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, 2001
-------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT of 1934
For the transition period from to
Commission file number: 0-25465
CORNERSTONE BANCORP, INC./CT
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
CONNECTICUT 06-1524044
------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
550 Summer St. , Stamford, Connecticut 06901
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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,
2001 was 1,071,505.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements (Unaudited)
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PAGE
----
Consolidated Statements of Condition
June 30, 2001 and December 31, 2000 .............................. 1
Consolidated Statements of Income
Three Months Ended June 30, 2001 and June 30, 2000 ............... 2
Consolidated Statements of Income
Six Months Ended June 30, 2001 and June 30, 2000 ................. 3
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 2001 and June 30, 2000 ................. 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and June 30, 2000 ................. 5
Notes to Consolidated Financial Statements ....................... 6
Item 2. Management's Discussion and Analysis
- ---------------------------------------------
of Financial Condition and Results of Operations ................. 7-16
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PART II - Other Information
Item 1. Legal Proceedings ................................................ None
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Item 2. Changes in Securities and Use of Proceeds ........................ None
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Item 3. Defaults upon Senior Securities................................... None
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Item 4. Submission of Matters to a Vote of Security Holders .............. 16
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Item 5. Other Information ................................................ None
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Item 6. Exhibits and Reports on Form 8-K ................................. 16
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Signatures ................................................................ 17
PART I - Financial Information
Item 1. Financial Statements
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CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share and per share data)
(unaudited)
June 30, December 31,
Assets 2001 2000
--------- -----------
Cash and due from banks $ 9,827 $ 8,854
Federal funds sold 39,344 2,816
-------- --------
Cash and cash equivalents 49,171 11,670
-------- --------
Securities, including $6,762 at June 30, 2001
and $6,583 at December 31, 2000 pledged as collateral
for repurchase agreements:
Available for sale, at fair value 7,150 18,482
Held to maturity (fair value of $18,232 at June 30, 2001
and $14,570 at December 31, 2000) 18,162 14,645
-------- --------
Total securities 25,312 33,127
-------- --------
Loans, net 103,300 99,205
Accrued interest receivable 936 1,124
Federal Home Loan Bank stock, at cost 466 419
Bank premises and equipment, net 2,794 2,699
Other assets 2,049 1,879
-------- --------
Total assets $184,028 $150,123
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand (non-interest bearing) $ 43,453 $ 29,919
Money market demand and NOW 32,073 25,894
Regular, club and money market savings 29,619 26,764
Time 53,718 41,375
-------- --------
Total deposits 158,863 123,952
Federal Home Loan Bank advances and
borrowings under repurchase agreements 6,779 8,562
Accrued interest payable 150 143
Other liabilities 853 882
-------- --------
Total liabilities 166,645 133,539
-------- --------
Stockholders' equity:
Common stock, par value $0.01 per share;
authorized 5,000,000 shares; issued
1,147,920 shares at June 30, 2001 and
1,142,159 shares at December 31, 2000 11 11
Additional paid-in capital 11,738 11,657
Retained earnings 6,427 5,818
Treasury stock, at cost (76,415 shares at June 30, 2001
and December 31, 2000) (880) (880)
Accumulated other comprehensive income (loss), net of taxes
of ($56) at June 30, 2001 and $15 at December 31, 2000 87 (22)
-------- --------
Total stockholders' equity 17,383 16,584
-------- --------
Total liabilities and stockholders' equity $184,028 $150,123
======== ========
See accompanying notes to consolidated financial statements.
-1-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(In thousands, except share and per share data)
(unaudited)
Three Months Ended
June 30,
-----------------------
2001 2000
---- ----
Interest income:
Loans $ 2,379 $ 2,070
Securities 297 623
Federal funds sold 375 102
-------- --------
Total interest income 3,051 2,795
-------- --------
Interest expense:
Deposits 974 790
Federal Home Loan Bank advances and
borrowings under repurchase agreements 31 120
-------- --------
Total interest expense 1,005 910
-------- --------
Net interest income 2,046 1,885
Provision for loan losses 39 102
-------- --------
Net interest income after provision for loan losses 2,007 1,783
-------- --------
Non-interest income:
Deposit service charges 123 112
Loss on sales of securities -- (14)
Other 108 82
-------- --------
Total non-interest income 231 180
-------- --------
Non-interest expense:
Salaries and employee benefits 812 613
Occupancy 133 141
Furniture and equipment 96 109
Data processing 191 81
Professional fees 68 50
Other 300 237
-------- --------
Total non-interest expense 1,600 1,231
-------- --------
Income before income tax expense 638 732
Income tax expense 245 294
-------- --------
Net income $ 393 $ 438
======== ========
Earnings per common share:
Basic $ 0.37 $ 0.41
Diluted 0.36 0.40
Weighted average common shares:
Basic 1,070,593 1,074,074
Diluted 1,099,499 1,090,725
See accompanying notes to consolidated financial statements.
-2-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(In thousands, except share and per share data)
(unaudited)
Six Months Ended
June 30,
-----------------------
2001 2000
---- ----
Interest income:
Loans $ 4,679 $ 3,942
Securities 709 1,266
Federal funds sold 530 179
-------- --------
Total interest income 5,918 5,387
-------- --------
Interest expense:
Deposits 1,831 1,572
Federal Home Loan Bank advances and
borrowings under repurchase agreements 73 171
-------- --------
Total interest expense 1,904 1,743
-------- --------
Net interest income 4,014 3,644
Provision for loan losses 109 143
-------- --------
Net interest income after provision for loan losses 3,905 3,501
-------- --------
Non-interest income:
Deposit service charges 249 231
Loss on sales of securities -- (14)
Other 210 135
-------- --------
Total non-interest income 459 352
-------- --------
Non-interest expense:
Salaries and employee benefits 1,554 1,245
Occupancy 285 287
Furniture and equipment 195 211
Data processing 326 163
Professional fees 137 116
Other 495 435
-------- --------
Total non-interest expense 2,992 2,457
-------- --------
Income before income tax expense 1,372 1,396
Income tax expense 535 563
-------- --------
Net income $ 837 $ 833
======== ========
Earnings per common share:
Basic $ 0.78 $ 0.76
Diluted 0.76 0.75
Weighted average common shares:
Basic 1,069,195 1,094,961
Diluted 1,096,594 1,108,697
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, 2001 AND 2000
(In thousands)
(unaudited)
Accumulated
Additional Other Total
Common Paid-in Retained Treasury Comprehensive Stockholders'
Stock Capital Earnings Stock Income (Loss) Equity
-------- ---------- -------- ----------- ------------- -------------
BALANCE, JANUARY 1, 2000 $ 11 $ 11,510 $ 4,452 $ -- $ (397) $ 15,576
Net income 833 833
Change in net unrealized gain (loss)
on available for sale securities,
net of taxes (20) (20)
--------
Total comprehensive income 813
Cash dividends ($0.19 per share) (203) (203)
Purchases of treasury stock
(74,265 shares) (852) (852)
Shares issued in connection with:
Directors Compensation Plan 6 6
Dividend Reinvestment Plan 65 65
-------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 2000 $ 11 $ 11,581 $ 5,082 $ (852) $ (417) $ 15,405
======== ======== ======== ======== ======== ========
BALANCE, JANUARY 1, 2001 $ 11 $ 11,657 $ 5,818 $ (880) $ (22) $ 16,584
Net income 837 837
Change in net unrealized gain (loss)
on available for sale securities,
net of taxes 109 109
--------
Total comprehensive income 946
Cash dividends ($0.21 per share) (228) (228)
Shares issued in connection with:
Directors Compensation Plan 10 10
Dividend Reinvestment Plan 71 71
-------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 2001 $ 11 $ 11,738 $ 6,427 $ (880) $ 87 $ 17,383
======== ======== ======== ========= ======== ========
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, 2001 AND 2000
(In thousands)
(unaudited)
Six Months Ended
June 30,
---------------------
2001 2000
---- ----
Operating activities:
Net income $ 837 $ 833
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 181 196
Provision for loan losses 109 143
Decrease (increase) in accrued interest receivable 188 (45)
Increase in other assets (241) (84)
Increase (decrease) in accrued interest payable 7 (11)
Decrease in other liabilities (43) (26)
Loss on sales of securities -- (14)
Other adjustments, net 6 6
-------- --------
Net cash provided by operating activities 1,044 998
-------- --------
Investing activities:
Proceeds from sales of securities available for sale -- 1,014
Proceeds from maturities and calls of securities
available for sale 11,510 --
Proceeds from maturities and calls of securities
held to maturity 5,079 2,070
Purchases of securities held to maturity (8,610) --
Disbursements for loan originations less principal
repayments (4,200) (13,634)
Purchase of Federal Home Loan Bank Stock (47) --
Purchases of bank premises and equipment (261) (25)
-------- --------
Net cash provided by (used in) investing activities 3,471 (10,575)
-------- --------
Financing activities:
Net increase in demand, money market and
savings deposits 22,568 9,836
Net increase (decrease) in time deposits 12,343 (1,557)
Net (decrease) increase in short-term Federal Home
Loan Bank advances and borrowings under
repurchase agreements (1,783) 6,311
Purchases of treasury stock -- (852)
Dividends paid on common stock (213) (199)
Proceeds from issuance of common stock 71 65
-------- --------
Net cash provided by financing activities 32,986 13,604
-------- --------
Net increase in cash and cash equivalents 37,501 4,027
Cash and cash equivalents at beginning of period 11,670 11,928
-------- --------
Cash and cash equivalents at end of period $ 49,171 $ 15,955
======== ========
Supplemental information:
Interest payments $ 1,897 $ 1,754
Income tax payments 569 637
======== ========
See accompanying notes to consolidated financial statements.
-5-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
- --------------------------------------------------------
(dollars in thousands)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
include the accounts of Cornerstone Bancorp, Inc. and its subsidiary Cornerstone
Bank (the "Bank"), collectively the "Company." The interim consolidated
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America for interim financial
statements and the instructions to Form 10-QSB, and, accordingly, do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
accompanying unaudited consolidated financial statements reflect all adjustments
necessary, consisting only of normal recurring accruals, to present fairly the
financial position, results of operations, changes in stockholders' equity and
cash flows at the dates and for the periods presented. In preparing the interim
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the statement of condition and revenues and expenses for the period.
Actual results could differ significantly from those estimates. A material
estimate that is particularly susceptible to near-term change is the allowance
for loan losses. The interim results of operations for the quarter and six
months ended June 30, 2001 are not necessarily indicative of the results to be
expected for the year ending December 31, 2001 or for any other interim period.
While management believes that the disclosures presented are adequate so as
not to make the information misleading, it is suggested that these interim
consolidated financial statements be read in conjunction with the annual
consolidated financial statements and notes included in the Form 10-KSB for the
year ended December 31, 2000.
NOTE B - EARNINGS PER SHARE
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing income available to common stockholders (net income less dividends on
preferred stock, if any) by the weighted average number of common shares
outstanding during the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock (such as
stock options) were exercised or converted into common stock that then shared in
the earnings of the entity. Diluted EPS is computed by dividing net income by
the weighted average number of common shares outstanding during the period, plus
common-equivalent shares computed using the treasury stock method. For the three
and six month periods ended June 30, 2001 and 2000, the number of shares for
diluted EPS exceeded the number of shares for basic EPS due to the dilutive
effect of outstanding stock options computed using the treasury stock method.
For purposes of computing basic EPS, net income applicable to common stock
equaled net income for these periods.
NOTE C - SEGMENT INFORMATION
Public companies are required to report certain financial information about
significant revenue-producing segments of the business for which sufficient
information is available and utilized by the chief operating decision maker.
Specific information to be reported for individual operating segments includes a
measure of profit and loss, certain revenue and expense items, and total assets.
As a community-oriented financial institution, substantially all of the Bank's
operations involve the delivery of loan and deposit products to customers.
Management makes operating decisions and assesses performance based on an
ongoing review of these banking operations, which constitute the Company's
only operating segment for financial reporting purposes.
NOTE D - ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," requires that all derivative
instruments be measured at fair value
-6-
and recognized in the statement of condition as either assets or liabilities.
Changes in the fair value of derivative instruments are reported either in
earnings or other comprehensive income, depending on the use of the derivative
and whether it qualifies for hedge accounting which is permitted only if
specific criteria are met. SFAS No. 133 was effective January 1, 2001 for the
Company. Because the Company had no derivatives or hedging activities at that
date or at any time during the first two quarters of 2001, SFAS No. 133 had no
impact on the consolidated financial statements.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets". Among other things, SFAS No. 141 requires use of the purchase method to
account for all business combinations"; use of the pooling-of-interests method
is not permitted for business combinations initiated after June 30, 2001. SFAS
No. 142 requires that goodwill no longer be amortized to expense, but instead be
reviewed for impairment, with impairment losses charged to expense when they
occur. Amortization of goodwill (including goodwill recorded in prior
acquisitions) ceases upon adoption of SFAS No. 142, which for calendar year-end
entities such as the Company, will be on January 1, 2002. SFAS No. 142 also
requires acquisition-related intangible assets other than goodwill continue to
be amortized to expense over their estimated useful lives. The Company has no
goodwill or other acquisition-related intangible assets at June 30, 2001 and,
accordingly, the adoption of SFAS No. 142 is not expected to affect the
Company's consolidated financial statements.
Item 2. Management's Discussion and Analysis of
- -----------------------------------------------
Financial Condition and Results of Operations
- ---------------------------------------------
(dollars in thousands)
FORWARD-LOOKING STATEMENTS
The statements contained in this report that are not historical are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Examples of such forward-looking statements include, without
limitation, statements by the Company regarding expectations for earnings,
credit quality and other financial and business matters. 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; technological changes; the extent and timing of actions of the
Federal Reserve Board, including changes in monetary policies and interest
rates; customer deposit disintermediation; changes in customers' acceptance of
the Company's products and services; and the extent and timing of legislative
and regulatory actions and reforms.
The forward-looking statements contained in this report speak only as of
the date on which such statements are made. By making any forward-looking
statements, the Company assumes no duty to update them to reflect new, changing
or unanticipated events or circumstances.
-7-
FINANCIAL CONDITION
General
Total assets increased to $184,028 at June 30, 2001 from $150,123 at
December 31, 2000, an increase of $33,905 (or 23%). The increase reflects an
increase of $37,501 in cash and cash equivalents (primarily federal funds sold),
net loan growth of $4,095 and an increase of $3,517 in securities held to
maturity, partially offset by a decrease of $11,332 in securities available for
sale. The asset growth was funded principally from a net increase of $34,911 in
deposits.
Loans
The net loan portfolio increased to $103,300 at June 30, 2001 from $99,205
at December 31, 2000, an increase of $4,095. The 4% increase in the loan
portfolio in the first six months of 2001 reflected increases in non-residential
real estate loans, construction loans and commercial loans, partially offset by
a decrease in residential loans. The increase in non-residential loans was
primarily due to line of credit activity for one loan. Increases in construction
and commercial loans were primarily due to the origination of one loan for
$1,000 in each category.
Major classifications of loans at June 30, 2001 and December 31, 2000 were
as follows:
Dollar Percent
June 30, 2001 December 31, 2000 Change Change
------------- ----------------- ------ -------
Loans secured by real estate:
Residential $ 45,215 $ 45,630 $ (415) (1%)
Non-residential 41,469 39,754 1,715 4
Construction 3,861 2,375 1,486 63
Commercial loans 12,170 10,711 1,459 14
Consumer and other loans 2,459 2,316 143 6
--------- --------- ---------
Total loans 105,174 100,786 4,388 4
Allowance for loan losses (1,886) (1,589) (297) 19
Deferred loan costs, net 12 8 4 50
--------- --------- ---------
Total loans, net $ 103,300 $ 99,205 $ 4,095 4%
========= ========= =========
Non-performing Loans and the Allowance for Loan Losses
It is the Bank's policy to manage its loan portfolio to facilitate early
recognition of problem loans. The Bank commences internal collection efforts
once a loan payment is more than 15 days past due. The Bank's data processing
system generates delinquency reports on all of the Bank's loans weekly, and
management reviews the loan portfolio to determine if past due loans should be
placed on non-accrual status. Unless the customer is working with the Bank
toward repayment, once a loan payment is 90 days past due, the Bank generally
initiates appropriate collection or legal action.
-8-
The following table sets forth information with respect to non-performing
loans at the dates indicated.
June 30, December 31,
2001 2000
-------- ------------
Loans on non-accrual status:
Loans secured by real estate $ 320 $ 455
Loans on accrual status:
Consumer and other loans 2 1
-------- --------
Total loans past due 90 days or more 322 456
Loans current or past due less than 90 days for which
interest payments are being applied to reduce principal
balances:
Loan secured by real estate 175 198
Commercial loans 7 9
-------- --------
182 207
-------- --------
Total non-performing loans $ 504 $ 663
======== ========
Ratio of total non-performing loans to
total loans outstanding 0.48% 0.66%
======== ========
As of June 30, 2001, the allowance for loan losses was $1,886 or 1.79% of
total loans and 374% of non-performing loans compared to $1,589 or 1.58% of
total loans and 240% of non-performing loans at December 31, 2000. During the
quarter ended March 31, 2001, the Bank recovered $90 with respect to a loan
charged off in November 1990. A recovery of $149 was received in the second
quarter of 2001, of which $81 was a recovery of previously charged off principal
and $68 was a recovery of interest payments applied against principal on a loan
charged off in December 1997.
The following table sets forth changes in the allowance for loan losses for
the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
Balance at beginning of period $ 1,752 $ 1,674 $ 1,589 $ 1,626
Provision for loan losses 39 102 109 143
Charge-offs -- (10) -- (10)
Recoveries 95 34 188 41
------- ------- ------- -------
Balance at end of period $ 1,886 $ 1,800 $ 1,886 $ 1,800
======= ======= ======= =======
Securities
Total securities decreased to $25,312 at June 30, 2001 from $33,127 at
December 31, 2000, a decrease of $7,815 (or 24%). The decrease in the securities
portfolio was primarily due to cash flows from securities called prior to
maturity in the available for sale and the held to maturity portfolios, the
proceeds of which (net of purchases) were reinvested in overnight federal funds.
It is expected that overnight federal funds will be reduced in the future by
purchasing additional securities or through loan originations.
-9-
The following table sets forth the amortized cost and estimated fair value of
the securities portfolio at the dates indicated.
June 30, 2001 December 31, 2000
-------------------- ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Value Cost
--------- --------- --------- ---------
Available for sale
- ------------------
U.S. Agency securities $ 7,007 $ 7,150 $18,519 $18,482
======= ======= ======= =======
Held to maturity
- ----------------
U.S. Agency securities $16,250 $16,325 $13,647 $13,576
Mortgage backed securities 1,837 1,832 923 919
Other 75 75 75 75
------- ------- ------- -------
Total $18,162 $18,232 $14,645 $14,570
======= ======= ======= =======
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, December 31, Dollar Percent
2001 2000 Change Change
--------- ------------ -------- --------
Demand deposits (non-interest bearing) $ 43,453 $ 29,919 $ 13,534 45%
Money market demand and NOW accounts 32,073 25,894 6,179 24
Regular, club and money market savings 29,619 26,764 2,855 11
Time deposits 53,718 41,375 12,343 30
-------- -------- --------
Total $158,863 $123,952 $ 34,911 28%
======== ======== ========
The increase in demand deposits was primarily related to activity
associated with one demand deposit account. The Bank expects the deposit balance
maintained in this account to be temporary in nature. The fluctuation in money
market demand and NOW accounts was due to attorney-related trust activity.
Increases in regular, club and money market savings were due to general deposit
activity. During the first six months of the year, competitive rates offered by
the Bank resulted in an increase in one year as well as two, three and five year
time deposits, totaling $11,800. Certificates of deposit in denominations of
$100 or more were $11,557 at June 30, 2001 compared to $9,773 at December 31,
2000, an increase of $1,784 (or 18%).
Liquidity and Capital Resources
At June 30, 2001, total short-term investments, which are made up of
federal funds sold, available for sale securities and held to maturity
securities maturing in three months or less, totaled $47,496. The liquidity of
the Company is measured by the ratio of net cash, short-term investments, and
marketable securities to deposits and short-term liabilities. The liquidity
ratio at June 30, 2001 was 39%, primarily due to the large overnight federal
funds portfolio. The Company's guideline is to maintain a liquidity ratio of 20%
or more.
Net cash provided by operating activities was $1,044 for the six months
ended June 30, 2001 as compared to $998 for the six months ended June 30, 2000.
For the first six months of 2001, cash provided by investing activities was
$3,471, compared to cash used in investing activities of $10,575 in the first
six months of 2000, primarily due to increased proceeds from callable securities
and security maturities and reduced volume of loan originations, partially
offset by purchases of securities held to maturity in the second quarter of
2001. Net cash provided by financing activities of $32,986 for the six months
ended June 30, 2001 compared to $13,604 for the six months ended June 30, 2000,
primarily resulted from a net increase in deposits, partially offset by
decreased borrowings from the Federal Home Loan Bank of Boston. Cash and cash
equivalents increased to $37,501 for the six months ended June 30, 2001.
-10-
At June 30, 2001, the Company had outstanding loan commitments under
unused lines of credit approximating $15,384 and outstanding letters of credit
approximating $211.
At June 30, 2001 and December 31, 2000, the Company's consolidated
leverage capital ratio was 10.0% and 11.1%, respectively. At June 30, 2001 and
December 31, 2000, the Company's consolidated Tier 1 risk-based capital ratio
was 14.8% and 15.4%, respectively. The Company's consolidated total risk-based
capital ratio at June 30, 2001 and December 31, 2000 was 16.0% and 16.6%,
respectively. The Bank's regulatory capital ratios at these dates were
substantially the same as these consolidated ratios, and the Bank was classified
as a well-capitalized institution for regulatory purposes.
RESULTS OF OPERATIONS
Comparative Analysis of Operating Results for the Three Months Ended June 30,
2001 and June 30, 2000.
Net Income. Net income was $393 for the three months ended June 30, 2001
compared to $438 for the three months ended June 30, 2000, a decrease of $45 (or
10%). Diluted earnings per common share were $0.36 for the three months ended
June 30, 2001 and $0.40 for the three months ended June 30, 2000 based on
weighted average shares of 1,099,499 and 1,090,725, respectively. The annualized
return on average common stockholders' equity (R.O.E) was 9.18% and 11.30% for
the three months ended June 30, 2001 and June 30, 2000, respectively. The
annualized return on average assets was 0.92% for the three months ended June
30, 2001 and 1.18% for the three months ended June 30, 2000.
Lower net income for the three months ended June 30, 2001 was principally
due to an increase in non-interest expense, partially offset by increased net
interest and non-interest income as well as the lower provision for loan losses
and income tax expense.
Net Interest Income. Net interest income is the difference between the
interest income the Company earns on its loans, securities, and other earning
assets, and the interest cost of deposits and other interest-bearing liabilities
necessary to fund these earning assets. It is the primary component of the
Company's earnings.
Net interest income was $2,046 for the three months ended June 30, 2001
compared to $1,885 for the three months ended June 30, 2000, an increase of $161
(or 9%). Higher loan volume was the primary contributor to increased interest
income. This increase was partially offset primarily by higher interest expense
on increased time and NOW account deposits. The effect of higher loan and
deposit volumes was partially offset by lower yield and cost rates. The average
yield on interest-earning assets decreased 45 basis points for the three months
ended June 30, 2001 compared to June 30, 2000, while the average rate paid on
interest-bearing liabilities decreased 7 basis points. These changes resulted in
a 33 basis point decrease in the net interest margin for the three months ended
June 30, 2001 compared to June 30, 2000. The lower asset yields primarily
reflect decreasing interest rates and the increased volume of federal funds held
during the quarter ended June 30, 2001 compared to June 30, 2000.
Interest Income. Average earning assets for the three months ended June 30,
2001 were $159,229 compared to $137,840 for the three months ended June 30,
2000, an increase of $21,389 (or 16%). Total interest income, which is a
function of the volume of interest-earning assets and their related rates, was
$3,051 for the three months ended June 30, 2001 compared to $2,795 for the three
months ended June 30, 2000, representing an increase of $256 (or 9%).
Loans represent the largest component of interest-earning assets. Average
loans outstanding in the three months ended
-11-
June 30, 2001 were $104,693 compared to $89,680 during the three months ended
June 30, 2000, an increase of $15,013 (or 17%). Interest on loans was $2,379 for
the three months ended June 30, 2000 compared to $2,070 for the three months
ended June 30, 2001, an increase of $309 (or 15%). The increase in loan income
primarily reflects the increase in loan volume for the three months ended June
30, 2001 compared to June 30, 2000.
Average investments in securities and federal funds sold were $54,536 for
the three months ended June 30, 2001 compared to $48,160 for the three months
ended June 30, 2000, an increase of $6,376 (or 13%). Related income decreased to
$672 for the three months ended June 30, 2001 from $725 for the three months
ended June 30, 2000, a decrease of $53 (or 8%). Average investments in
securities, not including federal funds sold, decreased by $21,268 (or 51%)
during the three months ended June 30, 2001, while average federal funds sold
increased by $27,644 (or 418%). The decrease in income from securities was
primarily due to the reduced volume of securities due to calls prior to
maturity. The increase in federal funds income was due to the increased amount
of federal funds sold resulting from the influx of cash flows from securities
called prior to maturity, as well as cash inflows from demand, time and NOW
accounts, which were reinvested in overnight federal funds. The average yield on
federal funds is lower than the average yield on securities.
Interest Expense. Interest expense was $1,005 for the three months ended
June 30, 2001 compared to $910 for the three months ended June 30, 2000, a 10%
increase. Interest expense is a function of the volume of interest-bearing
liabilities and their related rates. Average interest-bearing liabilities during
the three months ended June 30, 2001 were $116,084 compared to $103,108 during
the three months ended June 30, 2000, an increase of $12,976 (or 13%). Increased
interest expense was primarily due to increased time and NOW account deposits.
Provision for Loan Losses. The periodic provision for loan losses
represents the amount necessary to adjust the allowance for loan losses to
management's estimate of probable credit losses inherent in the existing loan
portfolio at the reporting date. Management's determination of the allowance for
loan losses is based on the results of continuing reviews of individual loans
and borrower relationships, particularly in the commercial and commercial real
estate loan portfolios. A review of the quality of the loan portfolio is
conducted internally by management on a quarterly basis, using a
consistently-applied methodology, and the results are presented to the Board of
Directors for approval. The evaluation covers individual borrowers whose
aggregate loans are greater than $100, as well as all adversely-classified
loans. Management also considers factors such as the borrower's financial
condition, historical and expected ability to make loan payments, and underlying
collateral values. The determination of the allowance for loan losses also
considers the level of past due loans, the Bank's historical loan loss
experience, changes in loan portfolio mix, geographic and borrower
concentrations, and current economic conditions. The allowance for loan losses
is also reduced by charge-offs and increased by recoveries. The provision for
loan losses was $39 for the three months ended June 30, 2001 and $102 for the
three months ended June 30, 2000. Net loan recoveries were $95 in the quarter
ended June 30, 2001 compared to $24 in the second quarter last year.
At June 30, 2001, the Company had $504 of non-performing loans, including
$320 of non-accrual loans and $2 of accruing loans greater than 90 days past
due. Loans less than 90 days past due for which interest payments are being
applied to reduce principal balances were $182 at June 30, 2001. At December 31,
2000, the Company had $663 of non-performing loans, including $455 of
non-accrual loans and $1 of accruing loans greater than 90 days past due. Loans
less than 90 days past due for which interest payments are being applied to
reduce principal balances were $207 at December 31, 2000.
Non-interest Income. Non-interest income was $231 for the three months
ended June 30, 2001 compared to $180 for the three months ended June 30, 2000,
an increase of $51 (or 28%). During the second quarter of 2001, ATM surcharges
increased $22 as a result of the imposition of such ATM fees beginning in July
2000.
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Non-interest Expense. Total non-interest expense was $1,600 for the three
months ended June 30, 2001 and $1,231 for the three months ended June 30, 2000,
an increase of $369 (or 30%).
The following table summarizes the dollar amounts for each category of
non-interest expense, and the dollar and percent changes:
Three Months Ended Increase (Decrease)
June 30, 2001 vs 2000
------------------- ---------------------
Category 2001 2000 $ Change % Change
---- ---- -------- --------
Salaries and employee benefits $ 812 $ 613 $ 199 32%
Occupancy 133 141 (8) (6)
Furniture and equipment 96 109 (13) (12)
Data processing 191 81 110 136
Other categories 368 287 81 28
------- ------- -------
Total non-interest expense $ 1,600 $1,231 $ 369 30%
======= ======= =======
The increase in salaries and employee benefits was due to the addition of
nine employees and associated benefits. The increase in data processing expense
is primarily related to increased data processing fees and expenses absorbed
during the second quarter of 2001 due to the conversion of the Bank's core data
processing system in May 2001. The increase in other non-interest expense is
primarily related to travel related expenses associated with the data processing
conversion during the second quarter of 2001, increased donations and legal
fees.
The following table summarizes dollar amounts for each category as a
percentage of total operating income (interest income plus non-interest income),
which increased by $307 (or 10%) in the second quarter of 2001 compared to the
same period in 2000:
Three Months Ended
June 30,
-------------------
Category 2001 2000
---- ----
Salaries and employee benefits 24.74% 20.61%
Occupancy 4.05 4.74
Furniture and equipment 2.93 3.66
Data processing 5.82 2.72
Other categories 11.21 9.64
----- --------
Total non-interest expense 48.75% 41.37%
===== ========
Income Taxes. The provision for income taxes decreased to $245 for the
three months ended June 30, 2001 from $294 for the three months ended June 30,
2000, a decrease of $49 (or 17%). The decrease in income taxes was primarily due
to the 13% decrease in pre-tax income.
Comparative Analysis of Operating Results for the Six Months Ended June 30, 2001
and June 30, 2000.
Net Income. Net income was $837 for the six months ended June 30, 2001
compared to $833 for the six months ended June 30, 2000, an increase of $4.
Diluted earnings per common share were $0.76 for the six months ended June 30,
2001 and $0.75 for the six months ended June 30, 2000 based on weighted average
shares of 1,096,594 and 1,108,697, respectively. The annualized return on
average common stockholders' equity (R.O.E) was 9.82% and 11.29% for the six
months ended June 30, 2001 and June 30, 2000, respectively. The annualized
return on average assets was 1.04% for the six months ended June 30, 2001 and
1.21% for the six months ended June 30, 2000.
-13-
Higher net income for the six months ended June 30, 2001 was principally
due to increased net interest income and non-interest income as well a decrease
in the provision for loan losses and income tax expense, which were offset by an
increase in non-interest expense.
Net Interest Income. Net interest income was $4,014 for the six months
ended June 30, 2001 compared to $3,644 for the six months ended June 30, 2000,
an increase of $370 (or 10%). Higher loan volume was the primary contributor to
increased interest income. This increase was partially offset by decreased
investment income and by higher interest expense on increased time and NOW
account deposits. The average yield on interest-earning assets decreased 9 basis
points for the six months ended June 30, 2001 compared to June 30, 2000, while
the average rate paid on interest-bearing liabilities increased 2 basis points.
These changes resulted in a 5 basis point decrease in the net interest margin
for the six months ended June 30, 2001 compared to June 30, 2000.
Interest Income. Average earning assets for the six months ended June 30,
2001 were $149,607 compared to $134,680 for the six months ended June 30, 2000,
an increase of $14,927 (or 11%). Total interest income, which is a function of
the volume of interest-earning assets and their related rates, was $5,918 for
the six months ended June 30, 2001 compared to $5,387 for the six months ended
June 30, 2000, representing an increase of $531 (or 10%).
Loans represent the largest component of interest-earning assets. Average
loans outstanding in the six months ended June 30, 2001 were $102,370 compared
to $86,297 during the six months ended June 30, 2000, an increase of $16,073 (or
19%). Interest on loans was $4,679 for the six months ended June 30, 2001
compared to $3,942 for the six months ended June 30, 2001, an increase of $737
(or 19%). The increase in loan income primarily reflected the increase in loan
volume for the six months ended June 30, 2001 compared to June 30, 2000.
Average investments in securities and federal funds sold were $47,237 for
the six months ended June 30, 2001 compared to $48,383 for the six months ended
June 30, 2000, a decrease of $1,146 (or 2%). Related income decreased to $1,239
for the six months ended June 30, 2001 from $1,445 for the six months ended June
30, 2000, a decrease of $206 (or 14%). Average investments in securities, not
including federal funds sold, decreased by $17,918 (or 42%) during the six
months ended June 30, 2001, while average federal funds sold increased by
$16,772 (or 278%). The decrease in income from securities was primarily due to
the reduced volume of securities due to calls prior to maturity. The increase in
federal funds income was due to the influx of cash flows from securities called
prior to maturity and increases in all deposit categories. The reinvestment of
securities cash flows in lower yielding federal funds and the decline in the
average federal funds rate from June 30, 2000 to June 30, 2001 resulted in a
decline in income for this category.
Interest Expense. Interest expense was $1,904 for the six months ended June
30, 2001 compared to $1,743 for the six months ended June 30, 2000, an increase
of $161 (or 9%). Interest expense is a function of the volume of
interest-bearing liabilities and their related rates. Average interest-bearing
liabilities during the six months ended June 30, 2001 were $108,945 compared to
$100,478 during the six months ended June 30, 2000, an increase of $8,467 (or
8%). Increased interest expense was primarily due to increased time and NOW
account deposits.
Provision for Loan Losses. The periodic provision for loan losses
represents the amount necessary to adjust the allowance for loan losses to
management's estimate of probable credit losses inherent in the existing loan
portfolio at the reporting date. The allowance for loan losses is also reduced
by charge-offs and increased by recoveries. The provision for loan losses was
$109 for the six months ended June 30, 2001 and $143 for the six months ended
June 30, 2000. Net loan recoveries were $188 in the six months ended June 30,
2001 compared to $31 in the first half of last year.
-14-
Non-interest Income. Non-interest income was $459 for the six months ended
June 30, 2001 compared to $352 for the six months ended June 30, 2000, an
increase of $107 (or 30%). During the first six months of 2001, ATM surcharges
increased $43 as a result of the imposition of such ATM fees beginning in July
2000. The increase in non-interest income also reflected the collection of
one-time lot release fees and other loan fees totaling $26, and $8 in late
charges on two loans during the first quarter of 2001.
Non-interest Expense. Total non-interest expense was $2,992 for the six
months ended June 30, 2001 and $2,457 for the six months ended June 30, 2000, an
increase of $535 (or 22%).
The following table summarizes the dollar amounts for each category of
non-interest expense, and the dollar and percent changes:
Six Months Ended Increase (Decrease)
June 30, 2001 vs 2000
------------------- -----------------------
Category 2001 2000 $ Change % Change
---- ---- -------- --------
Salaries and employee benefits $ 1,554 $ 1,245 $ 309 25%
Occupancy 285 287 (2) (1)
Furniture and equipment 195 211 (16) (8)
Data processing 326 163 163 100
Other categories 632 551 81 15
------- ------- -------
Total non-interest expense $ 2,992 $ 2,457 $ 535 22%
======= ======= =======
The increase in salaries and employee benefits was due to the addition of
nine employees and associated benefits. The increase in data processing expense
is primarily related to increased data processing fees and expenses absorbed
during the second half of 2001 due to the conversion of the Bank's core data
processing system in May 2001. The increase in other non-interest expense is
primarily related to travel related expenses associated with the data processing
conversion during the second quarter of 2001, increased donations and legal
fees.
The following table summarizes dollar amounts for each category as a
percentage of total operating income (interest income plus non-interest income),
which increased by $638 (or 11%) in the first six months of 2001 compared to the
same period in 2000:
Six Months Ended
June 30,
----------------
Category 2001 2000
---- ----
Salaries and employee benefits 24.37% 21.69%
Occupancy 4.47 5.00
Furniture and equipment 3.06 3.68
Data processing 5.11 2.84
Other categories 9.91 9.60
----- -----
Total non-interest expense 46.92% 42.81%
===== =====
Income Taxes. The provision for income taxes decreased to $535 for the six
months ended June 30, 2001 from $563 for the six months ended June 30, 2000, a
decrease of $28 (or 5%). The decrease in income taxes was primarily due to the
2% decrease in pre-tax income.
-15-
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 16, 2001.
At the annual meeting, the shareholders elected James P. Jakubek, Joseph A.
Maida, Melvin L. Maisel, Norman H. Reader and Paul H. Reader to the Board of
Directors of the Bancorp. There were 876,880 votes for and 46,762 votes withheld
for Mr. Jakubek, 876,880 votes for and 46,762 votes withheld for Mr. Maida,
876,880 votes for and 46,762 votes withheld for Mr. Maisel, 872,843 votes for
and 50,799 votes withheld for Mr. Norman Reader and 876,880 votes for and 46,762
votes withheld for Mr. Paul Reader. All five were elected for terms which expire
at the 2004 Annual Meeting of Shareholders. In addition, Joseph S. Field,
Merrill J. Forgotson, J. James Gordon, Courtney A. Nelthropp and Donald Sappern
are currently serving terms on the Board of Directors which expire at the 2002
Annual Meeting of Shareholders and Stanley A. Levine, Ronald C. Miller, Martin
Prince, Patrick Tisano and Dr. Joseph D. Waxberg are currently serving terms
which expire at the 2003 Annual Meeting of Shareholders.
The shareholders also ratified the appointment by the Board of Directors of
KPMG LLP as the Bancorp's independent auditors for the fiscal year ending
December 31, 2001. There were 885,500 votes for, 29,985 votes against and 8,156
abstentions with respect to such ratification.
The shareholders also voted for the amendment to the Bancorp's 1996 Stock
Plan (the "Stock Plan") to increase the total number of shares of common stock
authorized for issuance pursuant to the Stock Plan by an additional 37,000
shares. There were 835,490 votes for, 70,577 votes against and 17,567
abstentions with respect to such amendment.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits: None
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
June 30, 2001.
-16-
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 9, 2001 /s/ Merrill J. Forgotson
---------------------------- --------------------------------------
Merrill J. Forgotson
President and Chief Executive Officer
DATE: August 9 , 2001 /s/ Leigh A. Hardisty
--------------------------- --------------------------------------
Leigh A. Hardisty
Vice President and Chief Financial Officer
-17-