- ----------
Net interest income 2,018 1,650
Provision for loan losses 111 (11)
---------- ----------
Net interest income after
provision for loan losses 1,907 1,661
---------- ----------
Non-interest income:
Deposit service charges 107 118
Loss on sales of securities
available for sale (122) --
Other 126 60
---------- ----------
Total non-interest income 111 178
---------- ----------
Non-interest expense:
Salaries and employee benefits 670 605
Occupancy 150 140
Furniture and equipment 98 116
Data processing 97 84
Professional fees 58 60
Other 218 221
---------- ----------
Total non-interest expense 1,291 1,226
---------- ----------
Income before income tax expense 727 613
Income tax expense 304 239
---------- ----------
Net income $ 423 $ 374
========== ==========
Earnings per common share:
Basic $ 0.40 $ 0.33
Diluted 0.39 0.32
Weighted average common
Basic 1,063,640 1,126,618
Diluted 1,081,653 1,150,593
See accompanying notes to consolidated financial statements.
-2-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands, except share and per share data)
(unaudited)
Nine Months Ended
September 30,
-----------------------
2000 1999
---------- ----------
Interest income:
Loans $ 6,230 $ 4,812
Securities 1,850 1,949
Federal funds sold 274 608
---------- ----------
Total interest income 8,354 7,369
---------- ----------
Interest expense:
Deposits 2,401 2,603
Federal Home Loan Bank borrowings 195 --
Other 95 56
---------- ----------
Total interest expense 2,691 2,659
---------- ----------
Net interest income 5,663 4,710
Provision for loan losses 254 (23)
---------- ----------
Net interest income after provision for loan losses 5,409 4,733
---------- ----------
Non-interest income:
Deposit service charges 337 342
Loss on sales of securities available for sale (136) --
Other 262 222
---------- ----------
Total non-interest income 463 564
---------- ----------
Non-interest expense:
Salaries and employee benefits 1,916 1,761
Occupancy 437 392
Furniture and equipment 309 338
Data processing 260 262
Professional fees 174 240
Other 653 610
---------- ----------
Total non-interest expense 3,749 3,603
---------- ----------
Income before income tax expense 2,123 1,694
Income tax expense 867 685
---------- ----------
Net income $ 1,256 $ 1,009
========== ==========
Earnings per common share:
Basic $ 1.16 $ 0.90
Diluted 1.14 0.87
Weighted average common shares:
Basic 1,085,754 1,124,532
Diluted 1,100,850 1,161,956
See accompanying notes to consolidated financial statements.
-3-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 1,009 1,009
Change in net unrealized gain (loss)
on securities available for sale, net of taxes (387) (387)
--------
Total comprehensive income 622
Cash dividends ($0.36 per share) (404) (404)
Shares issued in connection with:
Directors Compensation Plan 5 5
Dividend Reinvestment Plan 118 118
----- ------- -------- ------- --------- --------
BALANCE, SEPTEMBER 30, 1999 $ 11 $ 11,474 $ 4,102 $ - $ (256) $ 15,331
===== ======= ======== ======= ========== =======
BALANCE, JANUARY 1, 2000 $ 11 $ 11,510 $ 4,452 $ -- $ (397) $ 15,576
Net income 1,256 1,256
Change in net unrealized gain (loss)
on securities available for sale,
net of taxes 216 216
-------
Total comprehensive income 1,472
Cash dividends ($0.29 per share) (310) (310)
Purchases of treasury stock (74,699 shares) (858) (858)
Shares issued in connection with:
Directors Compensation Plan 11 11
Dividend Reinvestment Plan 96 96
----- ------- -------- ------- ---------- --------
BALANCE, September 30, 2000 $ 11 $ 11,617 $ 5,398 $ (858) $ (181) $ 15,987
===== ======= ======== ======= ========== ========
See accompanying notes to consolidated financial statements.
-4-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(In thousands)
(unaudited)
Nine Months Ended
September 30,
----------------------
Operating activities: 2000 1999
---- ----
Net income $ 1,256 $ 1,009
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 254 (23)
Depreciation and amortization 291 299
Common stock issued under compensation agreements 11 5
Increase in accrued interest receivable (51) (106)
Decrease (increase) in deferred loan costs 32 (18)
Increase in other assets (121) (168)
Increase (decrease) in accrued interest payable 18 (38)
Increase in other liabilities 101 369
Loss on sales of securities available for sale 136 --
-------- --------
Net cash provided by operating activities 1,927 1,329
-------- --------
Investing activities:
Proceeds from sales of securities available for sale 4,864 --
Proceeds from maturities of securities available for sale 1,000 7,249
Proceeds from maturities of securities held to maturity 3,112 3,060
Purchases of securities available for sale -- (3,919)
Purchases of securities held to maturity -- (11,788)
Disbursements for loan originations less principal repayments (19,266) (5,548)
Purchases of bank premises and equipment (62) (402)
-------- --------
Net cash used in investing activities (10,352) (11,348)
-------- --------
Financing activities:
Net increase in demand, money market and savings deposits 5,093 8,188
Net decrease in time deposits (1,891) (6,348)
Net increase in securities sold under repurchase agreements 3,291 1,522
Net increase in Federal Home Loan Bank borrowings with terms
of three months or less 2,000 --
Proceeds from Federal Home Loan Bank borrowings with terms
longer than three months 2,500 --
Proceeds from issuance of common stock 96 118
Purchases of treasury stock (858) --
Dividends paid on common stock (305) (404)
-------- --------
Net cash provided by financing activities 9,926 3,076
-------- --------
Net increase (decrease) in cash and cash equivalents 1,501 (6,943)
Cash and cash equivalents at beginning of period 11,928 27,312
-------- --------
Cash and cash equivalents at end of period $ 13,429 $ 20,369
======== ========
Supplemental information:
Interest paid $ 2,673 $ 2,697
Income taxes paid 1,014 715
======== ========
See accompanying notes to consolidated financial statements.
-5-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
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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 three months and the nine months ended
September 30, 2000 are not necessarily indicative of the results to be expected
for the year ending December 31, 2000 or for any other interim period.
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 would occur if securities or other contracts to issue common stock
were exercised or converted into common stock, or otherwise resulted in the
issuance of common stock that then shared in the earnings of the entity. For the
three and nine month periods ended September 30, 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.
-6-
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 that 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 $150,935 at
September 30, 2000, an increase of $11,528 (or 8%). The increase reflects loan
growth of $18,980 and an increase of $1,501 in cash and cash equivalents,
partially offset by decreases of $3,134 in securities held to maturity and
$5,644 in securities available for sale. The asset growth was funded principally
from net increases of $3,202 in deposits, $4,500 in Federal Home Loan Bank
("FHLB") borrowings and $3,291 in repurchase agreement borrowings. A portion of
this funding ($858) was also used to purchase 74,699 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 $97,018
at September 30, 2000, an increase of $18,980 (or 24%). The increase in the loan
portfolio in the first nine months of 2000 reflects increases in non-residential
and residential real estate loans and commercial loans, partially offset by a
decrease in construction loans and consumer and other loans. Non-residential
loans increased from $25,470 at December 31, 1999 to $37,652 at September 30,
2000, an increase of $12,182 (or 48%). Residential loans increased from $35,501
at December 31, 1999 to $44,063 at September 30, 2000, an increase of $8,562 (or
24%). Commercial loans increased from $9,604 at December 31, 1999 to $11,038 at
September 30, 2000, an increase of $1,434 (or 15%). Loan originations in the
third quarter of 2000 continued to reflect an upswing in loan demand and
consequently volume that began in the third quarter of 1999 for loan types other
than construction loans and consumer and other loans. Construction loans
decreased from $6,022 at December 31, 1999 to $3,778 at September 30, 2000, a
decrease of $2,244
-7-
(or 37%) due to payoff activity during the period. Consumer and other loans
decreased from $3,026 at December 31, 1999 to $2,383 at September 30, 2000, a
decrease of $643 (or 21%) primarily due to the payoff of one large loan.
Major classifications of loans at September 30, 2000 and December 31, 1999 were
as follows:
September 30, 2000 December 31, 1999
------------------ ------------------
Loans secured by real estate:
Residential $44,063 $35,501
Non-residential 37,652 25,470
Construction 3,778 6,022
Commercial loans 11,038 9,604
Consumer and other loans 2,383 3,026
------- -------
Total loans 98,914 79,623
Allowance for loan losses (1,905) (1,626)
Deferred loan costs, net 9 41
------- -------
Total loans, net $97,018 $78,038
======= =======
Non-performing Loans and the Allowance for Loan Losses
It is the Bank's policy to manage its loan portfolio to facilitate early
recognition of problem loans. 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 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 or legal action.
The following table sets forth information with respect to non-performing loans
at the dates indicated.
September 30, 2000 December 31, 1999
------------------ -----------------
Loans on nonaccrual status:
Loans secured by real estate $ 412 $ 388
Commercial loans 460 -
------ ------
872 388
------ ------
Loans on accrual status:
Loans secured by real estate 172 50
Commercial loans -- 9
Consumer and other loans 1 13
------ ------
173 72
------ ------
Total loans past due 90 days or more 1,045 460
Real estate secured loans current or past due
less than 90 days, for which interest payments
were being applied to reduce principal balances 223 846
------ ------
Total non-performing loans $1,268 $1,306
====== ======
-8-
The increase in nonaccrual commercial loans of $460 primarily represents
loans to one borrower placed on nonaccrual status during the second quarter of
2000. The increase in loans on accrual status secured by real estate was due to
the addition of two loans in the third quarter of 2000. The decline in real
estate secured loans for which interest payments were being applied to principal
(from $846 at December 31, 1999 to $223 at September 30, 2000) was primarily due
to management's decision in the second quarter to return loans amounting to $526
(at December 31, 1999) to accrual status due to the borrowers' continuing
payment performance.
As of December 31, 1999, the allowance for loan losses was $1,626 or 2.04% of
gross loans, compared to $1,905 or 1.93% of gross loans at September 30, 2000,
primarily reflecting continuing loan growth in 2000. The following table sets
forth changes in the allowance for loan losses for the periods indicated.
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Balance at beginning of period $1,626 $1,733 $1,800 $1,709
Provision for loan losses 254 (23) 111 (11)
Charge-offs (19) (27) (9) --
Recoveries 44 45 3 30
------ ------ ------ ------
Balance at end of period $1,905 $1,728 $1,905 $1,728
====== ====== ====== ======
Securities
Total securities decreased from $43,169 at December 31, 1999 to $34,391 at
September 30, 2000, a decrease of $8,778 (or 20%). The decrease in the
securities portfolio was primarily due to maturities of securities held to
maturity and sales of securities available for sale, the proceeds of which were
used to fund a portion of loan growth and meet other short term cash needs.
The following table sets forth the amortized cost and estimated fair value of
the securities portfolio at the dates indicated.
September 30, 2000 December 31, 1999
-------------------- --------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
Available for sale
- ------------------
U.S. Agency securities $20,019 $19,713 $26,024 $25,357
======= ======= ======= =======
Held to maturity
- ----------------
U.S. Agency securities $14,603 $14,353 $14,735 $14,313
U.S. Treasury securities -- -- 3,002 2,997
Other 75 75 75 75
------- ------- ------- -------
Total $14,678 $14,428 $17,812 $17,385
======= ======= ======= =======
Pledged securities amounted to $10,051 and $12,400 at December 31, 1999 and
September 30, 2000, respectively.
-9-
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.
The following table indicates the composition of deposits at the dates
indicated.
September 30, 2000 December 31, 1999
------------------ -----------------
Demand deposits (non-interest bearing) $ 31,156 $ 25,177
Money market demand and NOW accounts 22,101 21,058
Regular, club and money market savings 26,258 28,187
Time deposits 42,969 44,860
-------- --------
Total $122,484 $119,282
======== ========
Total deposits increased from $119,282 at December 31, 1999 to $122,484 at
September 30, 2000, an increase of $3,202 (or 3%). Demand deposits increased
from $25,177 at December 31, 1999 to $31,156 at September 30, 2000, an increase
of $5,979 (or 24%). The increase in demand deposits is due to the increase in
the balance and number of demand deposit accounts. Money market demand and NOW
accounts increased from $21,058 at December 31, 1999 to $22,101 at September 30,
2000, an increase of $1,043 (or 5%). These increases were partially offset by a
decrease in regular, club and money market savings from $28,187 at December 31,
1999 to $26,258 at September 30, 2000, a decrease of $1,929 (or 7%) as well as a
decrease in time deposits from $44,860 at December 31, 1999 to $42,969 at
September 30, 2000, a decrease of $1,891 (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. The decrease in regular, club and money market savings was
attributable to normal customer activity. Certificates of deposit in
denominations of $100 or more were $9,820 at December 31, 1999 compared to
$9,922 at September 30, 2000, an increase of $102.
Liquidity and Capital Resources
At September 30, 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 $27,350. The liquidity of
the Company is measured by the ratio of net cash, short term investments, and
marketable assets to net deposits (defined as total deposits less repurchase
agreements) and short term liabilities. The liquidity ratio at September 30,
2000 was 24%, 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 $1,927 for the nine months ended
September 30, 2000 as compared to $1,329 for the nine months ended September 30,
1999 primarily due to increased net income and the provision for loan losses.
Compared to the first nine months of 1999, cash used in investing activities
decreased $996 primarily due to increased net disbursements for loan
originations in 2000, while 1999 purchases of securities did not recur in 2000.
The increase in net cash provided by financing activities of $6,850 for the nine
months ended September 30, 2000 primarily resulted from net borrowings from the
Federal Home Loan Bank of Boston, increased securities sold under repurchase
agreements and increased net deposits in the current year, partially offset by
treasury stock purchases. Cash and cash equivalents increased $1,501 for the
nine months ended September 30, 2000.
-10-
At September 30, 2000, the Company had outstanding loan commitments under
unused lines of credit approximating $13,788 and outstanding letters of credit
approximating $192.
At December 31, 1999 and September 30, 2000, the Company's consolidated
leverage capital ratio was 11.1% and 10.8%, respectively. At December 31, 1999
and September 30, 2000, the Company's consolidated Tier 1 risk-based capital
ratio was 18.4% and 15.3%, respectively. The Company's consolidated total risk-
based capital ratio at December 31, 1999 and September 30, 2000 was 19.6% and
16.6%, respectively. These ratios exceeded the stated minimum regulatory
requirements. The lower capital ratios at September 30, 2000 reflect the growth
in the loan portfolio and the stock repurchase program in 2000, as well as an
increase in total risk-weighted assets caused by a reduction in cash and cash
reserves at the Federal Reserve Bank of New York which were unusually high at
the end of 1999 due to year 2000 concerns. The Bank's regulatory capital ratios
at September 30, 2000 were substantially the same as these consolidated ratios,
and the Bank was classified as a well-capitalized institution for regulatory
purposes.
RESULTS OF OPERATIONS
Comparative Analysis of Operating Results for the Three Months Ended September
30, 2000 versus September 30, 1999
Net Income. Net income was $374 for the three months ended September 30, 1999
compared to $423 for the three months ended September 30, 2000, an increase of
$49 (or 13%). Diluted earnings per common share were $0.32 for the three months
ended September 30, 1999 and $0.39 for the three months ended September 30, 2000
based on weighted average shares of 1,150,593 and 1,081,653, respectively. The
annualized return on average common stockholders' equity (R.O.E) was 9.73% and
10.70% for the three months ended September 30, 1999 and September 30, 2000,
respectively. The annualized return on average assets was 1.01% for the three
months ended September 30, 1999 and 1.13% for the three months ended September
30, 2000.
Higher net income for the three months ended September 30, 2000 was
principally due to increased net interest income which was partially offset by
an increase in the provision for loan losses, lower non-interest income and
higher 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 $1,650 for the three months ended September 30, 1999
compared to $2,018 for the three months ended September 30, 2000, an increase of
$368 (or 22%). Higher loan volume resulted in increased interest income while
the rolloff of higher priced certificates of deposit resulted in decreased
interest expense on deposits. This decrease was partially offset by interest
expense on FHLB borrowings and an increase in other interest expense. The
average yield on interest-earning assets increased 109 basis points for the
three months ended September 30, 2000 compared to September 30, 1999, while the
average rate paid on interest-bearing liabilities increased 33 basis points.
These changes resulted in a 76 basis point increase in the net interest margin
for the three months ended September 30, 2000 compared to September 30, 1999.
The higher asset yields reflect increased loan volume at higher market interest
rates while the increased cost of funds reflect the higher market interest rate
paid on borrowed funds.
-11-
Interest Income. Average earning assets for the three months ended September 30,
1999 were $136,972 compared to $139,886 for the three months ended September 30,
2000, an increase of $2,914 (or 2%). Total interest income, which is a function
of the volume of interest-earning assets and their related rates, was $2,531 for
the three months ended September 30, 1999 and $2,966 for the three months ended
September 30, 2000, representing an increase of $435 (or 17%).
Loans represent the largest component of interest-earning assets. Average
loans outstanding in the three months ended September 30, 1999 were $73,701
compared to $95,390 during the three months ended September 30, 2000, an
increase of $21,689 (or 29%). Interest on loans was $1,641 for the three months
ended September 30, 1999 compared to $2,287 for the three months ended September
30, 2000, an increase of $646 (or 39%). The increase in loan income primarily
reflects the increase in loan volume, as well as an increase in average yield
for the three months ended September 30, 2000 compared to September 30, 1999.
Average investments in securities and federal funds sold were $63,271 for the
three months ended September 30, 1999 compared to $44,497 for the three months
ended September 30, 2000, a decrease of $18,774 (or 30%). Related income
decreased from $890 for the three months ended September 30, 1999 to $679 for
the three months ended September 30, 2000, a decrease of $211 (or 24%). Average
investments in securities, not including federal funds, decreased by $6,486 (or
14%) during the three months ended September 30, 2000, while average federal
funds sold decreased by $12,288 (or 68%). The decrease in income from securities
and federal funds sold was primarily due to the reduced volume in both
categories, partially offset by increasing rates of interest earned on federal
funds sold.
Interest Expense. Interest expense was $881 for the three months ended September
30, 1999 compared to $948 for the three months ended September 30, 2000, an 8%
increase. 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 September 30, 1999 were $105,217 compared to $103,134
during the three months ended September 30, 2000, a decrease of $2,083 (or 2%).
Increased interest expense was primarily due to the increased FHLB borrowings
and related interest expense which was partially offset by the declining volume
of time deposits at a lower average interest rate.
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 increased from $(11) for the three months ended
September 30, 1999 to $111 for the three months ended September 30, 2000,
primarily reflecting continuing loan growth in 2000.
At September 30, 2000, the Company had $1,268 of nonperforming loans,
including $872 of non-accrual loans and $173 of accruing loans greater than 90
days past due. Loans less than 90 days past due for which interest payments were
being applied to reduce principal balances, were $223 at September 30,
-12-
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 were
being applied to reduce principal balances, were $846 at December 31, 1999.
Non-interest Income. Non-interest income was $178 for the three months ended
September 30, 1999 compared to $111 for the three months ended September 30,
2000, a decrease of $67 (or 38%). During the three months ended September 30,
2000, the Bank sold $4,000 in securities available for sale at a loss of $122
(there were no such sales in the 1999 period). The sale of the securities was
used to fund loan demand, increase excess funds to meet daily withdrawal
activity, and reduce FHLB borrowings. The increase in other non-interest income
of $66 (or 110%) during the three months ended September 30, 2000 reflects an
the collection of past due rental income and ATM surcharge fees which commenced
in July 2000.
Non-interest Expense. Total non-interest expenses were $1,226 for the three
months ended September 30, 1999 and $1,291 for the three months ended September
30, 2000, a increase of $65 (or 5%).
A table summarizing the dollar amounts for each category of non-interest
expenses, and the dollar and percent changes, is as follows:
Three Months Ended Increase (Decrease)
September 30, 2000 vs 1999
------------------ -------------------
Category 2000 1999 $ Change % Change
---- ---- -------- --------
Salaries and employee benefits $ 670 $ 605 $ 65 11%
Occupancy 150 140 10 7
Furniture and equipment 98 116 (18) (16)
Other categories 373 365 8 2
------ ------ ----
Total non-interest expense $1,291 $1,226 $ 65 5%
====== ====== ==== ===
The increase in salaries and employee benefits was due to the addition of
three employees and associated benefits. The decrease in furniture and equipment
primarily relates to a decrease in equipment service contract/repairs.
The following table summarizes dollar amounts for each category as a
percentage of total operating income (interest income plus non-interest income),
which increased by $368 (or 14%) in the second quarter of 2000 compared to the
same period in 1999:
Three Months Ended
September 30,
------------------
Category 2000 1999
---- ----
Salaries and employee benefits 21.77% 22.33%
Occupancy 4.87 5.17
Furniture and equipment 3.18 4.28
Other categories 12.12 13.48
----- -----
Total non-interest expense 41.96% 45.26%
===== =====
Income Taxes. The provision for income taxes increased from $239 for the three
months ended September 30, 1999 to $304 for the three months ended September 30,
2000, an increase of $65 (or 27%). The increase in income taxes was primarily
due to the 19% increase in pre-tax income.
-13-
Comparative Analysis of Operating Results for the Nine Months Ended September
30, 2000 versus September 30, 1999
Net Income. Net income was $1,009 for the nine months ended September 30, 1999
compared to $1,256 for the nine months ended September 30, 2000, an increase of
$247 (or 24%). Diluted earnings per common share were $0.87 for the nine months
ended September 30, 1999 and $1.14 for the nine months ended September 30, 2000
based on weighted average shares of 1,161,956 and 1,100,850, respectively. The
annualized return on average common stockholders' equity (R.O.E) was 8.94% and
10.72% for the nine months ended September 30, 1999 and 2000, respectively. The
annualized return on average assets was 0.95% for the nine months ended
September 30, 1999 and 1.14% for the nine months ended September 30, 2000.
Higher net income for the nine months ended September 30, 2000 was principally
due to increased net interest income which was partially offset by lower non-
interest income and increases in the provision for loan losses, non-interest
expense and income tax expense.
Net Interest Income. Net interest income was $4,710 for the nine months ended
September 30, 1999 compared to $5,663 for the nine months ended September 30,
2000, an increase of $953 (or 20%). Higher loan volume resulted in increased
interest income. This increase in interest income and decrease in interest
expense on deposits were partially offset by interest expense on FHLB borrowings
and an increase in other interest expense. The average yield on interest-earning
assets increased 78 basis points for the nine months ended September 30, 2000
compared to September 30, 1999, while the average rate paid on interest-bearing
liabilities increased 5 basis points. These changes resulted in a 73 basis point
increase in the net interest margin for the nine months ended September 30, 2000
compared to September 30, 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 average funding cost reflects the maturity or withdrawal of
higher priced deposit accounts, partially offset by the effect of FHLB and other
borrowings in the nine months ended September 30, 2000.
Interest Income. Average earning assets for the nine months ended September 30,
1999 were $132,547 compared to $135,996 for the nine months ended September 30,
2000, an increase of $3,449 (or 3%). Total interest income, which is a function
of the volume of interest-earning assets and their related rates, was $7,369 for
the nine months ended September 30, 1999 and $8,354 for the nine months ended
September 30, 2000, representing an increase of $985 (or 13%).
Loans represent the largest component of interest-earning assets. Average
loans outstanding in the nine months ended September 30, 1999 were $71,679
compared to $89,328 during the nine months ended September 30, 2000, an increase
of $17,649 (or 25%). Interest on loans was $4,812 for the nine months ended
September 30, 1999 compared to $6,230 for the nine months ended September 30,
2000, an increase of $1,418 (or 29%). The increase in loan income primarily
reflects the increase in loan volume, as well as an increase in average yield
for the nine months ended September 30, 2000 compared to September 30, 1999.
Average investments in securities and federal funds sold were $60,868 for the
nine months ended September 30, 1999 compared to $46,668 for the nine months
ended September 30, 2000, a decrease of $14,200 (or 23%). Related income
decreased from $2,557 for the nine months ended September 30, 1999 to $2,124 for
the nine months ended September 30, 2000, a decrease of $433 (or 17%). Average
investments in securities, not including federal funds sold, decreased by $3,079
(or 7%) during the nine months ended September 30, 2000 while average federal
funds sold decreased by $11,121 (or 65%). The
-14-
decrease in income from securities and federal funds sold was primarily due to
the reduced volume in both categories which was partially offset by increasing
rates of interest earned on federal funds sold.
Interest Expense. Interest expense was $2,659 for the nine months ended
September 30, 1999 compared to $2,691 for the nine months ended September 30,
2000, a 1% increase. Interest expense is a function of the volume of interest-
bearing liabilities and their related rates. Average interest-bearing
liabilities during the nine months ended September 30, 1999 were $101,243
compared to $101,363 during the nine months ended September 30, 2000, an
increase of $120 (or less than 1%). The increase in average interest-bearing
liabilities was primarily due to the increase in the volume of NOW, money market
and regular savings deposit accounts, FHLB borrowings, and repurchase agreements
partially offset by a decrease in average time deposits and money market
savings.
Provision for Loan Losses. The provision for loan losses increased from ($23)
for the nine months ended September 30, 1999 to $254 for the nine months ended
September 30, 2000, primarily reflecting the continuing loan growth in 2000.
Non-interest Income. Non-interest income was $564 for the nine months ended
September 30, 1999 compared to $463 for the nine months ended September 30,
2000, a decline of $101 (or 18%). During the nine months ended September 30,
2000, the Bank sold $5,000 in securities available for sale at a loss of $136.
The sale of the securities was used to fund loan demand, increase excess funds
to meet daily withdrawal activity, as well as to reduce FHLB borrowings. The
increase in other non-interest income of $40 (or 18%) during the nine months
ended September 30, 2000 primarily reflects the collection of past due rental
income and the collection of ATM surcharge fees which began in July 2000.
Non-interest Expense. Total non-interest expenses were $3,603 for the nine
months ended September 30, 1999 and $3,749 for the nine months ended September
30, 2000, an increase of $146 (or 4%).
A table summarizing the dollar amounts for each category, and the dollar and
percent changes, is as follows:
Nine Months Ended Increase (Decrease)
September 30, 2000 vs 1999
----------------- -------------------
Category 2000 1999 $ Change % Change
---- ---- -------- --------
Salaries and employee benefits $1,916 $1,761 $155 9%
Occupancy 437 392 45 11
Furniture and equipment 309 338 (29) (9)
Other categories 1,087 1,112 (25) (2)
------ ------ ---- --
Total non-interest expense $3,749 $3,603 $146 4%
====== ====== ==== ==
The increase in salaries and employee benefits primarily resulted from the
addition of four employees, salary increases and increased cost of benefits. The
increase in occupancy expense primarily resulted from additional rent and
depreciation associated with the Norwalk branch opened in May 1999. The decrease
in furniture and equipment reflects reductions in equipment service contract
repairs and depreciation expense, partially offset by increased depreciation
associated with the Norwalk branch. The decrease in other non-interest expense
primarily relates to organization costs absorbed in 1999 relating to the
establishment of the bank holding company as well as decreased advertising and
legal expenses in the nine months ended September 30, 2000.
-15-
The following table summarizes dollar amounts for each category as a
percentage of total operating income (interest income plus non-interest income),
which increased by $884 (or 11%) in the first nine months of 2000 compared to
the same period in 1999:
Nine Months Ended
September 30,
-----------------
Category 2000 1999
---- -----
Salaries and employee benefits 21.73% 22.20%
Occupancy 4.96 4.94
Furniture and equipment 3.50 4.26
Other categories 12.33 14.02
----- -----
Total non-interest expense 42.52% 45.42%
===== =====
Income Taxes. The provision for income taxes increased from $685 for the nine
months ended September 30, 1999 to $867 for the nine months ended September 30,
2000, an increase of $182 (or 27%). The increase in income taxes was primarily
due to the 25% increase in pre-tax income.
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 quarter ended
September 30, 2000.
-16-
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized
CORNERSTONE BANCORP, INC.
-------------------------
(Registrant)
DATE: November 7, 2000 /s/ James P. Jakubek
---------------------------- ------------------------------------------
James P. Jakubek
Executive Vice President
DATE: November 7, 2000 /s/ Leigh A. Hardisty
---------------------------- ------------------------------------------
Leigh A. Hardisty
Vice President and Chief Financial Officer
-17-
EXHIBIT INDEX
Exhibit No. Description
27.1 Financial Data Schedule (1)
(1) Filed herewith