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 March 31, 2002
--------------
[_] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
550 Summer St. , Stamford, Connecticut 06901
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(Address of principal executive offices)
(203) 356-0111
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(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No______
----
The number of shares outstanding of the issuer's common stock as of April 30,
2002 was 1,091,970.
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
March 31, 2002 and December 31, 2001 ......................... 1
Consolidated Statements of Income
Three Months Ended March 31, 2002 and March 31, 2001 ......... 2
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended March 31, 2002 and March 31, 2001 ......... 3
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 and March 31, 2001 ......... 4
Notes to Consolidated Financial Statements ................... 5-6
Item 2. Management's Discussion and Analysis
- ---------------------------------------------
of Financial Condition and Results of Operations ............... 6-14
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PART II - Other Information
Item 1. Legal Proceedings ............................................... None
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Item 2. Changes in Securities and Use of Proceeds ....................... None
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Item 3. Defaults upon Senior Securities ................................. None
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Item 4. Submission of Matters to a Vote of Security Holders ............. None
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Item 5. Other Information ............................................... None
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Item 6. Exhibits and Reports on Form 8-K ................................ 14
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Signatures .............................................................. 15
PART I - Financial Information
Item 1. Financial Statements
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CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands, except per share data)
(unaudited)
March 31, December 31,
Assets 2002 2001
--------- ------------
Cash and cash equivalents:
Cash and due from banks $ 6,342 $ 8,700
Federal funds sold 12,307 15,599
-------- ---------
Total cash and cash equivalents 18,649 24,299
-------- ---------
Securities, including collateral of $6,040 at March 31, 2002
and $8,101 at December 31, 2001 for borrowings under
securities repurchase agreements:
Available for sale, at fair value 8,685 9,779
Held to maturity, at amortized cost (fair value of $31,943
at March 31, 2002 and $35,957 at December 31, 2001) 31,696 35,349
-------- ---------
Total securities 40,381 45,128
-------- ---------
Loans, net of allowance for loan losses of $1,883
at March 31, 2002 and $1,848 at December 31, 2001 111,522 105,539
Accrued interest receivable 1,071 1,075
Federal Home Loan Bank stock, at cost 521 466
Premises and equipment, net 2,913 2,915
Bank-owned life insurance 3,521 979
Other assets 1,283 1,116
-------- ---------
Total assets $179,861 $ 181,517
======== =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand (non-interest bearing) $ 38,571 $ 33,673
Money market demand and NOW 24,562 35,493
Regular, club and money market savings 32,885 29,824
Time 58,213 55,483
-------- ---------
Total deposits 154,231 154,473
Borrowings under securities repurchase
agreements and Federal Home Loan Bank advances 6,024 8,041
Accrued interest payable 136 164
Other liabilities 1,205 898
-------- ---------
Total liabilities 161,596 163,576
-------- ---------
Stockholders' equity:
Common stock, par value $0.01 per share; authorized
5,000,000 shares; issued 1,155,595 shares at March 31, 2002
and 1,153,135 shares at December 31, 2001 12 12
Additional paid-in capital 11,906 11,816
Retained earnings 7,189 6,848
Treasury stock, at cost (64,965 shares at March 31, 2002 and
76,415 shares at December 31, 2001) (748) (880)
Restricted stock (183) --
Accumulated other comprehensive income, net of taxes 89 145
-------- ---------
Total stockholders' equity 18,265 17,941
-------- ---------
Total liabilities and stockholders' equity $179,861 $ 181,517
======== =========
See accompanying notes to unaudited consolidated financial statements.
-1-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Dollars in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
----------------------------
2002 2001
---- ----
Interest income:
Loans $ 2,317 $ 2,300
Securities 554 412
Federal funds sold 50 155
---------- ----------
Total interest income 2,921 2,867
---------- ----------
Interest expense:
Deposits 805 857
Borrowings under securities repurchase agreements and
Federal Home Loan Bank advances 17 42
---------- ----------
Total interest expense 822 899
---------- ----------
Net interest income 2,099 1,968
Provision for loan losses 48 70
---------- ----------
Net interest income after provision for loan losses 2,051 1,898
---------- ----------
Non-interest income:
Deposit service charges 122 126
Other 216 102
---------- ----------
Total non-interest income 338 228
---------- ----------
Non-interest expense:
Salaries and employee benefits 899 742
Occupancy 183 153
Furniture and equipment 90 99
Data processing 138 135
Professional fees 72 69
Advertising and promotion 42 31
Other 194 163
---------- ----------
Total non-interest expense 1,618 1,392
---------- ----------
Income before income tax expense 771 734
Income tax expense 308 290
---------- ----------
Net income $ 463 $ 444
========== ==========
Earnings per common share (Note B):
Basic $ 0.39 $ 0.38
Diluted 0.37 0.37
Weighted average common shares (Note B):
Basic 1,186,323 1,174,333
Diluted 1,239,291 1,202,323
See accompanying notes to unaudited consolidated financial statements.
-2-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Dollars in thousands, except per share data)
(unaudited)
Accumulated
Additional Other Total
Common Paid-in Retained Treasury Restricted Comprehensive Stockholders'
Stock Capital Earnings Stock Stock Income(Loss) Equity
----- ------ -------- ----- ----- ------------ ------------
Balances at January 1, 2001 $ 11 $ 11,657 $ 5,818 $ (880) $ -- $ (22) $ 16,584
Net income 444 444
Change in net unrealized gain (loss)
on securities available for sale,
net of taxes 118 118
--------
Total comprehensive income 562
Cash dividends ($0.10 per share) (107) (107)
Shares issued under:
Dividend Reinvestment Plan 31 31
Directors Compensation Plan 5 5
-------- -------- -------- -------- -------- -------- --------
Balances at March 31, 2001 $ 11 $ 11,693 $ 6,155 $ (880) $ -- $ 96 $ 17,075
======== ======== ======== ======== ======== ======== ========
Balances at January 1, 2002 $ 12 $ 11,816 $ 6,848 $ (880) $ -- $ 145 $ 17,941
Net income 463 463
Change in net unrealized gain (loss)
on securities available for sale,
net of taxes (56) (56)
--------
Total comprehensive income 407
Issuance of restricted stock (11,450 shares) 51 132 (183) --
Cash dividends ($0.1125 per share) (122) (122)
Shares issued under:
Dividend Reinvestment Plan 33 33
Directors Compensation Plan 6 6
-------- -------- -------- -------- -------- -------- --------
Balance at March 31, 2002 $ 12 $ 11,906 $ 7,189 $ (748) $ (183) $ 89 $ 18,265
======== ======== ======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
-3-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 and 2001
(In thousands)
(unaudited)
Three Months Ended
March 31,
------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 463 $ 444
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 131 88
Provision for loan losses 48 70
Decrease in accrued interest receivable 4 137
(Increase) decrease in other assets (167) 99
Increase (decrease) in accrued interest payable (28) 2
Increase in other liabilities 307 185
Other adjustments, net 40 (7)
--------- --------
Net cash provided by operating activities 798 1,018
--------- --------
Cash flows from investing activities:
Proceeds from maturities and calls of securities available for sale 909 9,010
Proceeds from maturities and calls of securities held to maturity 3,709 2,524
Purchases of bank-owned life insurance (2,542) (353)
Disbursements for loan originations less principal repayments (6,030) (540)
Purchases of Federal Home Loan Bank Stock (55) (47)
Purchases of premises and equipment (91) (69)
--------- --------
Net cash provided by (used in) investing activities (4,100) 10,525
--------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits (242) 11,951
Net decrease in borrowings under securities repurchase
agreements and Federal Home Loan Bank advances (2,017) (2,509)
Dividends paid on common stock (122) (107)
Proceeds from issuance of common stock under the Dividend Reinvestment Plan 33 31
--------- --------
Net cash provided by (used in) financing activities (2,348) 9,366
--------- --------
Net increase (decrease) in cash and cash equivalents (5,650) 20,909
Cash and cash equivalents at beginning of period 24,299 11,670
--------- --------
Cash and cash equivalents at end of period $ 18,649 $ 32,579
========= ========
Supplemental information:
Interest payments $ 850 $ 897
Income tax payments 319 313
========= ========
-4-
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., its subsidiary Cornerstone
Bank (the "Bank") and the Bank's subsidiary Cornerstone Business Credit, Inc.
("CBC"), 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, as a result of
changing conditions and future events. An estimate that is particularly critical
and susceptible to significant near-term change is the allowance for loan
losses. The interim results of operations for the period ended March 31, 2002
are not necessarily indicative of the results to be expected for the year ending
December 31, 2002 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, 2001.
Prior period amounts are reclassified, whenever necessary, to conform to the
current period presentation.
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. Shares of restricted stock are considered
outstanding common shares and included in the computation of basic EPS when they
become vested. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock (such as stock options or
unvested restricted stock) were exercised or otherwise resulted in the issuance
of common stock. 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
month periods ended March 31, 2002 and 2001, the number of shares for diluted
EPS exceeded the number of shares for basic EPS due to the dilutive effect of
outstanding stock options and unvested restricted stock. For purposes of
computing basic EPS, net income applicable to common stock equaled net income
for these periods.
-5-
On March 20, 2002, the Board of Directors declared, at its regularly
scheduled meeting, a 10% common stock dividend. The stock dividend will be
distributed on June 14, 2002 to stockholders of record as of the close of
business on May 31, 2002. As a result of the stock dividend, earnings per share
data presented herein for the quarters ended March 31, 2002 and 2001 has been
adjusted to reflect the increase in average shares outstanding.
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
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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, was 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 had no goodwill or other acquisition-related
intangible assets at January 1, 2002 and March 31, 2002 and, accordingly, the
adoption of SFAS No. 142 did not 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'
-6-
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 decreased to $179,861 at March 31, 2002 from $181,517 at
December 31, 2001, a decrease of $1,656 (or 1%). Decreases in cash and cash
equivalents of $5,650 and total securities of $4,747 were partially offset by
increases in net loans of $5,983 and bank-owned life insurance of $2,542. While
deposits remained virtually unchanged during the first quarter of 2002, the
reduction of borrowings under repurchase agreements of $2,017 was funded
principally from the reduction in cash and cash equivalents.
Loans
The net loan portfolio increased to $111,522 at March 31, 2002 from
$105,539 at December 31, 2001, an increase of $5,983 (or 6%). The increase in
the loan portfolio in the first three months of 2002 reflected increases in all
loan types. The increase in construction loans is attributable to a combination
of new loan growth and advances funded on the existing portfolio. Increased
residential loans is primarily attributable to the origination of three loans
for more than $500 each.
Major classifications of loans at March 31, 2002 and December 31, 2001 were
as follows:
Dollar Percent
March 31, 2002 December 31, 2001 Change Change
-------------- ----------------- ------ ------
Loans secured by real estate:
Residential $ 44,164 $ 42,740 $ 1,424 3%
Non-residential 45,224 44,593 631 1
Construction 8,429 5,479 2,950 54
Commercial loans 13,059 12,157 902 7
Consumer and other loans 2,491 2,368 123 5
--------- --------- ----------
Total principal balances 113,367 107,337 6,030 6
Allowance for loan losses (1,883) (1,848) 35 2
Deferred loan costs, net 38 50 (12) (24)
--------- --------- ----------
Total loans, net $ 111,522 $ 105,539 $ 5,983 6%
========= ========= ==========
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.
-7-
The following table sets forth information with respect to non-performing
loans at the dates indicated.
March 31, 2002 December 31, 2001
---------------- -------------------
Loans on nonaccrual status:
Loans secured by real estate $ 149 $ 202
-------- -------
Loans on accrual status:
Loans secured by real estate 435 737
Commercial loans 193 133
Consumer and other loans 30 34
-------- -------
658 904
-------- -------
Total loans past due 90 days or more 807 1,106
Loans current or past due less than 90 days
for which interest payments are being applied
to reduce principal balances:
Loans secured by real estate 300 308
-------- -------
Total non-performing loans $ 1,107 $ 1,414
======== =======
Ratio of total non-performing loans to
total loans outstanding 0.98% 1.32%
During the first quarter of 2002, $308 of the $737 accruing loans secured
by real estate past due greater than 90 days at December 31, 2001 were paid-off.
In April 2002, $423 of the $435 accruing loans secured by real estate past due
greater than 90 days at March 31, 2002 were paid-off.
During the quarter ended March 31, 2002, the Bank recovered all principal
and other amounts due on four non-accrual loans to one borrower. This recovery
resulted in additional loan interest income of $175 (a recovery of interest
previously applied to reduce principal on the aforementioned loans) and an
additional $8 in late charge income.
The following table sets forth changes in the allowance for loan losses for
the periods indicated.
Three Months Ended
March 31,
------------------------------
2002 2001
---- ----
Balance at beginning of period $ 1,848 $ 1,589
Provision for loan losses 48 70
Charge-offs (14) --
Recoveries 1 93
-------- --------
Balance at end of period $ 1,883 $ 1,752
======== ========
Ratio of allowance for loan losses
to total loans at end of period 1.66% 1.72%
======== ========
During the quarter ended March 31, 2001, the Bank recovered $90 with
respect to a consumer loan that had been charged off in November 1990.
-8-
Securities
Total securities decreased to $40,381 at March 31, 2002 from $45,128 at
December 31, 2001, a decrease of $4,747 (or 11%). The decrease in the securities
portfolio was primarily due to cash flows from security maturities, securities
called prior to maturity in the available for sale and the held to maturity
portfolios, and mortgage-backed security principal payments. The proceeds from
the associated cash flows were used to fund loan portfolio growth.
The following table sets forth the amortized cost and fair value of the
securities portfolio at the dates indicated.
March 31, 2002 December 31, 2001
----------------------------- ----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
Available for sale
- ------------------
U.S. Government Agency securities $ 8,537 $ 8,685 $ 9,541 $ 9,779
========= ========= ========= =========
Held to maturity
- ----------------
U.S. Government Agency securities 31,621 31,868 35,274 35,882
Other 75 75 75 75
--------- --------- --------- ---------
31,696 31,943 35,349 35,957
--------- --------- --------- ---------
Total debt securities $ 40,233 $ 40,628 $ 44,890 $ 45,736
========= ========= ========= =========
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.
Dollar Percent
March 31, 2002 December 31, 2001 Change Change
-------------- ----------------- ------ ------
Demand deposits (non-interest bearing) $ 38,571 $ 33,673 $ 4,898 15%
Money market demand and NOW accounts 24,562 35,493 (10,931) (31)
Regular, club and money market savings 32,885 29,824 3,061 10
Time deposits 58,213 55,483 2,730 5
--------- --------- -------
Total $ 154,231 $ 154,473 $ (242) --%
========= ========= =======
Increases in demand, regular, club, money market savings and time deposits
were offset by a decline in money market demand and NOW accounts. During the
quarter, one deposit account with a balance of approximately $10,700 was closed
out as a money market demand account and reopened as a demand deposit.
Subsequently, approximately $6,800 was withdrawn from the account. This activity
accounted for a majority of the fluctuation in demand deposits and money market
demand and NOW accounts. During the quarter, competitive rates offered by the
Bank resulted in an influx of approximately $5,100 in 91-180 day time deposits.
This increase was partially offset by the withdrawal of approximately
-9-
$3,800 in 12-17 month time deposits. Certificates of deposit in denominations of
$100 or more were $14,205 at March 31, 2002 compared to $12,122 at December 31,
2001, an increase of $2,083 (or 17%).
Liquidity and Capital Resources
At March 31, 2002, 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 $21,495. The primary
liquidity of the Company is measured by the ratio of net cash, short-term
investments, and other marketable securities (non-U.S. agency securities) to
deposits and short-term liabilities. The primary liquidity ratio at March 31,
2002 was 11.88%. The Bank also calculates a secondary liquidity ratio which
contemplates the maturity of held to maturity securities beyond three months.
The Bank's secondary liquidity ratio at March 31, 2002 was 33.79%. The Company's
internal guideline is to maintain a secondary liquidity ratio of 20% or more.
Net cash provided by operating activities was $798 for the three months
ended March 31, 2002 as compared to $1,018 for the three months ended March 31,
2001. Compared to the first three months of 2001, cash used in investing
activities increased $14,625, primarily due to cash used to fund increased loan
disbursements, a decrease in cash provided by the proceeds from maturities and
calls of securities held to maturity and securities available for sale, and cash
used for purchases of bank-owned life insurance. Cash of $2,348 was used in
financing activities for the three months ended March 31, 2002, compared to cash
of $9,366 provided for the year-ago quarter, primarily due to differing cash
flows from deposits during the two quarters. Cash and cash equivalents decreased
$5,650 for the three months ended March 31, 2002.
At March 31, 2002, the Company had outstanding loan commitments under
unused lines of credit approximating $17,588 and outstanding letters of credit
approximating $1,595.
At March 31, 2002 and December 31, 2001, the Company's consolidated
leverage capital ratio was 10.1% and 9.6%, respectively. At March 31, 2002 and
December 31, 2001, the Company's consolidated Tier 1 risk-based capital ratio
was 14.2% and 14.8%, respectively. The Company's consolidated total risk-based
capital ratio at March 31, 2002 and December 31, 2001 was 15.4% and 16.1%,
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
General
The Company's results of operations depend primarily on its net interest
income, which is the difference between the interest income on earning assets,
such as loans and securities, and the interest expense paid on deposits and
borrowings. Results of operations are also affected by non-interest income and
expense, the provision for loan losses and income tax expense. Non-interest
income consists primarily of banking service fees and charges, but may also
include gains and losses on sales of securities available for sale. The
Company's non-interest expense consists primarily of salaries and employee
benefits, occupancy and equipment expenses, data processing expenses, and
professional fees. Results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities.
-10-
Accounting Policies
The Company's significant accounting policies are summarized in Note 1 to
the Consolidated Financial Statements, included in the 2001 Annual Report on
Form 10-KSB. These policies include the allowance for loan losses which
management deems to be an accounting policy that is critical to the Company's
financial results. This policy is critical due to the high degree of judgement
involved, the subjectivity of the assumptions utilized, and the potential for
changes in the necessary allowance as a result of changing conditions and future
events. While management uses the best available information to determine the
allowance for loan losses, future adjustments to the allowance may be necessary
based on a variety of factors, including changes in economic and real estate
market conditions, particularly in Southwestern Fairfield County, Connecticut.
Comparative Analysis of Operating Results for the Three Months Ended March 31,
2002 and March 31, 2001
Net Income. Net income was $463 for the three months ended March 31, 2002
compared to $444 for the three months ended March 31, 2001, an increase of $19
(or 4%). Diluted earnings per common share were $0.37 for the three months ended
March 31, 2002 and 2001 based on weighted average shares outstanding of
1,239,291 and 1,202,323, respectively (both adjusted for the shares to be issued
in the recently-announced 10% stock dividend). The annualized return on average
common stockholders' equity was 10.25% and 10.45% for the three months ended
March 31, 2002 and March 31, 2001, respectively. The annualized return on
average assets was 1.03% for the three months ended March 31, 2002 and 1.18% for
the three months ended March 31, 2001.
Higher net income for the three months ended March 31, 2002 was principally
due to increased net interest and non-interest income, substantially offset by
increased non-interest 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 $2,099 for the three months ended March 31, 2002
compared to $1,968 for the three months ended March 31, 2001, an increase of
$131 (or 7%). As discussed earlier in this report, during the quarter ended
March 31, 2002, the Bank recognized interest income of $175 due to the recovery
of interest previously applied against principal on four non-accrual loans to
one borrower. This one-time recovery was the primary contributor to the increase
in net interest income for the quarter ended March 31, 2002 compared to March
31, 2001.
The average yield on interest-earning assets decreased 117 basis points for
the three months ended March 31, 2002 compared to March 31, 2001, while the
average rate paid on interest-bearing liabilities decreased 94 basis points.
These changes resulted in a 58 basis point decrease in the net interest margin
for the three months ended March 31, 2002 compared to March 31, 2001. During the
last three quarters of 2001 and the first quarter of 2002, the prime rate
decreased 325 basis points. These decreases directly impacted yields on the
Company's variable rate loans tied to the prime rate, as well as the yield on
the Company's federal funds sold. To a lesser extent, yields on other maturing
interest earning assets declined as a result of the general decline in the level
of market interest rates. The smaller decrease in
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the average rate paid on interest bearing liabilities is due to the fixed rate
nature of a large portion of the deposit base and the time lag between changes
in market interest rates and time deposit repricings at maturity.
Interest Income. Average earning assets for the three months ended March
31, 2002 were $166,101 compared to $139,985 for the three months ended March 31,
2001, an increase of $26,116 (or 19%). Total interest income, which is a
function of the volume of interest-earning assets and their related rates, was
$2,921 for the three months ended March 31, 2002 and $2,867 for the three months
ended March 31, 2001, representing an increase of $54 (or 2%).
Loans represent the largest component of interest-earning assets. Average
loans outstanding in the three months ended March 31, 2002 were $109,785
compared to $100,047 during the three months ended March 31, 2001, an increase
of $9,738 (or 10%). Interest income on loans was $2,317 for the three months
ended March 31, 2002 compared to $2,300 for the three months ended March 31,
2001, an increase of $17 (or 1%). Increased loan income primarily reflects the
above-mentioned one-time recovery of $175 on non-accrual loans during the
quarter ended March 31, 2002. Average loan volume increased during the quarter
ended March 31, 2002 compared to March 31, 2001 but, due to the large market
decline in prime rate of 4.75% in 2001, interest income (after elimination of
the one-time recovery) remained below prior year levels.
Average investments in securities and federal funds sold were $56,316 for
the three months ended March 31, 2002 compared to $39,938 for the three months
ended March 31, 2001, an increase of $16,378 (or 41%). Related income increased
to $604 for the three months ended March 31, 2002 from $567 for the three months
ended March 31, 2001, an increase of $37 (or 7%). Average investments in
securities, not including federal funds sold, increased by $15,372 (or 54%)
during the three months ended March 31, 2002, while average federal funds sold
increased by $1,006 (or 9%). The increase in income from securities was due to
the increased volume of securities. The reduction in federal funds income was
due to the drop in market interest rates.
Interest Expense. Interest expense was $822 for the three months ended
March 31, 2002 compared to $899 for the three months ended March 31, 2001, a
decrease of $77 (or 9%). 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 March 31, 2002 were $126,425 compared
to $101,806 during the three months ended March 31, 2001, an increase of $24,319
(or 24%). Although the volume of deposits grew during the three months ended
March 31, 2002 compared to March 31, 2001, interest expense decreased due to the
general decline in market interest rates, which overshadowed the additional
interest expense resulting from the increased volume of 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
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conditions. The allowance for loan losses is also adjusted for charge-offs and
recoveries. The provision for loan losses decreased to $48 for the three months
ended March 31, 2002 from $70 for the three months ended March 31, 2001.
At March 31, 2002, the Company had $1,107 of non-performing loans,
including $149 of non-accrual loans and $658 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 $300 at March 31, 2002. At
December 31, 2001, the Company had $1,414 of non-performing loans, including
$202 of non-accrual loans and $904 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 $308 at December 31, 2001.
Non-interest Income. Non-interest income was $338 for the three months
ended March 31, 2002 compared to $228 for the three months ended March 31, 2001,
an increase of $110 (or 48%). During the first quarter of 2002, the Bank
recognized a gain of $76 from the sale of qualified loans to the Small Business
Administration through its subsidiary, CBC. CBC began operations in the third
quarter of 2001 and is engaged in the origination, sale and servicing of the
guaranteed portion of loans to the Small Business Administration.
Non-interest Expense. Total non-interest expense was $1,618 for the three
months ended March 31, 2002 and $1,392 for the three months ended March 31,
2001, an increase of $226 (or 16%).
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)
March 31, 2002 vs 2001
------------------ ----------------------
Category 2002 2001 $ Change % Change
---- ---- -------- --------
Salaries and employee benefits $ 899 $ 742 $157 21%
Occupancy 183 153 30 20
Furniture and equipment 90 99 (9) (9)
Data processing 138 135 3 2
Professional fees 72 69 3 4
Advertising and promotion 42 31 11 35
Other 194 163 31 19
------ ------ ----
Total non-interest expense $1,618 $1,392 $226 16%
====== ====== ====
The increase in salaries and employee benefits was due to the addition of
five employees and associated benefits, as well as restricted stock expense of
$9 for the first quarter of 2002. The increases in occupancy and other
non-interest expenses primarily relate to the general increase in expenses
resulting from the opening of the East Avenue, Norwalk business development
office and Westport branch in 2001.
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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 $164 (or 5%) in the first quarter of 2002 compared to the
same period in 2001:
Three Months Ended
March 31,
-----------------------
Category 2002 2001
---- ----
Salaries and employee benefits 27.59% 23.97%
Occupancy 5.62 4.94
Furniture and equipment 2.76 3.20
Data processing 4.23 4.36
Professional fees 2.21 2.23
Advertising and promotion 1.29 1.00
Other 5.95 5.28
----- -----
Total non-interest expense 49.65% 44.98%
===== =====
Income Taxes. The provision for income taxes increased to $308 for the
three months ended March 31, 2002 from $290 for the three months ended March 31,
2001, an increase of $18 (or 6%). The increase in income taxes was primarily due
to the 5% increase in pre-tax income.
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
March 31, 2002.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized
CORNERSTONE BANCORP, INC.
-------------------------
(Registrant)
DATE: May 14, 2002 /s/ Merrill J. Forgotson
- ------------------ ------------------------------
Merrill J. Forgotson
President and Chief Executive Officer
DATE: May 14, 2002 /s/ Ernest J. Verrico, Sr.
- ------------------ ------------------------------
Ernest J. Verrico, Sr.
Vice President and Chief
Financial Officer
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