SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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(Exact name of small business issuer as specified in its charter)
CONNECTICUT 06-1524044
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(State or other jurisdiction of incorporation or organization) ( I.R.S. Employer Identification No.)
550 Summer St., Stamford, Connecticut 06901
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(Address of principal executive offices)
(203) 356-0111
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(Issuer's telephone number)
Check whether the issuer (1) 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 October 31,
2001 was 1,076,188.
Transitional Small Business Disclosure Format (check one): Yes No X
--- --
TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements (Unaudited)
-----------------------------
PAGE
Consolidated Statements of Condition
September 30, 2001 and December 31, 2000 1
Consolidated Statements of Income
Three Months Ended September 30, 2001 and September 30, 2000 2
Consolidated Statements of Income
Nine Months Ended September 30, 2001 and September 30, 2000 3
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 2001 and September 30, 2000 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2001 and September 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
- --------------------------
Item 2. Changes in Securities and Use of Proceeds None
- -------------------------------------------------
Item 3. Defaults upon Senior Securities None
- ---------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders None
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Item 5. Other Information None
- -------------------------
Item 6. Exhibits and Reports on Form 8-K 16
- ----------------------------------------
Signatures 17
PART I - Financial Information
Item 1. Financial Statements
- ----------------------------
CORNERSTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share and per share data)
(unaudited)
September 30, December 31,
Assets 2001 2000
--------------- ------------------
Cash and due from banks $ 9,451 $ 8,854
Federal funds sold 18,996 2,816
------ -------
Cash and cash equivalents 28,447 11,670
------ -------
Securities, including $9,038 at September 30, 2001
and $6,583 at December 31, 2000 pledged as collateral
for repurchase agreements:
Available for sale, at fair value 6,776 18,482
Held to maturity (fair value of $40,373 at September 30, 2001
and $14,570 at December 31, 2000) 38,892 14,645
------ ------
Total securities 45,668 33,127
------ ------
Loans, net 98,520 99,205
Accrued interest receivable 1,149 1,124
Federal Home Loan Bank stock, at cost 466 419
Bank premises and equipment, net 2,775 2,699
Other assets 2,385 1,879
---------- --------
Total assets $179,410 $150,123
========= ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand (non-interest bearing) $ 32,580 $ 29,919
Money market demand and NOW 33,187 25,894
Regular, club and money market savings 30,063 26,764
Time 55,705 41,375
---------- ----------
Total deposits 151,535 123,952
Federal Home Loan Bank advances and
borrowings under repurchase agreements 9,086 8,562
Accrued interest payable 161 143
Other liabilities 928 882
----------- -----------
Total liabilities 161,710 133,539
----------- -----------
Stockholders' equity:
Common stock, par value $0.01 per share; authorized 5,000,000 shares; issued
1,150,125 shares at September 30, 2001
and 1,142,159 shares at December 31, 2000 12 11
Additional paid-in capital 11,771 11,657
Retained earnings 6,631 5,818
Treasury stock, at cost (76,415 shares at September 30, 2001
and December 31, 2000) (880) (880)
Accumulated other comprehensive income (loss), net of taxes of ($106)
at September 30, 2001 and $15 at December 31, 2000 166 (22)
------- ---------
Total stockholders' equity 17,700 16,584
------- ----------
Total liabilities and stockholders' equity $179,410 $150,123
======== =========
See accompanying notes to consolidated financial statements.
-1-
CORNERSTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands, except share and per share data)
(unaudited)
Three Months Ended
September 30,
--------------------------------------
2001 2000
---- ----
Interest income:
Loans $ 2,222 $ 2,287
Securities 436 584
Federal funds sold 293 95
----------- -----------
Total interest income 2,951 2,966
----------- -----------
Interest expense:
Deposits 983 829
Federal Home Loan Bank advances and
borrowings under repurchase agreements 40 119
----------- -----------
Total interest expense 1,023 948
----------- -----------
Net interest income 1,928 2,018
Provision for loan losses 21 111
----------- -----------
Net interest income after provision for loan losses 1,907 1,907
----------- -----------
Non-interest income:
Deposit service charges 134 107
Loss on sales of securities available for sale - (122)
Other 109 126
----------- -----------
Total non-interest income 243 111
----------- -----------
Non-interest expense:
Salaries and employee benefits 854 670
Occupancy 174 150
Furniture and equipment 105 98
Data processing 141 97
Professional fees 84 58
Other 260 218
----------- -----------
Total non-interest expense 1,618 1,291
----------- -----------
Income before income tax expense 532 727
Income tax expense 208 304
----------- -----------
Net income $ 324 $ 423
=========== ===========
Earnings per common share:
Basic $ 0.30 $ 0.40
Diluted 0.29 0.39
Weighted average common shares:
Basic 1,073,099 1,063,640
Diluted 1,109,213 1,081,653
See accompanying notes to consolidated financial statements.
-2-
CORNERSTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands, except share and per share data)
(unaudited)
Nine Months Ended
September 30,
-------------------------------
2001 2000
---- ----
Interest income:
Loans $ 6,901 $ 6,230
Securities 1,145 1,850
Federal funds sold 823 274
--------- ---------
Total interest income 8,869 8,354
-------- --------
Interest expense:
Deposits 2,814 2,401
Federal Home Loan Bank advances and
borrowings under repurchase agreements 113 290
--------- ---------
Total interest expense 2,927 2,691
-------- --------
Net interest income 5,942 5,663
Provision for loan losses 130 254
--------- ---------
Net interest income after provision for loan losses 5,812 5,409
-------- --------
Non-interest income:
Deposit service charges 383 337
Loss on sales of securities available for sale - (136)
Other 319 262
--------- ---------
Total non-interest income 702 463
--------- ---------
Non-interest expense:
Salaries and employee benefits 2,408 1,916
Occupancy 459 437
Furniture and equipment 300 309
Data processing 467 260
Professional fees 221 174
Other 755 653
-------- --------
Total non-interest expense 4,610 3,749
-------- --------
Income before income tax expense 1,904 2,123
Income tax expense 743 867
------- --------
Net income $ 1,161 $ 1,256
======= =======
Earnings per common share:
Basic $ 1.08 $ 1.16
Diluted 1.05 1.14
Weighted average common shares:
Basic 1,070,525 1,085,754
Diluted 1,100,699 1,100,850
See accompanying notes to consolidated financial statements.
-3-
CORNERSTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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 1,256 1,256
Change in net unrealized gain (loss)
on available for sale securities,
net of taxes 216 216
-----
Total comprehensive income 1,472
Cash dividends ($0.29 per share) (310) (310)
Purchases of treasury stock (74,699 shares) (858) (858)
Shares issued in connection with:
Directors Compensation Plan 11 11
Dividend Reinvestment Plan 96 96
---------- --------- ------- -------- ------------ ---------
BALANCE, SEPTEMBER 30, 2000 $ 11 $11,617 $5,398 $ (858) $ (181) $15,987
======== ======= ======= ======== ============ =========
BALANCE, JANUARY 1, 2001 $ 11 $11,657 $5,818 $ (880) $ (22) $16,584
Net income 1,161 1,161
Change in net unrealized gain (loss)
on available for sale securities,
net of taxes 188 188
--------
Total comprehensive income 1,349
Cash dividends ($0.33 per share) (348) (348)
Shares issued in connection with:
Directors Compensation Plan 13 13
Dividend Reinvestment Plan 1 101 102
-------- -------- ---------- -------- ----------- ----------
BALANCE, SEPTEMBER 30, 2001 $ 12 $11,771 $6,631 $ (880) $ 166 $17,700
======== ======= ======= ======== ========== ==========
See accompanying notes to consolidated financial statements.
-4-
CORNERSTONE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(In thousands)
(unaudited)
Nine Months Ended
September 30,
-----------------------------
2001 2000
---- ----
Operating activities:
Net income $ 1,161 $ 1,256
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 277 291
Provision for loan losses 130 254
Increase in accrued interest receivable (25) (51)
Increase in other assets (628) (121)
Increase in accrued interest payable 18 18
Increase in other liabilities 33 101
Loss on sales of securities available for sale - (136)
Other adjustments, net (9) 11
------------ ------------
Net cash provided by operating activities 957 1,927
------------ ------------
Investing activities:
Purchases of securities held to maturity (30,957) -
Proceeds from maturities and calls of securities held to maturity 6,673 3,112
Proceeds from maturities and calls of securities available for sale 12,030 1,000
Proceeds from sales of securities available for sale - 4,864
Net receipts (disbursements) for loan originations and repayments 577 (19,266)
Purchase of Federal Home Loan Bank stock (47) -
Purchases of bank premises and equipment (331) (62)
---------- ----------
Net cash used in investing activities (12,055) (10,352)
---------- ---------
Financing activities:
Net increase in demand, money market and savings deposits 13,253 5,093
Net increase (decrease) in time deposits 14,330 (1,891)
Net increase in short-term Federal Home Loan Bank advances
and borrowings under repurchase agreements 524 5,291
Net increase in long-term Federal Home Loan Bank advances - 2,500
Purchases of treasury stock - (858)
Dividends paid on common stock (334) (305)
Proceeds from issuance of common stock 102 96
---------- -------
Net cash provided by financing activities 27,875 9,926
---------- -------
Net increase in cash and cash equivalents 16,777 1,501
Cash and cash equivalents at beginning of period 11,670 11,928
--------- ----------
Cash and cash equivalents at end of period $ 28,447 $ 13,429
========= =========
Supplemental information:
Interest payments $ 2,909 $ 2,673
Income tax payments 744 1,014
========== =========
See accompanying notes to consolidated financial statements.
-5-
CORNERSTONE BANCORP, INC. AND SUBSIDIARIES
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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., Cornerstone Bank (the "Bank")
and Cornerstone Business Credit, Inc. ("CBC"), collectively the "Company." CBC
began operations in the third quarter of 2001 and is engaged in small business
lending. 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 nine months ended
September 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 nine month periods ended September 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
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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 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 nine
months ended September 30, 2001, SFAS No. 133 had no impact on the consolidated
financial statements.
In July 2001, the Financial Accounting Standards Board (the "FASB") 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 to continue
to be amortized to expense over their estimated useful lives. The Company has no
goodwill or other acquisition-related intangible assets at September 30, 2001
and, accordingly, the adoption of SFAS No. 142 is not expected to affect the
Company's consolidated financial statements.
The FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, in
August 2001 and SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, in October 2001. Adoption of these standards is not expected
to have a significant impact on 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
-7-
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.
FINANCIAL CONDITION
General
Total assets increased to $179,410 at September 30, 2001 from $150,123 at
December 31, 2000, an increase of $29,287 (or 20%). The increase principally
reflects increases of $16,777 in cash and cash equivalents (primarily federal
funds sold) and $24,247 in securities held to maturity, partially offset by
decreases of $11,706 in securities available for sale and $685 in net loans. The
asset growth was funded principally from a net increase of $27,583 in deposits.
Loans
The net loan portfolio decreased to $98,520 at September 30, 2001 from
$99,205 at December 31, 2000, a decrease of $685. The 1% decrease in the loan
portfolio in the first nine months of 2001 primarily reflected a decrease in
residential loans, substantially offset by increases in construction, commercial
and Small Business Administration ("SBA") loans. Increases in construction and
commercial loans were primarily due to the origination of one loan for $1,000 in
each category. The increase in SBA loans was due to the addition of three new
loans, as SBA lending commenced during the third quarter through CBC. The
decrease in residential loans was primarily due to loan refinancings which
resulted in net payoff activity of $1.5 million in loans with principal balances
greater than $500 thousand and the balance of net payoffs in smaller balance
loans.
Major classifications of loans at September 30, 2001 and December 31, 2000
were as follows:
Dollar Percent
September 30, 2001 December 31, 2000 Change Change
------------------ ----------------- ------ ------
Loans secured by real estate:
Residential $ 41,473 $45,630 $(4,157) (9%)
Non-residential 39,521 39,754 (233) 1
Construction 4,086 2,375 1,711 13
Commercial loans 12,112 10,711 1,401 13
SBA loans 710 - 710 --
Consumer and other loans 2,476 2,316 160 7
---------- ---------- ---------
Total loans 100,378 100,786 (408) --
Allowance for loan losses (1,888) (1,589) (299) 19
Deferred loan costs, net 30 8 22 275
------------- -------- ----------
Total loans, net $ 98,520 $99,205 $ (685) (1%)
========= ======= ========
-8-
Non-performing Loans and the Allowance for Loan Losses
It is the Bank's policy to manage its loan portfolio to facilitate early
recognition of problem loans. The Bank commences internal collection efforts
once a loan payment is more than 15 days past due. The Bank's data processing
system generates delinquency reports on all of the Bank's loans weekly, and
management reviews the loan portfolio to determine if past due loans should be
placed on non-accrual status. Unless the customer is working with the Bank
toward repayment, once a loan payment is 90 days past due, the Bank generally
initiates appropriate collection or legal action.
The following table sets forth information with respect to non-performing
loans at the dates indicated.
September 30, 2001 December 31, 2000
---------------------- -----------------
Loans on non-accrual status:
Loans secured by real estate $ 297 $ 455
Loans on accrual status:
Loans secured by real estate 954 --
Commercial loans 8 --
Consumer and other loans 10 1
--------- ----------
Total loans past due 90 days or more 1,269 456
--------- ----------
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 16 198
Commercial loans - 9
---------- ----------
16 207
--------- ----------
Total non-performing loans $ 1,285 $ 663
======== =======
Ratio of total non-performing loans to
total loans outstanding 1.28% 0.66%
===== =====
At September 30, 2001, two loans totaling $954 were greater than 90 days past
due but remained on accrual status based on management judgment, at that time,
concerning the probability of collection. One loan for $330 was subsequently
placed on non-accrual status in October 2001 due to unanticipated delays in
bringing the loan current, and the second loan for $624 is expected to be paid
in full in November 2001.
As of September 30, 2001, the allowance for loan losses was $1,888 or 1.88%
of total loans and 147% of non-performing loans compared to $1,589 or 1.58% of
total loans and 240% of non-performing loans at December 31, 2000.
-9-
The following table sets forth changes in the allowance for loan losses for
the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
Balance at beginning of period $ 1,886 $ 1,800 $ 1,589 $ 1,626
Provision for loan losses 21 111 130 254
Charge-offs (20) (9) (20) (19)
Recoveries 1 3 189 44
------- ------- -------- -------
Balance at end of period $ 1,888 $ 1,905 $ 1,888 $ 1,905
======= ======= ======== =======
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.
Securities
Total securities increased to $45,668 at September 30, 2001 from $33,127 at
December 31, 2000, an increase of $12,541 (or 38%). The increase in the
securities portfolio was primarily funded using a portion of the growth in
deposits to purchase U.S. agency and mortgage-backed securities.
The following table sets forth the amortized cost and estimated fair value of
the securities portfolio at the dates indicated.
September 30, 2001 December 31, 2000
---------------------------------- -------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------- -------- ------------ --------------
Available for sale
- ------------------
U.S. Agency securities $ 6,504 $ 6,776 $ 18,519 $ 18,482
========= ========= ======== ========
Held to maturity
- ----------------
U.S. Agency securities $ 28,961 $ 29,639 $ 13,647 $ 13,576
Mortgage-backed securities 9,856 10,659 923 919
Other 75 75 75 75
-------- --------- -------- --------
Total $ 38,892 $ 40,373 $ 14,645 $ 14,570
======== ======== ======== ========
Approximately $11,530 in U.S. Agency securities available for sale were
called prior to maturity during the first nine months of 2001. Due to the
limited amount of past sales of available-for-sale securities prior to maturity,
the current balance of U.S. Agency securities available for sale is viewed to be
sufficient to meet possible liquidity needs. In an effort to diversify the
securities portfolio and manage principal repayments, $8,111 in fixed and
variable mortgage-backed securities were added to the held-to-maturity portfolio
in the third quarter of 2001.
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
-10-
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.
Dollar Percent
September 30, 2001 December 31, 2000 Change Change
------------------ ----------------- ------ ------
Demand deposits (non-interest bearing) $ 32,580 $29,919 $ 2,661 9%
Money market demand and NOW accounts 33,187 25,894 7,293 28
Regular, club and money market savings 30,063 26,764 3,299 12
Time deposits 55,705 41,375 14,330 35
--------- ------- ------
Total $151,535 $123,952 $27,583 22%
======== ======== =======
The increase in demand deposits was due to deposit activity in business
demand deposit accounts. The increase in money market demand and NOW accounts
was primarily related to activity associated with one money market demand
account. The Bank expects the deposit balance maintained in this account to be
temporary in nature. Increases in regular, club and money market savings were
due to general deposit activity. During the first nine months of the year,
competitive rates offered by the Bank resulted in an increase in one year as
well as two, three, four and five year time deposits, totaling $14,590.
Certificates of deposit in denominations of $100 or more were $12,326 at
September 30, 2001 compared to $9,773 at December 31, 2000, an increase of
$2,553 (or 26%).
Liquidity and Capital Resources
At September 30, 2001, total short-term investments, which are made up of
federal funds sold, securities available for sale and securities held to
maturity maturing in three months or less, totaled $26,776. 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 September 30, 2001 was 42%, primarily due to the large federal funds
portfolio. The Company's guideline is to maintain a liquidity ratio of 20% or
more.
Net cash provided by operating activities was $957 for the nine months
ended September 30, 2001 as compared to $1,927 for the nine months ended
September 30, 2000. For the first nine months of 2001, cash used in investing
activities was $12,055, compared to cash used in investing activities of $10,352
in the first nine months of 2000, primarily due to increased proceeds from calls
of securities and security maturities, and reduced volume of loan originations,
partially offset by purchases of securities held to maturity in the second and
third quarters of 2001. Net cash provided by financing activities was $27,875
for the nine months ended September 30, 2001 compared to $9,926 for the nine
months ended September 30, 2000, primarily reflecting a larger net increase in
deposits, partially offset by decreased borrowings from the Federal Home Loan
Bank of Boston. Cash and cash equivalents increased to $28,447 at September 30,
2001.
At September 30, 2001, the Company had outstanding loan commitments under
unused lines of credit approximating $14,937 and outstanding letters of credit
approximating $1,590.
At September 30, 2001 and December 31, 2000, the Company's consolidated
leverage capital ratio was 10.0% and 11.1%, respectively. At September 30, 2001
and December 31, 2000, the Company's consolidated Tier 1 risk-based capital
ratio was 15.2% and 15.4%, respectively. The Company's
-11-
consolidated total risk-based capital ratio at September 30, 2001 and December
31, 2000 was 16.5% 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 September
30, 2001 and September 30, 2000.
Net Income. Net income was $324 for the three months ended September 30,
2001 compared to $423 for the three months ended September 30, 2000, a decrease
of $99 (or 23%). Diluted earnings per common share were $0.29 for the three
months ended September 30, 2001 and $0.39 for the three months ended September
30, 2000 based on weighted average shares of 1,109,213 and 1,081,653,
respectively. The annualized return on average common stockholders' equity
(R.O.E.) was 9.18% and 11.30% for the three months ended September 30, 2001 and
September 30, 2000, respectively. The annualized return on average assets was
0.70% for the three months ended September 30, 2001 and 1.13% for the three
months ended September 30, 2000.
Lower net income for the three months ended September 30, 2001 was
principally due to a decrease in net interest income and an increase in
non-interest expense, partially offset by increased 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 $1,928 for the three months ended September 30, 2001
compared to $2,018 for the three months ended September 30, 2000, a decrease of
$90 (or 4%). The decrease in net interest income resulted from lower yields on
loans and securities. The effect of this decrease was partially offset by lower
cost rates on a higher volume of deposits. The average yield on interest-earning
assets decreased 160 basis points to 6.84% for the three months ended September
30, 2001 compared to 8.44% for the three months ended September 30, 2000, while
the average rate paid on interest-bearing liabilities decreased 44 basis points
to 3.22% from 3.66%. These changes resulted in a 125 basis point decrease in the
net interest margin to 4.47% for the three months ended September 30, 2001 from
5.72% for the three months ended September 30, 2000. The lower asset yields
primarily reflect decreasing interest rates and the increased volume of lower
yield federal funds held during the quarter ended September 30, 2001 compared to
September 30, 2000.
Interest Income. Average earning assets for the three months ended
September 30, 2001 were $171,213 compared to $139,886 for the three months ended
September 30, 2000, an increase of $31,327 (or 22%). Total interest income,
which is a function of the volume of interest-earning assets and their related
rates, was $2,951 for the three months ended September 30, 2001 compared to
$2,966 for the three months ended September 30, 2000, representing a decrease of
$15 (or 1%). The Company's interest income has been impacted by nine decreases
in the Federal Funds rate during the first three quarters of 2001. The Wall
Street Journal Prime Rate has fallen three and one-half percent (3 1/2%) and
other indexes used for variable rate loans have decreased by similar amounts
during the same period. Approximately 40% of the Bank's portfolio is on a
variable rate basis. The Company does expect further downward
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pressure on interest rates during the balance of 2001 as the Federal Reserve
continues to reduce interest rates and the Federal Government seeks other ways
to stimulate the economy.
Loans represent the largest component of interest-earning assets. Average
loans outstanding in the three months ended September 30, 2001 were $102,982
compared to $95,390 during the three months ended September 30, 2000, an
increase of $7,592 (or 8%). Interest on loans was $2,222 for the three months
ended September 30, 2001 compared to $2,287 for the three months ended September
30, 2000, a decrease of $65 (or 3%). The decrease in loan income reflects the
decrease in loan yields which averaged 8.56% for the three months ended
September 30, 2001 compared to 9.54% for the three months ended September 30,
2000.
Average investments in securities and federal funds sold were $68,232 for
the three months ended September 30, 2001 compared to $44,497 for the three
months ended September 30, 2000, an increase of $23,735 (or 53%). Related income
increased to $729 for the three months ended September 30, 2001 from $679 for
the three months ended September 30, 2000, an increase of $50 (or 7%). Average
investments in securities, not including federal funds sold, decreased by $4,786
(or 12%) during the three months ended September 30, 2001, while average federal
funds sold increased by $28,521 (or 493%). The decrease in income from
securities was primarily due to the reduced volume of securities due to calls
prior to maturity, as well as lower yields on securities. 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 deposits, which were reinvested in
overnight federal funds. The average yield on federal funds is lower than the
average yield on securities. The average yield on investment securities (not
including federal funds sold) was 5.10% for the three months ended September 30,
2001 compared to 5.98% for the three months ended September 30, 2000. The
average yield on federal funds sold was 3.40% for the three months ended
September 30, 2001 compared to 6.51% for the three months ended September 30,
2000.
Interest Expense. Interest expense was $1,023 for the three months ended
September 30, 2001 compared to $948 for the three months ended September 30,
2000, an 8% increase. Interest expense is a function of the volume of
interest-bearing liabilities and their related rates. Average interest-bearing
liabilities during the three months ended September 30, 2001 were $126,241
compared to $103,134 during the three months ended September 30, 2000, an
increase of $23,107 (or 22%). Increased interest expense was primarily due to
the higher volume of time and money market deposits. The average cost of time
deposits was 5.31% and 5.29% for the three months ended September 30, 2001 and
2000, respectively. The average rate on all other non-interest bearing
liabilities was 1.64% for the three months ended September 30, 2001 compared to
2.47% for the three months ended September 30, 2000.
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.
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The provision for loan losses was $21 for the three months ended September 30,
2001 and $111 for the three months ended September 30, 2000, primarily
reflecting the slight contraction in the portfolio during the current year
compared to the significant growth in 2000.
At September 30, 2001, the Company had $1,285 of non-performing loans,
including $297 of non-accrual loans and $972 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 $16 at September 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 $243 for the three months
ended September 30, 2001 compared to $111 for the three months ended September
30, 2000, an increase of $132 (or 119%). During the three months ended September
30, 2000, the Bank sold $4,000 in securities available for sale at a loss of
$122 (there were no such sales in the 2001 period). The sale proceeds were used
to fund loan demand, increase excess funds to meet daily withdrawal activity,
and reduce FHLB borrowings. Deposit service charges were $134 for the three
months ended September 30, 2001 compared to $107 for the three months ended
September 30, 2000, an increase of $27 (or 25%). The increase resulted from the
higher volume of overdraft charges. Other non-interest income decreased to $109
for the three months ended September 30, 2001 compared to $126 for the three
months ended September 30, 2000, a decrease of $17 (or 13%). The decrease
primarily resulted from the discontinuation of rental expense and income on
subleased property subsequent to December 2000.
Non-interest Expense. Total non-interest expense was $1,618 for the three
months ended September 30, 2001 and $1,291 for the three months ended September
30, 2000, an increase of $327 (or 25%).
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)
September 30, 2001 vs 2000
------------------------ -----------------------------
Category 2001 2000 $ Change % Change
---- ----- ---------- --------
Salaries and employee benefits $ 854 $ 670 $184 27%
Occupancy 174 150 24 16
Furniture and equipment 105 98 7 7
Data processing 141 97 44 45
Other categories 344 276 68 25
------ -------- -------
Total non-interest expense $ 1,618 $1,291 $ 327 25%
======= ===== ======
The increase in salaries and employee benefits was due to the addition of
nine employees since September 30, 2000 and associated benefits. The increase in
data processing expense is primarily related to the outsourcing of items
processing which began in April 2001 and increased check imaging costs. 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.
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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 $117 (or 4%) in the third quarter of 2001 compared to the
same period in 2000:
Three Months Ended
September 30,
-------------------------
Category 2001 2000
---- ----
Salaries and employee benefits 26.74% 21.77%
Occupancy 5.45 4.87
Furniture and equipment 3.29 3.18
Data processing 4.41 3.15
Other categories 10.77 8.97
----- ------
Total non-interest expense 50.66% 41.96%
===== =====
Income Taxes. The provision for income taxes decreased to $208 for the
three months ended September 30, 2001 from $304 for the three months ended
September 30, 2000, a decrease of $96 (or 32%). The decrease in income taxes was
primarily due to the 27% decrease in pre-tax income.
Comparative Analysis of Operating Results for the Nine Months Ended September
30, 2001 and September 30, 2000.
Net Income. Net income was $1,161 for the nine months ended September 30,
2001 compared to $1,256 for the nine months ended September 30, 2000, a decrease
of $96 (or 8%). Diluted earnings per common share were $1.05 for the nine months
ended September 30, 2001 and $1.14 for the nine months ended September 30, 2000
based on weighted average shares of 1,100,699 and 1,100,850, respectively. The
annualized return on average common stockholders' equity (R.O.E.) was 8.98% and
10.72% for the nine months ended September 30, 2001 and September 30, 2000,
respectively. The annualized return on average assets was 0.92% for the nine
months ended September 30, 2001 and 1.14% for the nine months ended September
30, 2000.
Lower net income for the nine months ended September 30, 2001 was
principally due to increased non-interest expense, offset in part by increases
in net interest income and non-interest income, and reductions in the provision
for loan losses and income tax expense.
Net Interest Income. Net interest income was $5,942 for the nine months
ended September 30, 2001 compared to $5,663 for the nine months ended September
30, 2000, an increase of $279 (or 5%). Higher loan volume was the primary
contributor to increased interest income. This increase was partially offset by
decreased investment income on securities and by higher interest expense on
increased time, NOW and money market deposits. The average yield on
interest-earning assets decreased 65 basis points to 7.56% for the nine months
ended September 30, 2001 compared to 8.21% for the nine months ended September
30, 2000, while the average rate paid on interest-bearing liabilities decreased
14 basis points from 3.54% to 3.40%. These changes resulted in a 50 basis point
decrease in the net interest margin to 5.07% for the nine months ended September
30, 2001 compared to 5.57% for the nine months ended September 30, 2000.
Interest Income. Average earning assets for the nine months ended September
30, 2001 were $156,809 compared to $135,996 for the nine months ended September
30, 2000, an increase of $20,813 (or 15%). Total interest income, which is a
function of the volume of interest-earning assets and their related rates, was
$8,869 for the nine months ended September 30, 2001 compared to $8,354 for the
nine months ended September 30, 2000, representing an increase of $515 (or 6%).
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Loans represent the largest component of interest-earning assets. Average
loans outstanding in the nine months ended September 30, 2001 were $102,574
compared to $89,328 during the nine months ended September 30, 2000, an increase
of $13,246 (or 15%). Interest on loans was $6,901 for the nine months ended
September 30, 2001 compared to $6,230 for the nine months ended September 30,
2000, an increase of $671 (or 11%). The increase in loan income reflected the
increase in loan volume for the nine months ended September 30, 2001 compared to
September 30, 2000, partially offset by lower interest rates.
Average investments in securities and federal funds sold were $54,236 for
the nine months ended September 30, 2001 compared to $46,668 for the nine months
ended September 30, 2000, an increase of $7,568 (or 16%). Related income
decreased to $1,968 for the nine months ended September 30, 2001 from $2,124 for
the nine months ended September 30, 2000, a decrease of $156 (or 7%). Average
investments in securities, not including federal funds sold, decreased by
$13,121 (or 32%) during the nine months ended September 30, 2001, while average
federal funds sold increased by $20,689 (or 348%). 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 to 4.13% for the nine
months ended September 30, 2001 from 6.15% for the nine months ended September
30, 2000 resulted in a decline in combined interest income for these asset
categories.
Interest Expense. Interest expense was $2,927 for the nine months ended
September 30, 2001 compared to $2,691 for the nine months ended September 30,
2000, an increase of $236 (or 9%). Interest expense is a function of the volume
of interest-bearing liabilities and their related rates. Average
interest-bearing liabilities during the nine months ended September 30, 2001
were $114,710 compared to $101,363 during the nine months ended September 30,
2000, an increase of $13,347 (or 13%). Increased interest expense was primarily
due to increased time, NOW and money market deposits, partially offset by lower
interest rates. The average cost of time deposits increased to 5.41% for the
nine months ended September 30, 2001 from 5.12% for the nine months ended
September 30, 2000 due to competitive rates offered by the Bank for time
deposits during the first six months of 2001. The average rate on all other
non-interest bearing liabilities was 1.83% for the nine months ended September
30, 2001 compared to 2.39% for the nine months ended September 30, 2000.
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
$130 for the nine months ended September 30, 2001 and $254 for the nine months
ended September 30, 2000, primarily reflecting the slight contraction in the
portfolio during the current year compared to the significant growth in 2000.
Net loan recoveries after charge-offs were $169 in the nine months ended
September 30, 2001 compared to $25 in the first nine months of last year.
Non-interest Income. Non-interest income was $702 for the nine months ended
September 30, 2001 compared to $463 for the nine months ended September 30,
2000, an increase of $239 (or 52%). Deposit service charges were $383 for the
nine months ended September 30, 2001 and $337 for the nine months
ended September 30, 2000, an increase of $46 (or 14%). The increase in deposit
service charges was due to the increased volume of demand deposit charges. Other
non-interest income was $319 for the nine months ended September 30, 2001
compared to $262 for the nine months ended September 30, 2000, an increase of
$57 (or 22%). The Bank began collecting ATM surcharges in July 2000. This
resulted in a
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year-to-year increase in these charges of $40. Prepayment, lot release and other
loan fees totaling $43 were partially offset by the loss of rental income of $40
in 2001.
Non-interest Expense. Total non-interest expense was $4,610 for the nine
months ended September 30, 2001 and $3,749 for the nine months ended September
30, 2000, an increase of $861 (or 23%).
The following table summarizes the dollar amounts for each category of
non-interest expense, and the dollar and percent changes:
Nine Months Ended Increase (Decrease)
September 30, 2001 vs 2000
------------------------------------ --------------------------------------
Category 2001 2000 $ Change % Change
---- ----- -------- --------
Salaries and employee benefits $ 2,408 $ 1,916 $492 26%
Occupancy 459 437 22 5
Furniture and equipment 300 309 (9) (3)
Data processing 467 260 207 80
Other categories 976 827 149 18
------ ------- ------
Total non-interest expense $ 4,610 $ 3,749 $ 861 23%
======= ======= ======
The increase in salaries and employee benefits was due to the addition of
nine employees since September 30, 2000 and associated benefits. The increase in
data processing expense is primarily related to increased data processing fees
and expenses due to the conversion of the Bank's core data processing system in
May 2001 as well as increased fees associated with the outsourcing of items
processing in April 2001. The increase in other non-interest expense is
primarily related to travel-related expenses associated with the data processing
conversion, 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 $754 (or 9%) in the first nine months of 2001 compared to the
same period in 2000:
Nine Months Ended
September 30,
---------------------------
Category 2001 2000
---- ----
Salaries and employee benefits 25.16% 21.73%
Occupancy 4.80 4.96
Furniture and equipment 3.13 3.50
Data processing 4.88 2.95
Other categories 10.20 9.38
----- ------
Total non-interest expense 48.17% 42.52%
===== =====
Income Taxes. The provision for income taxes decreased to $743 for the nine
months ended September 30, 2001 from $867 for the nine months ended September
30, 2000, a decrease of $124 (or 14%). The decrease in income taxes was
primarily due to the 10% decrease in pre-tax income.
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PART II - Other Information
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
September 30, 2001.
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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: November 13, 2001 /s/ Merrill J. Forgotson
----------------------- -------------------------------------------
Merrill J. Forgotson
President and Chief Executive Officer
DATE: November 13, 2001 /s/ Leigh A. Hardisty
---------------------- -------------------------------------------
Leigh A. Hardisty
Vice President and Chief Financial Officer
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