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, 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
- ------------------------------- -------------------------------------
(State or other jurisdiction of ( I.R.S. Employer Identification No.)
incorporation or organization)
550 Summer St. , Stamford, Connecticut 06901
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(Address of principal executive offices)
(203) 356-0111
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(Issuer's telephone number)
Check whether the issuer (1) 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 ___
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The number of shares outstanding of the issuer's common stock as of April 30,
2001 was 1,071,145
Transitional Small Business Disclosure Format (check one): Yes ___ No X
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TABLE OF CONTENTS
PART I - Financial Information
Item 1. Financial Statements (Unaudited) PAGE
- ------------------------------- ----
Consolidated Statements of Condition
March 31, 2001 and December 31, 2000........................................... 1
Consolidated Statements of Income
Three Months Ended March 31, 2001 and March 31, 2000........................... 2
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended March 31, 2001 and March 31, 2000........................... 3
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and March 31, 2000........................... 4
Notes to Consolidated Financial Statements..................................... 5
Item 2 Management's Discussion and Analysis
- -----------------------------------------------
of Financial Condition and Results of Operations............................... 6- 12
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PART II - Other Information
Item 1. Legal Proceedings.............................................................. None
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Item 2. Changes in Securities and Use of Proceeds...................................... None
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Item 3. Defaults upon Senior Securities................................................ None
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Item 4. Submission of Matters to a Vote of Security Holders............................ None
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Item 5. Other Information.............................................................. None
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Item 6. Exhibits and Reports on Form 8-K............................................... None
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Signatures................................................................................ 13
PART I - Financial Information
Item 1. Financial Statements
- ----------------------------
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands, except per share data)
(unaudited)
March 31, December 31,
Assets 2001 2000
--------- -----------
Cash and due from banks $ 9,017 $ 8,854
Federal funds sold 23,562 2,816
--------- ---------
Total cash and cash equivalents 32,579 11,670
--------- ---------
Securities, including $6,059 at March 31, 2001
and $6,583 at December 31, 2000 pledged as
collateral for repurchase agreements:
Available for sale, at fair value 9,668 18,482
Held to maturity (fair value of $12,196 at March 31, 2001
and $14,570 at December 31, 2000) 12,115 14,645
--------- ---------
Total securities 21,783 33,127
--------- ---------
Loans, net 99,687 99,205
Accrued interest receivable 987 1,124
Federal Home Loan Bank stock, at cost 466 419
Bank premises and equipment, net 2,687 2,699
Other assets 2,054 1,879
--------- ---------
Total assets $ 160,243 $ 150,123
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Demand (non-interest bearing) $ 30,776 $ 29,919
Money market demand and NOW 29,038 25,894
Regular, club and money market savings 26,460 26,764
Time 49,629 41,375
--------- ---------
Total deposits 135,903 123,952
Federal Home Loan Bank advances and
borrowings under repurchase agreements 6,053 8,562
Accrued interest payable 145 143
Other liabilities 1,067 882
--------- ---------
Total liabilities 143,168 133,539
--------- ---------
Stockholders' equity:
Common stock, par value $0.01 per share; authorized 5,000,000 shares; issued
1,144,725 shares at March 31, 2001
and 1,142,159 shares at December 31, 2000 11 11
Additional paid-in capital 11,693 11,657
Retained earnings 6,155 5,818
Treasury stock, at cost (76,415 shares at March 31, 2001 and
December 31, 2000) (880) (880)
Accumulated other comprehensive income (loss), net of taxes of $63
at March 31, 2001 and $15 at December 31, 2000 96 (22)
--------- ---------
Total stockholders' equity 17,075 16,584
--------- ---------
Total liabilities and stockholders' equity $ 160,243 $ 150,123
========= =========
See accompanying notes to consolidated financial statements.
-1-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Dollars in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
-------------------------------
2001 2000
---- ----
Interest income:
Loans $ 2,300 $ 1,872
Securities 412 642
Federal funds sold 155 77
---------- ----------
Total interest income 2,867 2,591
---------- ----------
Interest expense:
Deposits 857 782
Federal Home Loan Bank advances and borrowings
under repurchase agreements 42 51
---------- ----------
Total interest expense 899 833
---------- ----------
Net interest income 1,968 1,758
Provision for loan losses 70 41
---------- ----------
Net interest income after provision for loan losses 1,898 1,717
---------- ----------
Non-interest income:
Deposit service charges 126 119
Other 102 54
---------- ----------
Total non-interest income 228 173
---------- ----------
Non-interest expense:
Salaries and employee benefits 742 632
Occupancy 153 146
Furniture and equipment 99 103
Data processing 135 82
Professional fees 69 66
Other 194 197
---------- ----------
Total non-interest expense 1,392 1,226
---------- ----------
Income before income tax expense 734 664
Income tax expense 290 269
---------- ----------
Net income $ 444 $ 395
========== ==========
Earnings per common share:
Basic $ 0.42 $ 0.35
Diluted 0.41 0.35
Weighted average common shares:
Basic 1,067,575 1,118,706
Diluted 1,093,021 1,129,932
See accompanying notes to consolidated financial statements.
-2-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Dollars in thousands, except per share data)
(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 395 395
Change in net unrealized gain (loss)
on securities available for sale,
net of taxes (75) (75)
--------
Total comprehensive income 320
Cash dividends ($0.09 per share) (97) (97)
Purchases of treasury stock (589) (589)
Shares issued in connection with:
Dividend Reinvestment Plan 37 37
Directors Compensation Plan 3 3
----- -------- -------- -------- ----------- --------
Balance, March 31, 2000 $ 11 $ 11,550 $ 4,750 $ (589) $ (472) $ 15,250
===== ======== ======== ======== =========== ========
Balance, 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 in connection with:
Dividend Reinvestment Plan 31 31
Directors Compensation Plan 5 5
----- -------- -------- -------- ----------- --------
Balance, March 31, 2001 $ 11 $ 11,693 $ 6,155 $ (880) $ 96 $ 17,075
===== ======== ======== ======== =========== ========
See accompanying notes to consolidated financial statements.
-3-
CORNERSTONE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 and 2000
(In thousands)
(unaudited)
Three Months Ended
March 31, 2001
------------------------------
2001 2000
---- ----
Operating activities:
Net income $ 444 $ 395
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 88 99
Provision for loan losses 70 41
Decrease (increase) in accrued interest receivable 137 (32)
Increase in other assets (254) (84)
Increase (decrease) in accrued interest payable 2 (13)
Increase in other liabilities 185 259
Other adjustments, net (7) (3)
-------- --------
Net cash provided by operating activities 665 662
-------- --------
Investing activities:
Proceeds from maturities and calls of securities available for sale 9,010 --
Proceeds from maturities and calls of securities held to maturity 2,524 1,024
Disbursements for loan originations less principal repayments (540) (5,362)
Purchase of Federal Home Loan Bank Stock (47) --
Purchases of bank premises and equipment (69) (20)
-------- --------
Net cash provided by (used in) investing activities 10,878 (4,358)
-------- --------
Financing activities:
Net increase in demand, money market and savings deposits 3,697 2,785
Net increase (decrease) in time deposits 8,254 (1,857)
Net increase (decrease) in short-term Federal Home Loan Bank advances
and borrowings under repurchase agreements (1,491) 3,983
Purchases of treasury stock -- (589)
Dividends paid on common stock (107) (102)
Proceeds from issuance of common stock 31 37
-------- --------
Net cash provided by financing activities 9,366 4,257
-------- --------
Net increase in cash and cash equivalents 20,909 561
Cash and cash equivalents at beginning of period 11,670 11,928
-------- --------
Cash and cash equivalents at end of period $ 32,579 $ 12,489
======== ========
Supplemental information:
Interest payments $ 897 $ 846
Income tax payments 313 70
======== ========
See accompanying notes to consolidated financial statements.
-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. and Cornerstone Bank (the
"Bank"), collectively the "Company." The interim consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles for interim financial statements and the instructions to Form 10-QSB,
and, accordingly, do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited consolidated financial
statements reflect all adjustments necessary, consisting only of normal
recurring accruals, to present fairly the financial position, results of
operations, changes in stockholders' equity and cash flows at the dates and for
the periods presented. In preparing the interim consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the statement
of condition and revenues and expenses for the period. Actual results could
differ significantly from those estimates. A material estimate that is
particularly susceptible to near-term change is the allowance for loan losses.
The interim results of operations for the three months ended March 31, 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 shareholders (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
month periods ended March 31, 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
-5-
community-oriented financial institution, substantially all of the Bank's
operations involve the delivery of loan and deposit products to customers.
Management makes operating decisions and assesses performance based on an
ongoing review of these banking operations, which constitute the Company's only
operating segment for financial reporting purposes.
NOTE D - ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities, requires that all derivative
instruments be measured at fair value and recognized in the statement of
condition as either assets or liabilities. Changes in the fair value of
derivative instruments are reported either in earnings or other comprehensive
income, depending on the use of the derivative and whether it qualifies for
hedge accounting which is permitted only if specific criteria are met. SFAS No.
133 was effective January 1, 2001 for the Company. Because the Company had no
derivatives or hedging activities at that date or at any time during the first
quarter of 2001, SFAS No. 133 had no impact on the consolidated financial
statements.
Item 2. Management's Discussion and Analysis of
- -----------------------------------------------
Financial Condition and Results of Operations
- ---------------------------------------------
(dollars in thousands)
FORWARD-LOOKING STATEMENTS
The statements contained in this report that are not historical are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Examples of such forward-looking statements include, without
limitation, statements by the Company regarding expectations for earnings,
credit quality and other financial and business matters. When used in this
report, the words "anticipate," "plan," "believe," "estimate," "expect" and
similar expressions as they relate to the Company or its management are intended
to identify forward-looking statements. All forward-looking statements involve
risks and uncertainties. Actual results may differ materially from those
discussed in, or implied by, the forward-looking statements as a result of
certain factors, including but not limited to, competitive pressures on loan and
deposit product pricing; other actions of competitors; changes in economic
conditions; technological changes; the extent and timing of actions of the
Federal Reserve Board, including changes in monetary policies and interest
rates; customer deposit disintermediation; changes in customers' acceptance of
the Company's products and services; and the extent and timing of legislative
and regulatory actions and reforms.
The forward-looking statements contained in this report speak only as of
the date on which such statements are made. By making any forward-looking
statements, the Company assumes no duty to update them to reflect new, changing
or unanticipated events or circumstances.
FINANCIAL CONDITION
General
Total assets increased from $150,123 at December 31, 2000 to $160,243 at
March 31, 2001, an increase of $10,120 (or 7%). The increase reflects an
increase of $20,909 in cash and cash equivalents (primarily federal funds sold)
and net loan growth of $482, partially offset by decreases of $2,530 in
securities held to maturity and $8,814 in securities available for sale. The
asset growth was funded principally from a net increase of $11,951 in deposits.
-6-
Loans
The net loan portfolio increased from $99,205 at December 31, 2000 to
$99,687 at March 31, 2001, an increase of $482. This slight increase in the loan
portfolio in the first three months of 2001 reflected increases in
non-residential real estate loans as well as consumer and other loans, largely
offset by decreases in residential real estate loans, construction loans and
commercial loans. Non-residential loan origination increases during the first
quarter of 2001 were partially offset by residential loan payoffs.
Major classifications of loans at March 31, 2001 and December 31, 2000 were
as follows:
Dollar Percent
March 31, 2001 December 31, 2000 Change Change
-------------- ----------------- ------ ------
Loans secured by real estate:
Residential $ 43,672 $ 45,630 $ (1,958) (4%)
Non-residential 42,308 39,754 2,554 6
Construction 2,212 2,375 (163) (7)
Commercial loans 10,698 10,711 (13) --
Consumer and other loans 2,529 2,316 213 9
--------- --------- ---------
Total loans 101,419 100,786 633 1
Allowance for loan losses (1,752) (1,589) 163 10
Deferred loan costs, net 20 8 12 150
--------- --------- ---------
Total loans, net $ 99,687 $ 99,205 $ 482 --%
========= ========= =========
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, 2001 December 31, 2000
-------------- -----------------
Loans on nonaccrual status:
Loans secured by real estate $367 $455
Loans on accrual status:
Consumer and other loans 1 1
---- ----
Total loans past due 90 days or more 368 456
---- ----
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 196 198
Commercial loans 8 9
---- ----
204 207
---- ----
Total non-performing loans $572 $663
==== ====
Ratio of total non-performing loans to
total loans outstanding 0.56% 0.66%
==== ====
As of December 31, 2000, the allowance for loan losses was $1,589 or 1.58%
of total loans and 240% of non-performing loans, compared to $1,752 or 1.73% of
total loans and 306% of non-performing loans at March 31, 2001. During the
quarter ended March 31, 2001, the Bank recovered 75% of a loan charged off in
November 1990.
The following table sets forth changes in the allowance for loan losses for
the periods indicated.
Three Months Ended
March 31,
----------------------
2001 2000
---- ----
Balance at beginning of period $ 1,589 $ 1,626
Provision for loan losses 70 41
Charge-offs - --
Recoveries 93 7
-------- -------
Balance at end of period $ 1,752 $ 1,674
======== =======
Securities
Total securities decreased from $33,127 at December 31, 2000 to $21,783 at
March 31, 2001, a decrease of $11,344 (or 34%). The decrease in the securities
portfolio was primarily due to cash flows from securities called prior to
maturity in the available for sale and the held to maturity portfolios, the
proceeds of which were reinvested in overnight federal funds.
-8-
The following table sets forth the amortized cost and estimated fair value of
the securities portfolio at the dates indicated.
March 31, 2001 December 31, 2000
------------------------------- -----------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
Available for sale
- ------------------
U.S. Agency securities $ 9,508 $ 9,668 $ 18,519 $ 18,482
========= ========= ========= =========
Held to maturity
- ----------------
U.S. Agency securities $ 12,040 $ 12,121 $ 14,570 $ 14,495
Other 75 75 75 75
--------- --------- --------- ---------
Total $ 12,115 $ 12,196 $ 14,645 $ 14,570
========= ========= ========= =========
Deposits
Deposits are the primary source of funds for the Company. Deposits consist
of checking accounts, preferred savings accounts, regular savings deposits, NOW
accounts, money market accounts, and certificates of deposit (time deposits).
Deposits are obtained from individuals, partnerships, small and medium size
businesses and professionals in the Company's market area. The Company does not
accept brokered deposits.
The following table indicates the composition of deposits at the dates
indicated.
Dollar Percent
March 31, 2001 December 31, 2000 Change Change
-------------- ----------------- ------ ------
Demand deposits (non-interest bearing) $ 30,776 $ 29,919 $ 857 3%
Money market demand and NOW accounts 29,038 25,894 3,144 12
Regular, club and money market savings 26,460 26,764 (304) (1)
Time deposits 49,629 41,375 8,254 20
--------- -------- -------
Total $ 135,903 $123,952 $11,951 10%
========= ======== =======
Increases in time, money market, NOW and demand deposits were partially
offset by a small decline in savings deposits. During the quarter, competitive
rates offered by the Bank resulted in an increase in one year as well as two,
three and five year time deposits, totaling $8.8 million. Certificates of
deposit in denominations of $100 or more were $9,773 at December 31, 2000
compared to $11,508 at March 31, 2001, an increase of $1,735 (or 18%). Increased
money market demand and NOW accounts during the quarter were primarily due to
increased balances held by one customer.
Liquidity and Capital Resources
At March 31, 2001, total short-term investments, which are made up of
federal funds sold, available for sale securities and held to maturity
securities maturing in three months or less, totaled $45,243. 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 March 31, 2001 was 33%, primarily due to the large overnight federal
funds portfolio. The Company's guideline is to maintain a liquidity ratio of 20%
or more.
-9-
Net cash provided by operating activities was $665 for the three months
ended March 31, 2001 as compared to $662 for the three months ended March 31,
2000. Compared to the first three months of 2000, cash provided by investing
activities increased $15,236, primarily due to increased proceeds from callable
securities and security maturities and a reduced volume of loan originations in
the first quarter of 2001. The increase in net cash provided by financing
activities of $5,109 for the three months ended March 31, 2001 primarily
resulted from a net increase in deposits, particularly time deposits, partially
offset by decreased borrowings from the Federal Home Loan Bank of Boston. Cash
and cash equivalents increased $20,909 for the three months ended March 31,
2001.
At March 31, 2001, the Company had outstanding loan commitments under
unused lines of credit approximating $17,085 and outstanding letters of credit
approximating $97.
At December 31, 2000 and March 31, 2001, the Company's consolidated
leverage capital ratio was 11.1% and 11.3%, respectively. At December 31, 2000
and March 31, 2001, the Company's consolidated Tier 1 risk-based capital ratio
was 15.4% and 15.3%, respectively. The Company's consolidated total risk-based
capital ratio at December 31, 2000 and March 31, 2001 was 16.6%. 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 March 31,
2001 and March 31, 2000.
Net Income. Net income was $395 for the three months ended March 31, 2000
compared to $444 for the three months ended March 31, 2001, an increase of $49
(or 12%). Diluted earnings per common share were $0.35 for the three months
ended March 31, 2000 and $0.41 for the three months ended March 31, 2001 based
on weighted average shares of 1,129,932 and 1,093,021, respectively. The
annualized return on average common stockholders' equity (R.O.E) was 10.22% and
10.45% for the three months ended March 31, 2000 and March 31, 2001,
respectively. The annualized return on average assets was 1.12% for the three
months ended March 31, 2000 and 1.18% for the three months ended March 31, 2001.
Higher net income for the three months ended March 31, 2001 was principally
due to increased net interest and non-interest income, which was partially
offset by increases in the provision for loan losses, non-interest expense 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 $1,758 for the three months ended March 31, 2000
compared to $1,968 for the three months ended March 31, 2001, an increase of
$210 (or 12%). Higher loan volume was the primary contributor to increased
interest income. This increase was partially offset primarily by higher interest
expense on increased time and NOW account deposits. The average yield on
interest-earning assets increased 37 basis points for the three months ended
March 31, 2001 compared to March 31, 2000, while the average rate paid on
interest-bearing liabilities increased 16 basis points. These changes resulted
in a 32 basis point increase in the net interest margin for the three months
ended March 31, 2001
-10-
compared to March 31, 2000. The higher asset yields reflected increased loan
volume while the increased cost of funds reflected the higher volume of time
deposits.
Interest Income. Average earning assets for the three months ended March
31, 2000 were $131,519 compared to $139,985 for the three months ended March 31,
2001, an increase of $8,466 (or 6%). Total interest income, which is a function
of the volume of interest-earning assets and their related rates, was $2,591 for
the three months ended March 31, 2000 and $2,867 for the three months ended
March 31, 2001, representing an increase of $276 (or 11%).
Loans represent the largest component of interest-earning assets. Average
loans outstanding in the three months ended March 31, 2000 were $82,914 compared
to $100,047 during the three months ended March 31, 2001, an increase of $17,133
(or 21%). Interest on loans was $1,872 for the three months ended March 31, 2000
compared to $2,300 for the three months ended March 31, 2001, an increase of
$428 (or 23%). The increase in loan income primarily reflected the increase in
loan volume for the three months ended March 31, 2001 compared to March 31,
2000.
Average investments in securities and federal funds sold were $48,605 for
the three months ended March 31, 2000 compared to $39,938 for the three months
ended March 31, 2001, a decrease of $8,667 (or 18%). Related income decreased
from $719 for the three months ended March 31, 2000 to $567 for the three months
ended March 31, 2001, a decrease of $152 (or 21%). Average investments in
securities, not including federal funds sold, decreased by $14,567 (or 34%)
during the three months ended March 31, 2001, while average federal funds sold
increased by $5,899 (or 108%). The decrease in income from securities was
primarily due to the reduced volume of securities. The increase in federal funds
income was due to the influx of cash flows from securities called prior to
maturity, time and NOW accounts which were reinvested in overnight federal
funds.
Interest Expense. Interest expense was $833 for the three months ended
March 31, 2000 compared to $899 for the three months ended March 31, 2001, 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 March 31, 2000 were $97,847 compared to $101,806 during
the three months ended March 31, 2001, an increase of $3,959 (or 4%). Increased
interest expense was primarily due to increased time and NOW account deposits.
Provision for Loan Losses. The periodic provision for loan losses
represents the amount necessary to adjust the allowance for loan losses to
management's estimate of probable credit losses inherent in the existing loan
portfolio at the reporting date. Management's determination of the allowance for
loan losses is based on the results of continuing reviews of individual loans
and borrower relationships, particularly in the commercial and commercial real
estate loan portfolios. A review of the quality of the loan portfolio is
conducted internally by management on a quarterly basis, using a
consistently-applied methodology, and the results are presented to the Board of
Directors for approval. The evaluation covers individual borrowers whose
aggregate loans are greater than $100, as well as all adversely-classified
loans. Management also considers factors such as the borrower's financial
condition, historical and expected ability to make loan payments, and underlying
collateral values. The determination of the allowance for loan losses also
considers the level of past due loans, the Bank's historical loan loss
experience, changes in loan portfolio mix, geographic and borrower
concentrations, and current economic conditions. The allowance for loan losses
is also adjusted for charge-offs and recoveries. The provision for loan losses
increased from $41 for the three months ended March 31, 2000 to $70 for the
three months ended March 31, 2001.
-11-
At March 31, 2001, the Company had $572 of non-performing loans, including
$367 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 $204 at March 31, 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 $173 for the three months
ended March 31, 2000 compared to $228 for the three months ended March 31, 2001,
an increase of $55 (or 32%). During the first quarter of 2001, ATM surcharges
increased $21 as a result of the imposition of such ATM fees beginning in July
2000. The increase in non-interest income also reflected the collection of
one-time lot release fees and other loan fees totaling $26, as well as $8 in
late charges on two loans during the first quarter of 2001.
Non-interest Expense. Total non-interest expense was $1,226 for the three
months ended March 31, 2000 and $1,392 for the three months ended March 31,
2001, an increase of $166 (or 14%).
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, 2001 vs 2000
------------------ ----------------------
Category 2001 2000 $ Change % Change
---- ---- -------- --------
Salaries and employee benefits $ 742 $ 632 $ 110 17%
Occupancy 153 146 7 5
Furniture and equipment 99 103 (4) (4)
Other categories 398 345 53 15
-------- ------- -----
Total non-interest expense $ 1,392 $ 1,226 $ 166 14%
======== ======= =====
The increase in salaries and employee benefits was due to the addition of
six employees and associated benefits. The increase in other non-interest
expense primarily related to increased data processing fees during the first
quarter of 2001.
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 $331 (or 12%) in the first quarter of 2001 compared to the
same period in 2000:
Three Months Ended
March 31,
--------------------
Category 2001 2000
---- ----
Salaries and employee benefits 23.97% 22.87%
Occupancy 4.94 5.28
Furniture and equipment 3.20 3.73
Other categories 12.87 12.48
----- -----
Total non-interest expense 44.98% 44.36%
===== =====
Income Taxes. The provision for income taxes increased from $269 for the
three months ended March 31, 2000 to $290 for the three months ended March 31,
2001, an increase of $21 (or 8%). The increase in income taxes was primarily due
to the 11% increase in pre-tax income.
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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, 2001 /s/ Merrill J. Forgotson
------------------- -----------------------------------------------
Merrill J. Forgotson
President and Chief Executive Officer
DATE: May 14, 2001 /s/ Leigh A. Hardisty
-------------------- ----------------------------------------------
Leigh A. Hardisty
Vice President and Chief Financial Officer
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