SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
[X] THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
CONNECTICUT 06-1524044
----------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
550 SUMMER ST., STAMFORD, CONNECTICUT 06901
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(Address of executive office)
(203) 356-0111
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(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,
1999 was 1,124,716.
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)
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PAGE
----
Consolidated Statements of Condition
March 31, 1999, December 31, 1998 and March 31, 1998...................................... 1
Consolidated Statements of Income
Three Months Ended March 31, 1999 and March 31, 1998...................................... 2
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended March 31, 1999 and March 31, 1998...................................... 3
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and March 31, 1998...................................... 4
Notes to Consolidated Financial Statements ............................................... 5
Item 2. Management's Discussion and Analysis
- --------------------------------------------
of Financial Condition and Results of Operations....................................... 6 - 12
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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...................................................... 12
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Signatures..................................................................................... 13
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
March 31, December 31, March 31,
ASSETS 1999 1998 1998
--------- ------------ ---------
Cash and due from banks $ 6,940 $ 4,768 $ 6,638
Federal funds sold 21,028 22,544 12,424
-------- -------- --------
Cash and cash equivalents 27,968 27,312 19,062
Available for sale securities, at fair value 30,544 30,003 22,756
Held to maturity securities (fair value of $12,181 at March, 31, 1999,
$9,744 at December 31, 1998 and $5,583 at March 31, 1998) 12,162 9,661 5,549
Loans, net of allowance for loan losses of $1,725 at March 31, 1999,
$1,733 at December 31, 1998 and $1,639 at March 31, 1998 69,289 67,651 76,322
Bank premises and equipment, net 2,786 2,815 2,946
Accrued interest receivable 1,074 970 941
Other assets 1,597 1,321 1,520
-------- -------- --------
Total assets $145,420 $139,733 $129,096
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand (non-interest bearing) $ 25,624 $ 25,746 $ 20,928
Money market demand and NOW 23,976 18,941 20,650
Regular, club and money market savings 25,838 24,700 23,627
Time 50,148 52,492 46,750
-------- -------- --------
Total deposits 125,586 121,879 111,955
Securities sold under repurchase agreements 4,078 2,198 2,880
Accrued interest payable 155 166 178
Other liabilities 620 500 551
-------- -------- --------
Total liabilities 130,439 124,743 115,564
-------- -------- --------
Stockholders' equity:
Common stock, par value $0.01 per share; authorized
2,000,000 shares; issued and outstanding 1,122,848 shares at
March 31, 1999, 1,119,336 shares at December 31, 1998 and
1,013,931 shares at March 31, 1998 11 11 10
Additional paid-in capital 11,417 11,351 9,089
Retained earnings 3,550 3,497 4,358
Accumulated other comprehensive income, net of taxes of $1 at
March 31, 1999, $91 at December 31, 1998 and $51 at March 31, 1998 3 131 75
-------- -------- --------
Total stockholders' equity 14,981 14,990 13,532
-------- -------- --------
Total liabilities and stockholders' equity $145,420 $139,733 $129,096
======== ======== ========
See accompanying notes to consolidated financial statements.
1
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
-----------------------
1999 1998
---------- ----------
Interest income:
Loans $ 1,538 $ 1,820
Securities 616 470
Federal funds sold
215 117
Total interest income ---------- ----------
2,369 2,407
---------- ----------
Interest expense:
Deposits 879 851
Other 18 16
---------- ----------
Total interest expense 897 867
---------- ----------
Net interest income 1,472 1,540
Provision (credit) for loan losses (17) 108
---------- ----------
Net interest income after
provision (credit) for loan losses 1,489 1,432
---------- ----------
Non-interest income:
Deposit service charges 117 94
Other 55 68
---------- ----------
Total non-interest income 172 162
---------- ----------
Non-interest expense:
Salaries and employee benefits 565 491
Occupancy 121 117
Furniture and equipment 108 97
Data processing 87 97
Professional fees 68 52
Other 166 149
---------- ----------
Total non-interest expense 1,115 1,003
---------- ----------
Income before income tax expense 546 591
Income tax expense 224 234
---------- ----------
Net income $ 322 $ 357
========== ==========
Earnings per common share:
Basic $ 0.29 $ 0.32
Diluted 0.28 0.31
Weighted average common shares:
Basic 1,122,848 1,114,222
Diluted 1,163,661 1,156,302
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, 1999 AND 1998
(IN THOUSANDS)
(UNAUDITED)
Accumulated
Additional other Total
Common paid-in Retained comprehensive stockholders'
Stock capital earnings income equity
------- ----------- -------- ------------- -------------
Balance, January 1, 1998 $ 10 $ 9,050 $ 4,164 $ 86 $ 13,310
Comprehensive income:
Net income 357 357
Decrease in net unrealized gain on
available for sale securities,
net of taxes (11) (11)
---------
Total comprehensive income 346
Cash dividends (163) (163)
Shares issued in connection with:
Directors Compensation Plan 2 2
Dividend Reinvestment Plan 37 37
------ -------- ------- ------ ---------
Balance, March 31, 1998 $ 10 $ 9,089 $ 4,358 $ 75 $ 13,532
====== ======== ======= ====== =========
Balance, January 1, 1999 $ 11 $ 11,351 $ 3,497 $ 131 $ 14,990
Comprehensive income:
Net income 322 322
Decrease in net unrealized gain on
available for sale securities,
net of taxes (128) (128)
---------
Total comprehensive income 194
Cash dividends (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
====== ======== ======= ====== =========
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, 1999 AND 1998
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
------------------
Operating activities: 1999 1998
---- ----
Net income $ 322 $ 357
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision (credit) for loan losses (17) 108
Depreciation and amortization 89 62
Common stock issued under compensation agreements 1 2
Increase in accrued interest receivable (104) (91)
(Increase) in deferred loan costs (19) ( 1)
Increase in other assets (186) (102)
(Decrease) in accrued interest payable (11) (3)
Increase in other liabilities 120 48
-------- -------
Net cash provided by operating activities 195 380
-------- -------
Investing activities:
Proceeds from maturities of available-for sale securities 2,740 2,506
Proceeds from maturities of held-to-maturity securities 1,000
Purchases of available-for-sale securities (3,500) (2,496)
Purchases of held-to-maturity securities (3,505) (1,000)
Net receipts (disbursements) for loan repayments and originations (1,603) 998
Purchases of bank premises and equipment (54) (63)
-------- -------
Net cash used in investing activities (4,922) (55)
-------- -------
Financing activities:
Net increase in demand, money market and savings deposits 6,051 2,161
Net increase in time deposits (2,344) 890
Net increase in securities sold under repurchase agreements 1,880 370
Proceeds from issuance of common stock 65 37
Dividends paid on common stock (269) (163)
-------- -------
Net cash provided by financing activities 5,383 3,295
-------- -------
Increase in cash and cash equivalents 656 3,620
Cash and cash equivalents, beginning of year 27,312 15,442
-------- -------
Cash and cash equivalents, end of period $ 27,968 $19,062
======== =======
Supplemental information:
Interest paid $ 908 $ 870
Income taxes paid 100 87
Decrease in net unrealized gain on available-for-sale
securities, net of tax (128) (11)
======== =======
See accompanying notes to consolidated financial statements.
4
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
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(dollars in thousands)
NOTE A - BASIS OF PRESENTATION
On March 1, 1999, Cornerstone Bank (the"Bank") completed a reorganization
whereby the Bank became a wholly-owned subsidiary of Cornerstone Bancorp, Inc.
(the"Bancorp"), a newly-formed holding company incorporated by the Bank for that
purpose. This reorganization was accounted for in a manner similar to a pooling
of interests and,accordingly, it had no effect on the Bank's financial
statements. The Bancorp's principal activity is its ownership of the Bank's
stock and, prior to the reorganization, it had no operations other than those of
an organizational nature. Accordingly, all financial and other information for
periods prior to the reorganization refers to the Bank. Collectively, the
Bancorp and the Bank are referred to herein as the "Company."
The accompanying unaudited 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. The interim results of operations for
the first quarter of 1999 are not necessarily indicative of the results to be
expected for the year ending December 31, 1999.
While management believes that the disclosures presented are adequate so as
not to make the information misleading, it is suggested that these consolidated
financial statements be read in conjunction with the financial statements and
notes included in the Form 10-KSB for the year ended December 31, 1998.
NOTE B - EARNINGS PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," specifies the computation, presentation and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. SFAS No. 128 requires the presentation of basic EPS
and diluted EPS. 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 months ended March 31, 1999 and 1998, 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 both periods. The number of shares for both basic and
diluted EPS for the first quarter of 1998 reflects the effect of the 10% stock
dividend distributed in August 1998.
NOTE C - SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", requires public companies 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 under SFAS No. 131.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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(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, other financial and business matters and efforts to achieve Year
2000 compliance. 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, the
extent and timing of legislative and regulatory actions and reforms, and
unanticipated internal and/or third party delays or failures in achieving Year
2000 compliance.
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
Total assets increased from $139,733 at December 31, 1998 to $145,420 at
March 31, 1999, an increase of $5,687 (or 4%). The net loan portfolio
increased from $67,651 at December 31, 1998 to $69,289 at March 31, 1999, an
increase of $1,638 (or 2%). (For purposes of this discussion, loan amounts are
net of unearned income/deferred costs and the allowance for loan losses.) The
increase in the loan portfolio from December 31, 1998 to March 31, 1999 was
primarily attributable to an increase in term loans and commercial mortgage
loans. Commercial mortgage loans increased from $38,728 at December 31, 1998 to
$39,676 at March 31, 1999, an increase of $948 (or 2%). Term loans increased
from $8,980 at December 31, 1998 to $9,570 at March 31, 1999, an increase of
$590 (or 7%).
LOANS
Major classifications of loans at March 31, 1999 and December 31, 1998 were as
follows:
March 31, 1999 December 31, 1998
-------------- -----------------
Demand, time and term loans $18,565 $18,046
Commercial mortgage loans 39,676 38,728
Residential mortgage loans 8,780 8,647
Aircraft loans 2,763 2,698
Installment loans 656 662
Other loans 540 588
------- -------
Total loans 70,980 69,369
Allowance for loan losses (1,725) (1,733)
Deferred loan costs, net 34 15
------- -------
Total loans, net $69,289 $67,651
======= =======
6
NONPERFORMING ASSETS AND THE ALLOWANCE FOR LOAN LOSSES
Loans are classified as nonaccrual when, in the opinion of management,
collectibility of interest or principal becomes uncertain. Generally, loans are
placed on nonaccrual status when principal or interest is past due for a period
of 90 days, or for a lesser period if circumstances indicate collection of
interest or principal is doubtful. When a loan is placed on nonaccrual status,
previously accrued and uncollected interest is reversed against current period
interest income. A nonaccrual loan is restored to accrual status only when
sustained performance has been demonstrated and prospects for future payments of
interest and principal are no longer in doubt.
The following table sets forth information with respect to nonperforming assets
at the dates indicated.
March 31, 1999 December 31, 1998
-------------- -----------------
Loans on nonaccrual status (1):
Real estate loans (2) $ 952 $ 370
Commercial loans 154 154
------ -----
Total 1,106 524
Accruing loans past due 90 days or more 316 288
------ -----
Total nonperforming loans $1,422 $ 812
====== =====
Nonperforming loans as a
percentage of total loans 2.00% 1.17%
====== =====
(1) Nonaccrual basis denotes loans for which, in the opinion of management, the
collection of additional interest is unlikely, or loans that meet nonaccrual
criteria as established by regulatory authorities. Payments received on
nonaccrual loans are applied to the outstanding principal balance until a
history of payments has been established and management's assessment of the
collectibility of the loan has been made.
(2) Consists of loans collateralized by 1-4 family residential properties,
multifamily properties and nonfarm nonresidential properties.
The following table sets forth changes in the allowance for loan losses for
the periods indicated. The allowance is not necessarily indicative of future
losses.
Three Months Ended
March 31,
------------------
1999 1998
---- ----
Balance at beginning of period $1,733 $1,529
Provision (credit) for loan losses (17) 108
Loans charged off --- ----
Recoveries 9 2
------ ------
Balance at end of period $1,725 $1,639
====== ======
SECURITIES PORTFOLIO
Securities increased from $39,664 at December 31, 1998 to $42,706 at March
31, 1999, an increase of $3,042 (or 8%).
7
The following table sets forth the amortized cost and estimated fair value of
the securities portfolio at the dates indicated.
March 31, 1999 December 31, 1998
-------------------- -------------------------
Held to Maturity Held to Maturity
-------------------- ------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
U.S. Treasury securities $ 4,002 $ 4,024 $ 5,003 $ 5,049
U.S. Government agency securities 8,085 8,082 4,583 4,620
Other 75 75 75 75
------- ------- ------- -------
Total $12,162 $12,181 $ 9,661 $ 9,744
======= ======= ======= =======
March 31, 1999 December 31, 1998
-------------------- -------------------------
Available for Sale Available for Sale
-------------------- ------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
U.S. Treasury securities $ 500 $ 503 $ 501 $ 505
U.S. Government agency securities 30,039 30,041 29,280 29,498
------- ------- ------- -------
Total $30,539 $30,544 $29,781 $30,003
======= ======= ======= =======
The Bank maintained pledged securities amounting to $2,701 and $4,442 at
December 31, 1998 and March 31, 1999, 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. 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.
March 31, 1999 December 31, 1998
-------------- -----------------
Demand (non-interest bearing) $ 25,624 $ 25,746
Money market demand and NOW 23,976 18,941
Regular, club and money market savings 25,838 24,700
Time deposits 50,148 52,492
-------- --------
Total deposits $125,586 $121,879
======== ========
Deposits increased from $121,879 at December 31, 1998 to $125,586 at March 31,
1999, an increase of $3,707 (or 3%). Money market demand and NOW accounts
increased from $18,941 at December 31, 1998 to $23,976 at March 31, 1999, an
increase of $5,035 (or 27%). Approximately $5,040 was received for attorney's
accounts during the last three days of the quarter. Regular, club and money
market savings increased from $24,700 at December 31, 1998 to $25,838 at March
31, 1999, an increase of $1,138 (or 5%). These increases were partially offset
by a decline in time deposits which decreased from $52,492 at December 31, 1998
to $50,148 at March 31, 1999, a decrease of $2,344 (or 4%) and demand deposits
which decreased from $25,746 at December 31, 1998 to $25,624 at March 31, 1999,
a decrease of $122. Due to
8
a decline in the loan portfolio, the Company has let higher priced certificates
of deposit rolloff at maturity. This rolloff primarily began in March 1999.
Certificates of deposit of $100 or more were $10,490 at December 31, 1998
compared to $10,445 at March 31, 1999, a decrease of $45.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, total short term investments, which are made up of federal
funds sold, available for sale securities and securities maturing in one year or
less, totaled $54,576. 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, 1999 was 52.52% due to the large
available for sale portfolio and large federal funds position. The Company's
guideline is to maintain a liquidity ratio of 20% or more.
At March 31, 1999, the Company had outstanding loan commitments under unused
lines of credit approximating $9,566 and outstanding letters of credit
approximating $224.
At December 31, 1998 and March 31, 1999, the Bank's leverage capital ratio
was equal to 10.95% and 10.92%, respectively. At December 31, 1998 and March 31,
1999, the Bank's Tier 1 risk-based capital ratio was 18.54% and 18.12%,
respectively. The Bank's total risk-based capital ratio at December 31, 1998 and
March 31, 1999 was 19.80% and 19.38%, respectively. These ratios exceeded the
stated minimum regulatory requirements. The Bancorp's consolidated regulatory
capital ratios at March 31, 1999 were substantially the same as the Bank's
ratios.
RESULTS OF OPERATIONS
NET INCOME. Net income was $357 for the three months ended March 31, 1998
compared to $322 for the three months ended March 31, 1999, a decrease of $35
(or 10%). Diluted earnings per share were $0.31 for the three months ended March
31, 1998 and $0.28 for the three months ended March 31, 1999 based on weighted
shares outstanding of 1,156,302 and 1,163,661, respectively. Return on average
common stockholders' equity (R.O.E) was 10.65% and 8.57% for the three months
ended March 31, 1998 and March 31, 1999, respectively.
The decrease in net income for the three months ended March 31, 1999 reflects
a $68 decrease in net interest income due to decreased loan volume as well as
lower interest rates on loans, federal funds and the securities portfolio. The
effect of lower rates was partially offset by increased federal funds and
securities. The average yield on interest earning assets decreased 103 basis
points for the three months ended March 31, 1999 compared to March 31, 1998, and
deposit rates decreased 24 basis points. Non-interest expense increased $112 (or
11%) thus contributing further to the decline in net income. The decrease in net
interest income and the increase in non-interest expense were partially offset
by a reduction in the provision for loans losses, increased non-interest income
and a reduction in income taxes.
The return on average assets was 1.17% for the three months ended March 31,
1998 and 0.94% for the three months ended March 31, 1999.
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 $1,540 for the three months ended March 31, 1998
compared to $1,472 for the three months ended March 31, 1999, a decrease of $68
or 4%.
INTEREST INCOME. Average earning assets for the three months ended March 31,
1998 were $115,454 compared to $129,460 for the three months ended March 31,
1999, an increase of $14,006, or 12%. Total interest income, which is a function
of the volume of interest earning assets and their related rates, was $2,407 for
the three months ended March 31, 1998 and $2,369 for the three months ended
March 31, 1999, representing a decrease of $38 or 2%.
Loans represent the largest component of interest earning assets. Average
loans outstanding in the three months ended March 31, 1998 were $78,660 compared
to $70,405 during the three months ended March 31, 1999, a 10% decrease.
Decreased loan volume is attributable to loan payoffs and competitive pressures
on both rates and terms for various loan types. Interest on loans was $1,820 for
the three months ended March 31, 1998 compared to $1,538 for the three months
ended March 31,1999, a 15% decrease. The decrease in loan income was primarily
due to decreased loan volume.
9
Average investments in debt securities and federal funds sold were $36,794
for the three months ended March 31, 1998 compared to $59,055 for the three
months ended March 31, 1999, an increase of $22,261 (or 61%). Related income
increased from $587 for the three months ended March 31, 1998 to $831 for the
three months ended March 31, 1999, an increase of $244 (or 42%). The increase in
income resulted from the increased volume of debt securities and federal funds
sold. Average investments in debt securities, not including federal funds,
increased by $12,073 (or 43%) during the three months ended March 31, 1999 while
average federal funds sold increased by $10,188 (or 117%). The average rate
earned on federal funds decreased from 5.45% for the three months ended March
31, 1998 to 4.60% for the three months ended March 31, 1999. The increase in
debt securities and federal funds sold was primarily due to a decline in the
loan portfolio and increased deposits.
INTEREST EXPENSE. Interest expense was $867 for the three months ended March
31, 1998 compared to $897 for the three months ended March 31, 1999, a 3%
increase. Interest expense is a function of interest-bearing liabilities and
their related rates. Average interest bearing liabilities during the three
months ended March 31, 1998 were $89,298 compared to $98,451 during the three
months ended March 31, 1999, an increase of $9,153 (or 10%). The growth in
interest bearing liabilities was primarily due to the growth in time deposits.
PROVISION FOR LOAN LOSSES. The provision for loan losses is the amount
necessary to adjust the allowance for loan losses to management's current
estimate of probable losses based upon an evaluation of portfolio risk and
economic factors. A review of the quality of the loan portfolio is conducted
internally by management on a quarterly basis with the results presented to the
Board of Directors for its approval. The evaluation considers individual
borrowers whose aggregate loans are greater than $100, as well as all classified
assets. Consideration is also given to other factors including, but not limited
to, economic conditions, delinquency, charge off history, and growth and
composition of the loan portfolio. The provision (credit) for loan losses was
$108 for the three months ended March 31, 1998 and ($17) for the three months
ended March 31, 1999. As of March 31, 1999, the allowance for loan losses was
$1,725 or 2.43% of gross loans, compared to $1,733 or 2.50% of gross loans at
December 31, 1998.
NON-INTEREST INCOME. Non-interest income was $162 for the three months ended
March 31, 1998 compared to $172 for the three months ended March 31, 1999, an
increase of $10 (or 6%). Deposit service charges increased $23 (or 24%)
primarily due to increased fees relating to overdrafts. Other non-interest
income in the quarter ended March 31, 1998 included a non-recurring gain of $11
on the sale of a Bank owned vehicle.
NON-INTEREST EXPENSE. Total non-interest expenses were $1,003 for the three
months ended March 31, 1998 and $1,115 for the three months ended March 31,
1999, an increase of $112 (or 11%).
A table summarizing the dollar amounts for each category, and the dollar and
percent changes is as follows:
Three Months Ended Increase
March 31, 1999 vs 1998
------------------ --------------------------
1999 1998 $ Change % Change
---- ---- -------- --------
Salaries and employee benefits $ 565 $ 491 $ 74 15%
Occupancy 121 117 4 3
Furniture and equipment 108 97 11 11
Other 321 298 23 8
------ ------ ----
Total non-interest expense $1,115 $1,003 $112 11%
====== ====== ==== ===
In 1999, the increase in salaries and employee benefits resulted from the
addition of five new employees as well as salary increases compared to March 31,
1998. The increase in furniture and equipment resulted from increased equipment
maintenance. The increase in other non-interest expense primarily relates to
accounting, legal and other expenses associated with the organization and start-
up of the bank holding company.
10
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,
--------------------
1999 1998
---- ----
Salaries and employee benefits 22.24% 19.11%
Occupancy 4.76 4.55
Furniture and equipment 4.25 3.77
Other 12.63 11.60
----- -----
Total non-interest expense 43.88% 39.03%
===== =====
INCOME TAXES. The provision for income taxes decreased from $234 for the three
months ended March 31, 1998 to $224 for the three months ended March 31, 1999, a
decrease of $10 (or 4%).
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have date-sensitive software may recognize a date using "00" as the Year
1900 rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, generate accurate customer
statements, or engage in similar normal business activities.
While the Company believes that most of its systems are already Year 2000
compliant, the Company has in place an action plan to identify, review and test
all of its operating systems. In addition, the FDIC monitors the Company's
preparedness for the Year 2000. The actions being taken by the Company in
response to the Year 2000 issue are consistent with the guidelines in policy
statements issued by the bank regulatory agencies.
Management has initiated a Company-wide program, consistent with guidelines
issued by the Federal Financial Institutions Examination Council, to prepare the
Company's computer systems and software applications for the Year 2000. The
program includes the following phases (current status is indicated for each
phase):
* Identification (Completed)
* Assessment (Completed)
* Remediation (Completed)
* Testing (Continuing)
* Contingency Planning (Continuing)
The Company has tested its mission critical applications, which are those
comprising its "core" data processing system for loans, deposits and the general
ledger maintained by a third-party vendor. Testing of these applications was
completed by December 31, 1998. The overall testing phase of the Year 2000
program is continuing, and is expected to be completed by June 30, 1999.
The Company has initiated formal communications with all of its significant
vendors and has contacted certain of its customers to determine the extent to
which the Company is vulnerable to those third parties' failures to remediate
their own Year 2000 Issue. The Company is in the process of obtaining assurances
from vendors that timely updates will be made available to make all remaining
purchased software Year 2000 compliant. However, there can be no guarantee that
the systems of other entities on which the Company's systems rely will be timely
converted, or that a failure to convert by another entity, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company.
The Company has also initiated 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
has also employed an outside consultant to assist in developing its Year 2000
plan.
11
The Company estimates that its total Year 2000 project costs, including costs
charged to expense, will not exceed $100. As of March 31, 1999, the Company had
incurred $53 of costs relating to Year 2000, the majority of which are hardware
and software related. The cost of the project and the date on which the Company
plans to complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the availability of certain resources, third party modification plans
and other factors. There can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that may cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes and similar uncertainties.
Significant Year 2000 failures in the Company's systems, or in the systems
of third parties, a significant reduction in liquidity due to high levels of
withdrawals of customer deposits, could have a material adverse effect on the
Company's financial condition and results of operations. The Company believes
that its reasonably likely worst case scenario might include a material increase
in credit losses due to Year 2000 problems of borrowers, a significant reduction
in liquidity due to high levels of withdrawals of customer deposits, and a
disruption in financial markets generally. The magnitude of potential credit
losses, liquidity problems or a disruption in financial markets cannot be
determined at this time; however, the Company's Year 2000 program described
above is designed to address exposure to risks. The Company continues to develop
a business resumption contingency plan to address the possibility of unplanned
system difficulties or third party failures. This plan will entail some type of
manual record-keeping and reporting procedures in critical operating areas.
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.
On March 1, 1999, the Bancorp filed a Current Report on Form 8-K dated
March 1, 1999 reporting in Item 2 thereof the completion of the acquisition of
the Bank by the Bancorp and the creation of a holding company structure.
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized
CORNERSTONE BANCORP, INC.
-------------------------
(Registrant)
DATE: May 10, 1999 /s/ Norman H. Reader
------------------ ------------------------------------------
Norman H. Reader
President and Chief Executive Officer
DATE: May 10, 1999 /s/ Leigh A. Hardisty
----------------- ------------------------------------------
Leigh A. Hardisty
Vice President and Chief Financial Officer
13
EXHIBIT INDEX
Exhibit No. Description
27.1 Financial Data Schedule (1)
(1) Filed herewith