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 June 30, 1999
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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 (I.R.S. Employer Identification No.)
incorporation or organization)
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) 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 July 31,
1999 was 1,126,510.
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
June 30, 1999, December 31, 1998 and June 30, 1998................. 1
Consolidated Statements of Income
Three Months Ended June 30, 1999 and June 30, 1998................. 2
Consolidated Statements of Income
Six Months Ended June 30, 1999 and June 30, 1998................... 3
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 1999 and June 30, 1998................... 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and June 30, 1998................... 5
Notes to Consolidated Financial Statements ........................ 6 - 7
Item 2. Management's Discussion and Analysis
- ---------------------------------------------
of Financial Condition and Results of Operations............... 7 -17
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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............. 17
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Item 5. Other Information............................................... None
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Item 6. Exhibits and Reports on Form 8-K................................ 17
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Signatures.............................................................. 18
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 data)
(unaudited)
June 30, December 31, June 30,
Assets 1999 1998 1998
Cash and due from banks $ 6,922 $ 4,768 $ 8,293
Federal funds sold 17,820 22,544 17,295
-------- -------- --------
Cash and cash equivalents 24,742 27,312 25,588
Available for sale securities, at fair value 26,763 30,003 23,773
Held to maturity securities (fair value of $19,207 at June, 30, 1999,
$9,744 at December 31, 1998 and $6,603 at June 30, 1998) 19,432 9,661 6,571
Loans, net of allowance for loan losses of $1,709 at June 30, 1999,
$1,733 at December 31, 1998 and $1,760 at June 30, 1998) 68,243 67,651 76,408
Bank premises and equipment, net 2,993 2,815 2,948
Accrued interest receivable 1,073 970 927
Other assets 1,868 1,321 1,597
-------- -------- --------
Total assets $145,114 $139,733 $137,812
======== ======== ========
Liabilities And Stockholders' Equity
Liabilities:
Deposits:
Demand (non-interest bearing) $ 26,673 $ 25,746 $ 26,293
Money market demand and NOW 22,533 18,941 22,300
Regular, club and money market savings 27,273 24,700 24,863
Time 49,339 52,492 47,383
-------- -------- --------
Total deposits 125,818 121,879 120,839
Securities sold under repurchase agreements 3,509 2,198 2,003
Accrued interest payable 148 166 158
Other liabilities 540 500 624
-------- -------- --------
Total liabilities 130,015 124,743 123,624
-------- -------- --------
Stockholders' equity:
Common stock, par value $0.01 per share; authorized
5,000,000 shares; issued and outstanding 1,124,975 shares
at June 30, 1999, 1,119,336 shares at December 31, 1998 and
1,014,721 shares at June 30, 1998 11 11 10
Additional paid-in capital 11,450 11,351 9,107
Retained earnings 3,796 3,497 5,013
Accumulated other comprehensive (loss) income, net of taxes of $111
at June 30, 1999, $91 at December 31, 1998 and $41 at June 30, 1998 (158) 131 58
-------- -------- --------
Total stockholders' equity 15,099 14,990 14,188
-------- -------- --------
Total liabilities and stockholders' equity $145,114 $139,733 $137,812
======== ======== ========
See accompanying notes to consolidated financial statements.
-1-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands, except per share data)
(unaudited)
Three Months Ended
June 30,
----------------------
1999 1998
---------- ----------
Interest income:
Loans $ 1,632 $ 2,356
Securities 672 507
Federal funds sold 165 194
---------- ----------
Total interest income 2,469 3,057
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Interest expense:
Deposits 862 887
Other 19 17
---------- ----------
Total interest expense 881 904
---------- ----------
Net interest income 1,588 2,153
Provision for loan losses 5 65
---------- ----------
Net interest income after provision for loan losses 1,583 2,088
---------- ----------
Non-interest income:
Deposit service charges 108 98
Other 106 92
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Total non-interest income 214 190
---------- ----------
Non-interest expense:
Salaries and employee benefits 591 497
Occupancy 132 115
Furniture and equipment 113 107
Data processing 91 83
Professional fees 55 73
Other 281 171
---------- ----------
Total non-interest expense 1,263 1,046
---------- ----------
Income before income tax expense 534 1,232
Income tax expense 221 517
---------- ----------
Net income $ 313 $ 715
========== ==========
Earnings per common share:
Basic $ 0.28 $ 0.64
Diluted 0.27 0.62
Weighted average common shares:
Basic 1,124,904 1,115,870
Diluted 1,157,030 1,158,798
See accompanying notes to consolidated financial statements.
-2-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands, except per share data)
(unaudited)
Six Months Ended
June 30,
-----------------------
1999 1998
---------- ----------
Interest income:
Loans $ 3,170 $ 4,175
Securities 1,289 977
Federal funds sold 379 311
---------- ----------
Total interest income 4,838 5,463
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Interest expense:
Deposits 1,741 1,738
Other 37 34
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Total interest expense 1,778 1,772
---------- ----------
Net interest income 3,060 3,691
Provision (credit) for loan losses (12) 172
---------- ----------
Net interest income after provision (credit) for loan losses 3,072 3,519
---------- ----------
Non-interest income:
Deposit service charges 225 192
Other 161 160
---------- ----------
Total non-interest income 386 352
---------- ----------
Non-interest expense:
Salaries and employee benefits 1,156 988
Occupancy 252 231
Furniture and equipment 221 204
Data processing 178 179
Professional fees 123 125
Other 447 321
---------- ----------
Total non-interest expense 2,377 2,048
---------- ----------
Income before income tax expense 1,081 1,823
Income tax expense 446 751
---------- ----------
Net income $ 635 $ 1,072
========== ==========
Earnings per common share:
Basic $ 0.57 $ 0.96
Diluted 0.54 0.93
Weighted average common shares:
Basic 1,123,490 1,115,052
Diluted 1,167,550 1,155,703
See accompanying notes to consolidated financial statements.
-3-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands)
(unaudited)
Accumulated
Additional other Total
Common Paid-in Retained comprehensive stockholders'
Stock Capital Earnings (loss) income equity
------ ---------- --------- -------------- --------------
BALANCE, JANUARY 1, 1998 $ 10 $ 9,050 $ 4,164 $ 86 $ 13,310
Comprehensive income:
Net income 1,072 1,072
Change in net unrealized gain on
available for sale securities,
net of taxes (28) (28)
---------
Total comprehensive income 1,044
Cash dividends (223) (223)
Shares issued in connection with:
Directors Compensation Plan 5 5
Dividend Reinvestment Plan 52 52
---- --------- -------- ------ ---------
BALANCE, JUNE 30, 1998 $ 10 $ 9,107 $ 5,013 $ 58 $ 14,188
==== ========= ======== ====== =========
BALANCE, JANUARY 1, 1999 $ 11 $ 11,351 $ 3,497 $ 131 $ 14,990
Comprehensive income:
Net income 635 635
Change in net unrealized gain (loss)
on available for sale securities,
net of taxes (289) (289)
---------
Total comprehensive income 346
Cash dividends (336) (336)
Shares issued in connection with
Directors Compensation Plan 3 3
Dividend Reinvestment Plan 96 96
---- --------- -------- ------ ---------
BALANCE, JUNE 30, 1999 $ 11 $ 11,450 $ 3,796 $ (158) $ 15,099
==== ========= ======== ====== =========
See accompanying notes to consolidated financial statements.
-4-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands)
(unaudited)
Six Months Ended
June 30,
-------------------------
Operating activities: 1999 1998
---------- ----------
Net income $ 635 $ 1,072
Adjustments to reconcile net income
to net cash provided by operating activities:
(Credit) provision for loan losses (12) 172
Depreciation and amortization 192 169
Common stock issued under compensation agreements 3 5
Increase in accrued interest receivable (103) (77)
(Increase) decrease in deferred loan costs (7) 3
Increase in other assets (345) (179)
Decrease in accrued interest payable (18) (23)
Increase in other liabilities 40 121
---------- ----------
Net cash provided by operating activities 385 1,263
---------- ----------
Investing activities:
Proceeds from maturities of available-for-sale securities 6,245 6,483
Proceeds from maturities of held-to-maturity securities 2,000 494
Purchases of available-for-sale securities (3,500) (7,530)
Purchases of held-to-maturity securities (11,788) (2,516)
Net (disbursements) receipts for loan repayments and originations (572) 846
Purchases of bank premises and equipment (350) (151)
---------- ----------
Net cash used in investing activities (7,965) (2,374)
---------- ----------
Financing activities:
Net increase in demand, money market and savings deposits 7,092 10,412
Net (decrease) increase in time deposits (3,153) 1,523
Net increase (decrease) in securities sold under repurchase agreements 1,311 (507)
Proceeds from issuance of common stock 96 52
Dividends paid on common stock (336) (223)
---------- ----------
Net cash provided by financing activities 5,010 11,257
---------- ----------
(Decrease) increase in cash and cash equivalents (2,570) 10,146
Cash and cash equivalents - beginning of period 27,312 15,442
---------- ----------
Cash and cash equivalents - end of period $ 24,742 $ 25,588
========== ==========
Supplemental information:
Interest paid $ 1,796 $ 1,749
Income taxes paid 565 690
========== ==========
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
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 six months 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 interim
consolidated financial statements be read in conjunction with the annual
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 and six month periods ended June 30, 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 each of these periods. The number of shares
for both basic and diluted EPS for the three and six month periods ended June
30, 1998 reflect the effect of the 10% stock dividend distributed in August
1998.
-6-
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.
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, 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 $145,114 at
June 30, 1999, an increase of $5,381 (or 4%). The net loan portfolio increased
from $67,651 at December 31, 1998 to $68,243 at June 30, 1999, an increase of
$592 (or 1%). (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 from December 31, 1998 to June 30, 1999 was attributable
to an increase in commercial mortgage loans which was offset by decreases in
other loan categories. The commercial mortgage loan portfolio increased from
$38,728 at December 31, 1998 to $42,020 at June 30, 1999, an increase of $3,292
(or 9%). Demand, time and term loans decreased from $18,046 at December 31, 1998
to $15,916 at June 30, 1999, a decrease of $2,130 (or 12%). Aircraft loans
decreased from $2,698 at December 31, 1998 to $2,509 at June 30, 1999, a
decrease of $189 (or 7%). Residential mortgage loans decreased from $8,647 at
-7-
December 31, 1998 to $8,472 at June 30, 1999, a decrease of $175 (or 2%).
Installment loans decreased from $662 at December 31, 1998 to $575 at June 30,
1999, a decrease of $87 (or 13%).
Loans
Major classifications of loans at June 30, 1999 and December 31, 1998 were as
follows:
June 30, 1999 December 31, 1998
------------- -----------------
Demand, time and term loans $15,916 $18,046
Commercial mortgages 42,020 38,728
Residential mortgages 8,472 8,647
Aircraft loans 2,509 2,698
Installment loans 575 662
Other loans 438 588
------- -------
Total loans 69,930 69,369
Allowance for loan losses (1,709) (1,733)
Deferred loan costs, net 22 15
------- -------
Total loans, net $68,243 $67,651
======= =======
Non-Performing 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 non-performing assets
at the dates indicated.
June 30, 1999 December 31, 1998
------------- -----------------
Loans on nonaccrual status (1):
Real estate loans (2) $ 748 $ 370
Commercial and industrial loans 149 154
------ -----
Total 897 524
Accruing loans past due 90 days or more 439 288
------ -----
Total nonperforming loans $1,336 $ 812
====== =====
Nonperforming loans as a
percentage of total loans 1.91% 1.17%
(1) Nonaccrual status 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.
-8-
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.
Six Months Ended Three Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
-------- ------ ------ ------
Balance at beginning of period $1,733 $1,529 $1,725 $1,639
Charge-offs (27) (6) (27) (6)
Recoveries 15 65 6 63
Provision (credit) for loan losses (12) 172 5 64
------ ------ ------ ------
Balance at end of period $1,709 $1,760 $1,709 $1,760
====== ====== ====== ======
Securities Portfolio
Total securities increased from $39,664 at December 31, 1998 to $46,195 at
June 30, 1999, an increase of $6,531 (or 16%). The increase in the securities
portfolio was primarily due to the influx of deposits and a reduction in the
federal funds portfolio.
The following table sets forth the amortized cost and estimated fair value
of the securities portfolio at the dates indicated.
June 30, 1999 December 31, 1998
------------------ ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Held to maturity Cost Value Cost Value
- ---------------- ------- ------- ------- -------
U.S. Treasury securities $ 4,007 $ 4,009 $ 5,003 $ 5,049
U.S. Government agency securities 14,189 14,006 4,583 4,620
Mortgage-backed securities 1,161 1,117 - --
Other 75 75 75 75
------- ------- ------- -------
Total $19,432 $19,207 $ 9,661 $ 9,744
======= ======= ======= =======
Available-for-sale
- ------------------
U.S. Treasury securities $ -- $ -- $ 501 $ 505
U.S. Government agency securities 27,032 26,763 29,280 29,498
------- ------- ------- -------
Total $27,032 $26,763 $29,781 $30,003
======= ======= ======= =======
Available for sale securities constituted 58% of the securities portfolio
as of June 30, 1999, down from 76% at December 31, 1998. Given the size of the
portfolio, high liquidity level and limited sales of securities in the past,
management has determined (with the approval of the Funds Management Committee)
that new purchases may be placed in the held to maturity portfolio. During the
six months ended June 30, 1998, $11.8 million of security purchases were
classified as held to maturity and $3.5 million of security purchases were
classified as available for sale.
Pledged securities amounted to $2,701 and $5,325 at December 31, 1998 and
June 30, 1999, 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.
June 30, 1999 December 31, 1998
------------- -----------------
Demand deposits (non-interest bearing) $ 26,673 $ 25,746
Money market demand and NOW accounts 22,533 18,941
Regular, club and money market savings 27,273 24,700
Time deposits 49,339 52,492
-------- --------
Total $125,818 $121,879
======== ========
Total deposits increased from $121,879 at December 31, 1998 to $125,818 at
June 30, 1999, an increase of $3,939 (or 3%). Money market demand and NOW
accounts increased from $18,941 at December 31, 1998 to $22,533 at June 30,
1999, an increase of $3,592 (or 19%). The increase in money market and demand
accounts was primarily related to fluctuations in attorney/trustee accounts.
Regular, club and money market savings increased from $24,700 at December 31,
1998 to $27,273 at June 30, 1999, an increase of $2,573 (or 10%). Demand
deposits increased from $25,746 at December 31, 1998 to $26,673 at June 30,
1999, an increase of $927 (or 4%). These increases were partially offset by a
decrease in time deposits from $52,492 at December 31, 1998 to $49,339 at June
30, 1999, a decrease of $3,153 (or 6%). Certificates of deposit in
denominations of $100 or more were $10,490 at December 31, 1998 compared to
$10,009 at June 30, 1999, a decrease of $481 (or 5%). Due to the decline in
the loan portfolio, the Company has let higher priced certificates of deposit
rolloff at maturity.
Liquidity and CapitaL Resources
At June 30, 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 $47,591. 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 June 30, 1999 was 51.85% due to its
large available for sale portfolio and large federal funds position. The
Company's guideline is to maintain a liquidity ratio of 20% or more.
The decrease in net cash provided by operating activities was primarily due
to the decrease in net income of $437 for the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. Net income for 1998 included an
additional $309 resulting from the resolution of two nonaccrual loans in May
1998. Net cash used in investing activities increased due to increased purchases
of held-to-maturity securities. The increase in net cash provided by financing
activities primarily resulted from the increase in demand, money market and
savings deposits as well as securities sold under repurchase agreements. This
was partially offset by the decrease in time deposits. As a result of decreased
net income, the increase in purchases of held-to-maturity securities, as well as
increased deposits, cash and cash equivalents decreased $2,570 for the first six
months of June 1999.
At June 30, 1999, the Company had outstanding loan commitments under unused
lines of credit approximating $10,241 and outstanding letters of credit
approximating $219.
-10-
At December 31, 1998 and June 30, 1999, the Company's consolidated leverage
capital ratio was equal to 10.95% and 10.88%, respectively. At December 31, 1998
and June 30, 1999, the Company's consolidated Tier 1 risk-based capital ratio
was 18.54% and 18.55%, respectively. The Company's consolidated total risk-based
capital ratio at December 31, 1998 and June 30, 1999 was 19.80% and 19.81%,
respectively. These ratios exceeded the stated minimum regulatory requirements.
The Bank's regulatory capital ratios at June 30, 1999 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 for the Three Months Ended June 30, 1999 Versus June 30,
1998
Net Income. Net income was $715 for the three months ended June 30, 1998
compared to $313 for the three months ended June 30, 1999, a decrease of $402
(or 56%). Diluted earnings per share were $0.62 for the three months ended June
30, 1998 and $0.27 for the three months ended June 30, 1999 based on weighted
average shares of 1,158,798 and 1,157,030, respectively. Return on average
common stockholders' equity (R.O.E) was 20.97% and 8.29% for the three months
ended June 30, 1998 and June 30, 1999, respectively. The return on average
assets was 2.21% for the three months ended June 30, 1998 and 0.89% for the
three months ended June 30, 1999.
The higher net income for the three months ended June 30, 1998 was
principally due to the resolution of two nonperforming loans in May 1998 which
resulted in an additional $309 of net income for the quarter (additional pretax
loan income of $509 less related income taxes of $200). The decreased net income
in the three months ended June 30, 1999 was also due to a decline in size of the
loan portfolio as well as lower interest rates on loans, federal funds and the
securities portfolio. The effect of the decline in the loan portfolio and lower
rates was partially offset by the growth in debt securities. The average yield
on interest earning assets decreased 255 basis points for the three months ended
June 30, 1999 compared to June 30, 1998 (inclusive of the recovery of interest
on nonaccrual loans which totaled $509), while the average rate paid on
interest-bearing liabilities decreased 34 basis points. Non-interest expense
increased $217 (or 21%) 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 loan losses, increased
non-interest income and a reduction in income taxes.
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 $2,153 for the three months ended June 30, 1998
compared to $1,588 for the three months ended June 30, 1999, a decrease of $565
(or 26%). The majority of this decrease is attributable to the recovery of
interest on the two nonperforming loans resolved in the second quarter of 1998.
Interest Income. Average earning assets for the three months ended June 30,
1998 were $121,407 compared to $131,125 for the three months ended June 30,
1999, an increase of $9,718 (or 8%). Total interest income, which is a function
of the volume of interest earning assets and their related rates, was $3,057 for
the three months ended June 30, 1998 and $2,469 for the three months ended June
30, 1999, representing a decrease of $588 (or 19%).
-11-
Loans represent the largest component of interest earning assets. Average
loans outstanding in the three months ended June 30, 1998 were $77,225 compared
to $70,936 during the three months ended June 30, 1999, a decrease of $6,289 (or
8%). Decreased loan volume is attributable to loan payoffs and competitive
pressures on both rates and terms for various loan types. Interest on loans was
$2,356 for the three months ended June 30, 1998 compared to $1,632 for the three
months ended June 30,1999, a decrease of $724 (or 44%). The decrease in loan
income reflects decreased loan volume in the three months ended June 30, 1999
and, to a greater extent, the resolution of two nonperforming loans which
resulted in an additional $509 of pretax loan income in the second quarter of
1998.
Average investments in debt securities and federal funds sold were $44,182
for the three months ended June 30, 1998 compared to $60,189 for the three
months ended June 30, 1999, an increase of $16,007 (or 36%). Related income
increased from $701 for the three months ended June 30, 1998 to $837 for the
three months ended June 30, 1999, an increase of $136 (or 19%). Average
investments in debt securities, not including federal funds, increased by
$16,184 (or 54%) during the three months ended June 30, 1999 while average
federal funds sold decreased by $177 (or 1%). The increase in income from debt
securities primarily was due to the increased volume of debt securities stemming
from the decline in the loan portfolio and the growth in deposits, partially
offset by a decline in average yield.
Interest Expense. Interest expense was $904 for the three months ended June 30,
1998 compared to $881 for the three months ended June 30, 1999, a 3% decrease.
Interest expense is a function of interest-bearing liabilities and their related
rates. Average interest-bearing liabilities during the three months ended June
30, 1998 were $93,426 compared to $99,886 during the three months ended June 30,
1999, an increase of $6,460 (or 7%). The growth in interest- bearing liabilities
was primarily due to the growth in time deposits and money market savings. The
increase in interest expense associated with these categories was offset by a
decline in rate of interest paid on these funds as well as other deposit
products, thus resulting in an overall decline in interest expense for the three
months ended June 30, 1999 compared to June 30, 1998.
Provision for Loan Losses. The provision for loan losses is based upon the size
of the loan portfolio and management's 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 several
factors including, but not limited to, economic conditions, delinquency, charge
off history, growth and composition of the loan portfolio, and other relevant
factors. The provision for loan losses was $65 for the three months ended June
30, 1998 and $5 for the three months ended June 30, 1999. As of June 30, 1999,
the allowance for loan losses was $1,709 or 2.44% of gross loans, compared to
$1,733 or 2.50% of gross loans at December 31, 1998.
At June 30, 1999, the Company had $1,336 of nonperforming loans, of which
$897 were nonaccrual loans and $439 were accruing loans greater than 90 days
past due. At December 31, 1998, the Company had $812 of nonperforming loans, of
which $524 were nonaccrual loans and $288 were accruing loans greater than 90
days past due.
Non-interest Income. Non-interest income was $190 for the three months ended
June 30, 1998 compared to $214 for the three months ended June 30, 1999, an
increase of $24 (or 13%). Deposit service charges increased $10 (or 10%)
primarily due to increased fees relating to overdrafts. Other non-interest
income increased $14 (or 15%) due to the increased volume of service charges and
the collection of past due rental income, partially offset by the decline in the
volume of late charges on loans.
-12-
Non-interest Expense. Total non-interest expenses were $1,046 for the three
months ended June 30, 1998 and $1,263 for the three months ended June 30, 1999,
an increase of $217 (or 21%).
A table summarizing the dollar amounts for each category, and the dollar
and percent changes, is as follows:
Three Months Ended
June 30, 1999 vs 1998
------------------- ---------------------
Category 1999 1998 $ Change % Change
------- ------ -------- --------
Salaries and employee benefits $ 591 $ 497 $ 94 19%
Occupancy 132 115 17 15
Furniture and equipment 113 107 6 6
Other 427 327 100 31
------- ------ --------
Total non-interest expense $ 1,263 $1,046 $ 217 21%
======= ====== ======== ==
In the three months ended June 30, 1999, the increase in salaries and
employee benefits resulted from the addition of six employees, salary increases
and increased cost of benefits. On May 17, 1999, the Bank opened its fifth
branch in Norwalk, Connecticut. The increase in occupancy expense resulted from
additional rent expense, occupancy and depreciation associated with the new
branch. The increase in other non-interest expense during the three months ended
June 30, 1999 primarily resulted from increased advertising expense as well as
additional accounting, legal, printing and miscellaneous expense associated with
the establishment of the bank holding company.
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
June 30,
------------------
Category 1999 1998
---- ----
Salaries and employee benefits 22.03% 15.31%
Occupancy 4.92 3.54
Furniture and equipment 4.21 3.30
Other 15.91 10.06
----- -----
Total non-interest expense 47.07% 32.21%
===== =====
Income Taxes. The provision for income taxes decreased from $517 for the three
months ended June 30, 1998 to $221 for the three months ended June 30, 1999, a
decrease of $296 (or 57%). The decrease in income taxes was principally due to
the decrease in pretax income.
Comparative Analysis for the Six months ended June 30, 1999 versus June 30, 1998
Net Income. Net income was $1,072 for the six months ended June 30, 1998
compared to $635 for the six months ended June 30, 1999, a decrease of $437 (or
41%). Diluted earnings per share were $0.93 for the six months ended June 30,
1998 and $0.54 for the six months ended June 30, 1999 based on weighted average
shares of 1,155,703 and 1,167,550, respectively. Return on average common
stockholders' equity (R.O.E) was 15.74% and 8.49% for the six months ended June
30, 1998 and June 30, 1999, respectively. The return on average assets was 1.70%
and 0.92% for the six months ended June 30, 1998 and 1999, respectively.
The higher net income for the six months ended June 30, 1998 was
principally due to the resolution
-13-
of two nonperforming loans in May 1998 which resulted in an additional $309 of
net income for the six months ended June 30, 1998 (additional pretax loan income
of $509 less related income taxes of $200). The decreased net income in the six
months ended June 30, 1999 was also due to a decline in size of the loan
portfolio as well as lower interest rates on loans, federal funds and the
securities portfolio. The effect of the decline in the loan portfolio and lower
rates was partially offset by the growth in debt securities and federal funds
sold. The average yield on interest earning assets decreased 181 basis points
for the six months ended June 30, 1999 compared to June 30, 1998 (inclusive of
the recovery of nonaccrual interest totaling $509), while the average rate paid
on interest-bearing liabilities increased 30 basis points. Non-interest expense
increased $329 (or 16%) 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 loan losses, increased
non-interest income and a reduction in income taxes.
Net Interest Income. Net interest income was $3,691 for the six months ended
June 30, 1998 compared to $3,060 for the six months ended June 30, 1999, a
decrease of $631 (or 17%). The majority of this decrease is attributable to the
recovery of interest on the two nonperforming loans resolved in the second
quarter of 1998.
Interest Income. Average earning assets for the six months ended June 30, 1998
were $118,450 compared to $130,262 for the six months ended June 30, 1999, an
increase of $11,812 (or 10%). Total interest income was $5,463 in the six months
ended June 30, 1998 and $4,838 in the six months ended June 30, 1999,
representing a decrease of $625 (or 11%). The decrease in interest income
reflects reduced loan volume, lower interest rates on earning assets and, to a
greater extent, the resolution of two nonperforming loans which resulted in an
additional $509 of pretax loan income in May 1998. The decrease in loan income
was partially offset by increased debt securities and federal funds volume.
Loans represent the largest component of interest earning assets. Average
loans outstanding in the six months ended June 30, 1998 were $77,939 compared to
$70,646 in the six months ended June 30, 1999, a decrease of $7,293 (or 9%).
Interest on loans was $4,175 for the six months ended June 30, 1998 compared to
$3,170 for the six months ended June 30, 1999, a decrease of $1,005 (or 24%).
The average yield for the loan portfolio decreased to 9.05% for the six months
ended June 30, 1999 compared to 10.80% for the six months ended June 30, 1998.
The decrease in loan income was due to the resolution of two nonperforming loans
which resulted in an additional $509 of pretax loan income in May 1998, as well
as reduced loan volume.
Average investments in debt securities and federal funds sold were $40,511
for the six months ended June 30, 1998 compared to $59,616 for the six months
ended June 30, 1999, an increase of $19,105 (or 47%). Related income increased
from $1,288 for the six months ended June 30, 1998 to $1,668 for the six months
ended June 30, 1999, an increase of $380 (or 30%). The increased income
primarily resulted from the increased volume of debt securities and federal
funds sold, partially offset by a decline in average yield. Average investments
in debt securities, not including federal funds, increased by $14,141 (or 49%)
in the six months ended June 30, 1999 and average federal funds sold increased
by $4,964 (or 43%).
Interest Expense. Interest expense was $1,772 for the six months ended June 30,
1998 compared to $1,778 for the six months ended June 30, 1999. Average
interest-bearing liabilities for the six months ended June 30, 1998 were $91,374
compared to $99,209 for the six months ended June 30, 1999, an increase of
$7,835 (or 9%). The decline in interest-bearing liabilities was primarily due to
the decline in certificates of deposit.
-14-
Provision for Loan Losses. The provision (credit) for loan losses was $172 for
the six months ended June 30, 1998 and ($12) for the six months ended June 30,
1999. As of June 30, 1999, the allowance for loan losses was $1,709 or 2.44% of
gross loans, compared to $1,733 or 2.50% of gross loans at December 31, 1998.
Non-interest Income. Non-interest income was $352 for the six months ended June
30, 1998 compared to $386 for the six months ended June 30, 1999, an increase of
$34 (or 10%). Deposit service charges increased $33 (or 17%) primarily due to
increased fees relating to overdrafts.
Non-interest Expense. Total non-interest expenses were $2,048 for the six months
ended June 30, 1998 and $2,377 for the six months ended June 30, 1999, an
increase of $329 (or 16%).
A table summarizing the dollar amounts for each category, and the dollar and
percent changes, is as follows:
Six Months Ended
June 30, 1999 vs 1998
----------------- -----------------------
Category 1999 1998 $ Change % Change
------ ---- -------- ---------
Salaries and employee benefits $1,156 $ 988 $168 17%
Occupancy 252 231 21 9
Furniture and equipment 221 204 17 8
Other 748 625 123 20
------ ------ ----
Total non-interest expense $2,377 $2,048 $329 16%
====== ====== ==== ==
In the six months ended June 30, 1999, the increase in salaries and
employee benefits resulted from the addition of six employees, salary increases
and increased cost of benefits. On May 17, 1999, the Bank opened its fifth
branch in Norwalk, Connecticut. Increased furniture and equipment expense for
the six months ended June 30, 1999 primarily resulted from additional
depreciation from equipment purchases and the increased cost of service
contracts. The increase in occupancy expense resulted from additional rent
expense, occupancy and depreciation associated with the new branch. The increase
in other non-interest expense resulted from increased advertising expense as
well as additional accounting, legal, printing and miscellaneous expense
associated with the establishment of the bank holding company.
The following table summarizes dollar amounts for each category as a percentage
of total operating income:
Six Months Ended
June 30,
----------------
Category 1999 1998
----- ------
Salaries and employee benefits 22.13% 16.99%
Occupancy 4.82 3.97
Furniture and equipment 4.23 3.51
Other 14.32 10.75
----- -----
Total non-interest expense 45.50% 35.22%
===== =====
Income Taxes. The provision for income taxes decreased from $751 in six months
ended June 30, 1998 to $446 in the six months ended June 30, 1999, a decrease of
$305 (or 41%). The decrease in income taxes was principally due to the decrease
in pre-tax income.
-15-
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 of mission critical
applications is now complete. Additional testing of non-mission critical
applications is continuing.
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 estimates that its total Year 2000 project costs, including
costs charged to expense, will not exceed $100. As of June 30, 1999, the Company
had incurred $56 in 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
-16-
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 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Annual Meeting of Shareholders of the Bancorp was held on May 19, 1999.
At the annual meeting, the shareholders elected Joseph S. Field, Jr., J. James
Gordon and Courtney A. Nelthropp to the Board of Directors of the Bancorp. There
were 918,361 votes for and 18,165 votes withheld for Mr. Field, 918,361 votes
for and 18,165 votes withheld for Mr. Gordon and 918,361 votes for and 18,165
votes withheld for Mr. Nelthropp. All three were elected for terms which expire
at the 2002 Annual Meeting of Shareholders. In addition, Stanley A. Levine,
Ronald C. Miller, Martin Price, Patrick Tisano and Dr. Joseph Waxberg are
currently serving terms on the Board of Directors which expire at the 2000
Annual Meeting of Shareholders and James P. Jakubek, Joseph A. Maida, Melvin L.
Maisel and Norman H. Reader are currently serving terms which expire at the 2001
Annual Meeting of Shareholders.
The shareholders also approved an amendment to the Bancorp's Certificate of
Incorporation to increase the number of authorized shares of common stock from
2,000,000 to 5,000,000 shares. There were 801,571 votes for, 132,331 votes
against, 2,616 abstaining and 8 broker non-votes with respect to such approval.
Finally, the shareholders ratified the appointment by the Board of Directors of
KPMG LLP as the Bancorp's independent auditors for the fiscal year ending
December 31, 1999. There were 916,395 votes for, 18,614 votes against and 1,517
abstentions with respect to such ratification.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
Exhibit No. Description
----------- -----------
3.1 Certificate of Amendment to Certificate of
Incorporation (filed herewith)
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 June 30, 1999.
-17-
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: August 5, 1999 /s/ Norman H. Reader
----------------------- --------------------------------------------
Norman H. Reader
President and Chief Executive Officer
DATE: August 5, 1999 /s/ Leigh A. Hardisty
---------------------- --------------------------------------------
Leigh A. Hardisty
Vice President and Chief Financial Officer
-18-
EXHIBIT INDEX
Exhibit No. Description
3.1 Certificate of Amendment to Certificate of
Incorporation (1)
27.1 Financial Data Schedule (1)
(1) Filed herewith